UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission file number: 1-15729
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PARAGON TECHNOLOGIES, INC.
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 22-1643428
(State Or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
600 Kuebler Road, Easton, Pennsylvania 18040
(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-3205
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $1.00 Per Share American Stock Exchange
(Title of Class) (Name of Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |_| No |X|
Aggregate market value of common stock held by non-affiliates (based on the
closing price on The American Stock Exchange) on June 30, 2004 was approximately
$22.6 million. For purposes of determining this amount only, Registrant has
defined affiliates as including (a) the executive officers named in Part III of
this 10-K report, (b) all directors of Registrant, and (c) each stockholder that
has informed Registrant by June 30, 2004 that it is the beneficial owner of 10%
or more of the outstanding common stock of Registrant.
The number of shares outstanding of the Registrant's Common Stock, as of
March 24, 2005 was 4,266,710.
DOCUMENTS INCORPORATED BY REFERENCE None.
1
[LOGO]
TABLE OF CONTENTS
PART I.........................................................................3
Item 1. Business.......................................................3
Item 2. Properties....................................................10
Item 3. Legal Proceedings.............................................11
Item 4. Submission of Matters to a Vote of Security Holders...........11
PART II.......................................................................12
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities................................................12
Item 6. Selected Financial Data.......................................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....25
Item 8. Financial Statements and Supplementary Data...................26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................53
Item 9A. Controls and Procedures.......................................53
Item 9B. Other Information.............................................53
PART III......................................................................53
Item 10. Directors and Executive Officers of the Registrant............53
Item 11. Executive Compensation........................................56
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................60
Item 13. Certain Relationships and Related Transactions................62
Item 14. Principal Accountant Fees and Services........................62
PART IV.......................................................................63
Item 15. Exhibits and Financial Statement Schedules....................63
Signatures....................................................67
Exhibit Index.................................................69
2
PART I
------
Item 1. Business
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Company Overview
----------------
Paragon Technologies, Inc. ("the Company") provides a variety of material
handling solutions, including systems, technologies, products, and services for
material flow applications. The Company has gone to market with a multiple
brand, multiple channel strategy under the SI Systems and Ermanco brands. The
Company's capabilities include horizontal transportation, rapid dispensing,
order fulfillment, computer software, sortation, integrating conveyors and
conveyor systems, and aftermarket services.
The Company was originally incorporated in Pennsylvania in 1958. On
December 7, 2001, upon receiving shareholder approval, the Company changed its
state of incorporation from Pennsylvania to Delaware.
SI Systems
----------
The Company's Easton, Pennsylvania operation (hereafter referred to as "SI
Systems"), is a specialized systems integrator supplying 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 and SI Production & Assembly Systems (hereafter referred to as
"SI-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 sales force focuses on providing order fulfillment systems
to order processing and distribution operations, which may incorporate the
Company's proprietary DISPEN-SI-MATIC(TM) and automated order fulfillment
solutions, specialized software from the SINTHESIS(TM) Software Suite, and
Ermanco branded products. 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-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 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. Integrated material handling solutions involve both
standard and specially designed components and include integration of
non-proprietary automated handling technologies so as to provide turnkey
solutions for its customers' unique material handling needs. The engineering
staff develops and designs computer controlled programs required for the
efficient operation of the systems and for optimizing manufacturing, assembly,
and fulfillment operations.
Ermanco
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The Company's Spring Lake, Michigan operation (hereafter referred to as
"Ermanco"), is a manufacturer of Ermanco branded light to medium duty unit
handling conveyor and sortation products, serving the material handling industry
through a worldwide network of approximately 100 experienced material handling
equipment distributors and one licensee. Ermanco also provides complete conveyor
systems for a variety of applications, including distribution centers and
automated manufacturing, 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.
------------------------------
3
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, software, and aftermarket sales by
brand during the years ended December 31, 2004, 2003, and 2002 are as follows
(in thousands):
For the year ended December 31, 2004:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Systems and software sales......... $ 8,375 28,550 36,925 87.4%
Aftermarket sales.................. 3,327 2,003 5,330 12.6%
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Total sales........................ $ 11,702 30,553 42,255 100.0%
====== ====== ====== =====
As a % of total sales.............. 27.7% 72.3% 100.0%
For the year ended December 31, 2003:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Systems and software sales......... $ 9,134 23,533 32,667 87.6%
Aftermarket sales.................. 2,949 1,679 4,628 12.4%
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Total sales........................ $ 12,083 25,212 37,295 100.0%
====== ====== ====== =====
As a % of total sales.............. 32.4% 67.6% 100.0%
For the year ended December 31, 2002:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Systems and software sales......... $ 11,439 21,584 33,023 86.4%
Aftermarket sales.................. 3,467 1,734 5,201 13.6%
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Total sales........................ $ 14,906 23,318 38,224 100.0%
====== ====== ====== =====
As a % of total sales.............. 39.0% 61.0% 100.0%
The Company's products are sold worldwide through its own sales personnel,
along with a network of independent distributors and one licensee. Domestic and
international sales by brand during the years ended December 31, 2004, 2003, and
2002 are as follows (in thousands):
For the year ended December 31, 2004:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Domestic sales..................... $ 9,941 28,800 38,741 91.7%
International sales................ 1,761 1,753 3,514 8.3%
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Total sales........................ $ 11,702 30,553 42,255 100.0%
====== ====== ====== =====
For the year ended December 31, 2003:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Domestic sales..................... $ 10,780 23,650 34,430 92.3%
International sales................ 1,303 1,562 2,865 7.7%
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Total sales........................ $ 12,083 25,212 37,295 100.0%
====== ====== ====== =====
For the year ended December 31, 2002:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Domestic sales..................... $ 14,698 21,844 36,542 95.6%
International sales................ 208 1,474 1,682 4.4%
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Total sales........................ $ 14,906 23,318 38,224 100.0%
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4
The Company engages in sales with the U.S. government, which is one of the
Company's customers. Sales to the U.S. government during the years ended
December 31, 2004, 2003, and 2002 represented 0.8%, 3.7%, and 8.8% of total
sales, respectively. No individual customer accounted for more than 10% of total
sales.
The Company's backlog of orders at December 31, 2004 and December 31, 2003
are as follows (in thousands):
December 31, December 31,
2004 2003
------------------- ------------------
SI Systems............................................ $ 5,514 4,052
Ermanco............................................... 5,692 6,473
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Total backlog of orders............................ $ 11,206 10,525
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The Company's backlog of orders associated with U.S. government projects
were $29,000 and $0 at December 31, 2004 and December 31, 2003, 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. The Company expects to fill, within its 2005 calendar year, all
of the December 31, 2004 backlog of orders indicated above.
Products
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SI Systems' Branded Products -- Automated Material Handling Systems Segment
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SI Systems' branded products encompass the horizontal transport,
manufacturing, assembly, order fulfillment, and inventory replenishment families
of products.
Horizontal Transport
--------------------
LO-TOW(R). LO-TOW(R) is an in-floor towline conveyor. These conveyor
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systems are utilized in the automation of manufacturing, assembly, unit load
handling in distribution environments, and large newspaper roll delivery
systems. Industries served include the automotive, recreational and utility
vehicle, distribution centers, radiation chambers, engine assembly, truck
assembly, construction vehicles, newspaper facilities, farm machinery, and the
U.S. government, primarily the United States Postal Service and the Defense
Logistics Agency. This simple, yet reliable component design allows for a
variety of configurations well suited for numerous applications. It provides
reliable and efficient transportation for unit loads of all types in progressive
assembly or distribution applications. Because SI Systems' LO-TOW(R) tow chain
used with the system operates at a minimal depth, systems can be installed in
existing one-story and multi-story buildings as well as newly constructed
facilities. Controls sophistication varies depending upon the application. More
complex systems include programmable logic controllers ("PLCs"), personal
computers for data collection and operator interface, radio frequency
identification and communication, bar code identification, and customer host
computer communication interface. The Company believes that SI Systems is the
largest supplier of in-floor towline systems in the United States. A typical
LO-TOW(R) system requires approximately six months to engineer, manufacture, and
install. LO-TOW(R) sales as a percent of total sales were 6.3%, 12.2%, and 17.4%
for the years ended December 31, 2004, 2003, and 2002, respectively.
5
Order Fulfillment Systems
-------------------------
DISPEN-SI-MATIC(TM), SINTHESIS(TM), and Automated Order Fulfillment
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Solutions
---------
DISPEN-SI-MATIC(TM) and SINTHESIS(TM) offer ideal solutions for reducing
inefficiencies, labor-intensive methods, and long-time deliveries where high
volume of small orders must be fulfilled. Industries served include
pharmaceutical, entertainment, vision, nutritional supplements, health and
beauty aids, cosmetics, and an assortment of various soft goods.
SINTHESIS(TM) is a proprietary intelligent order fulfillment software suite
that can achieve picking accuracy of up to 99.9%, increase order throughput up
to 70%, and reduce return volumes by as much as 80%. Comprised of eight software
groups with 26 extendible software modules, SINTHESIS(TM) continuously assesses
real-time needs and deploys solutions to accurately facilitate and optimize
planning, warehousing, inventory, routing, and order fulfillment within the
distribution process. In installations worldwide, SINTHESIS(TM) integrates
intelligent software programming with innovative conveyance technology to
perform high-volume, full-case or split-case, item-oriented distribution
smarter, faster, and leaner.
SI Systems' branded products include a variety of DISPEN-SI-MATIC(TM)
models for automated order fulfillment, where volume, speed, accuracy, and
efficiency are of the essence. The Pick-to-Belt, Totes Through, and Buckets
Through are solutions that provide ultra-high throughput for loose-pick
individual items. Additionally, the DISPEN-SI-MATIC(TM) allows a package to be
dispensed into a tote or carton, thus achieving a high degree of accuracy and
efficiency in order fulfillment.
SI Systems' capabilities also include gantry picking, which involves the
fulfillment of orders as well as inventory replenishment, utilizing automated
gantry/robotic technology. Certain customer applications and order profiles are
well suited for this solution.
SI Systems' branded technologies include automated picking and
replenishment solutions that complement DISPEN-SI-MATIC(TM), thus offering the
Company's customers a comprehensive solution in order fulfillment where volume
of orders are processed with a high degree of accuracy. These highly
sophisticated systems require customization tailored to each individual
customer's requirements.
A typical DISPEN-SI-MATIC(TM), SINTHESIS(TM), and automated order
fulfillment system requires approximately six to nine months to engineer,
manufacture, and install.
DISPEN-SI-MATIC(TM), SINTHESIS(TM), and the related order fulfillment
systems sales (including sales of Automated Pharmacy Systems to SI/BAKER, INC.
("SI/BAKER")), as a percent of total sales, were 13.0%, 10.0%, and 11.5% for the
years ended December 31, 2004, 2003, and 2002, respectively.
SI/BAKER, INC. (Automated Pharmacy Systems)
------------------------------------------
On March 1, 1993, the Company and Automated Prescription Systems, Inc.
formed a 50/50 joint venture, SI/BAKER, INC. In 1998, Automated Prescription
Systems, Inc. was renamed McKesson Automation Systems Inc. ("McKesson").
On September 19, 2003, the Company sold its entire ownership interest in
SI/BAKER to McKesson pursuant to the terms of a Stock Purchase Agreement dated
September 19, 2003 by and among the Company, McKesson, and SI/BAKER.
6
Ermanco Branded Products -- Conveyor Systems Segment
----------------------------------------------------
Conveyor Systems
----------------
Ermanco branded products encompass the conveyor and sortation systems
segment of the business.
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. Ermanco often combines various
components of its technologies as part of a total system solution.
Ermanco's accumulation technologies encompass XenoROL(R) line-shaft-driven
live roller conveyors, NBA(TM)23 narrow belt accumulation conveyors, AccuROL(R)
belt-driven live roller conveyors, and IntelliROL(R) motorized-roller conveyors.
Ermanco's proven sortation systems include technologies such as urethane belt
transfers (UBTs); ERS(R) right angle sorters; multi-stage, air-operated pushers;
ESA60(R) swing arm diverters; NBS(R)30, NBS(R)90, and NBS(R)90SP narrow belt
sorters. Ermanco's Command Systems Software(R), a suite of software routines, is
available to meet the configuration, operation, and specific parameters of
individual systems. Ermanco branded sales as a percent of total sales were
72.3%, 67.6%, and 61.0% for the years ended December 31, 2004, 2003, and 2002,
respectively.
------------------------------
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.
Sales and Marketing
-------------------
The Company goes to market with a multiple brand, multiple channel strategy
under the SI Systems and Ermanco brands. Each brand has its own focused sales
force, utilizing the products and services currently available or under
development within the Company.
SI Systems
----------
SI Systems' sales of SI Systems' branded products are made through SI
Systems' internal sales personnel. The systems 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 customer until the system has been accepted.
Customers include major manufacturers, technology organizations, and
distributors of a wide variety of products, as well as the U.S. government. A
significant amount of business is derived from existing customers through the
sale of additional systems, additions to existing systems, plus parts and
service. The Company is not substantially dependent upon any one customer,
however, the Company's business is dependent upon a limited number of customers.
Ermanco
-------
Ermanco branded products are sold primarily through a worldwide network of
approximately 100 experienced material handling equipment distributors and one
licensee. The distributors locate opportunities that they may fulfill themselves
by purchasing products and/or services from Ermanco and take the order in their
name, acting as the system integrator, or they may elect to have Ermanco assume
the role of system integrator. In the latter case, Ermanco will negotiate the
contract with the end user and assume total system responsibility, providing the
distributor with a "finder's fee." Approximately 85% of Ermanco's volume is
orders processed by distributors, and 15% of the volume is orders processed with
the end user. Depending upon the distribution channel that is used, the typical
number of competitors on any particular project varies. A licensee is located in
Japan, and global affiliates are located in Brazil, Canada, and the United
Kingdom. Ermanco branded products and services are sold on a fixed-price
7
basis. Generally, contract terms are net 30 days for product and parts sales,
with progress payments for system-type projects.
Competition
-----------
The material handling industry includes many products, devices, and systems
competitive with those of the Company. As in the case of other technically
oriented companies, there is a risk that the Company's business may be adversely
affected by technological advances made by its competitors. However, the Company
believes that its competitive advantages include its reputation in the material
handling field and proven capabilities in the markets in which it concentrates.
Its disadvantages include its relatively small size as compared to certain of
its larger competitors.
SI Systems
----------
There are four principal competitors supplying equipment similar to the
LO-TOW(R) system. Competition in this field is primarily in the areas of price,
experience, systems performance, and features. SI Systems is a leading provider
of LO-TOW(R) systems, based on Conveyor Equipment Manufacturers Association
(CEMA) United States market statistics.
The DISPEN-SI-MATIC(TM) system competes primarily with manual picking
methods, and it also competes with similar devices provided by two other system
manufacturers, along with various alternative picking technologies, such as
general purpose "broken case" automated order fulfillment systems that have been
sold for picking items of non-uniform configuration. The Company believes that
the DISPEN-SI-MATIC(TM) system provides greater speed and accuracy than manual
methods of collection and reduces damage, pilferage, and labor costs.
Proprietary SINTHESIS(TM) software competes with other middleware that has
been developed for order fulfillment logistics by a variety of software and/or
hardware suppliers. The Company believes that SINTHESIS(TM) is superior to other
software offerings, because it is based on a proven track record of successful
applications that manage distribution centers by accepting order data from the
customer's host business system and efficiently optimizing the full range of
order fulfillment functions down to control of individual pieces of material
handling equipment.
Ermanco
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The 2004-2005 Conveyor Equipment Manufacturers Association yearbook
includes 26 companies in the list of members in the Unit Handling Conveyors
(Light to Medium) classification (SIC 353501). Twenty-two members report
statistics on a monthly basis in this category, with booked sales of $1.02
billion in 2004. Many companies are involved in more than this one category.
Many of these companies pursue opportunities with a direct sales force. Ermanco
branded products are sold primarily through a distributor network of
independently owned and operated companies as its primary channel. There are
approximately 2,400 companies in the Conveying and Conveying Equipment -
Wholesale classification (SIC 508410); however, this includes those companies
involved in bulk material handling and unit conveyor handling.
Raw Materials
-------------
The Company has not been adversely affected by energy or raw materials
shortages. Its Spring Lake, Michigan plant uses natural gas for heating and
electricity to operate its machinery. The principal raw material purchased by
the Company is steel, which the Company purchases from various suppliers. Steel
prices have escalated during the past year; however, the Company has been able
to pass these increased costs on to its customers. The Company also purchases
components from various suppliers that are incorporated into the Company's
finished products.
Patents, Copyrights, and Licenses
---------------------------------
The Company seeks patents, trademarks, and other intellectual property
rights to protect and preserve its proprietary technology and its rights to
capitalize on the results of research and development activities. The Company
seeks copyright protection for its proprietary software. The Company also relies
on trade secrets, know-how, technological innovations, and licensing
opportunities to provide it with competitive advantages in its market and to
accelerate new product introductions.
8
It is the Company's policy to require its professional and technical
employees and consultants to execute confidentiality agreements at the time that
they enter into employment or consulting relationships with the Company. These
agreements provide that all confidential information developed by, or known to,
the individual during the course of the individual's relationship with the
Company, is to be kept confidential and not disclosed to third parties except in
specific circumstances. In the case of employees, the agreement provides that
all inventions conceived by the employee during his tenure at the Company will
be the exclusive property of the Company.
SI Systems
----------
SI Systems holds eleven patents, of which eight have been issued in the
United States, with lives that expire from November 2005 through May 2020; in
addition, SI Systems has two pending patent applications. Significant design
features of the LO-TOW(R), CARTRAC(R), DISPEN-SI-MATIC(TM), and Sortation
systems are covered by patents or patent applications in the United States and
pertain mainly to the following areas: loading and unloading products, speed and
precision control, vehicle and carrier design, track design and assembly,
accumulation of vehicles, simultaneous order requests processing equipment, and
order fulfillment system designs.
CARTRAC(R), ROBOLITE(R), ROBODRIVE(R), LO-TOW(R), SWITCH-CART(R), SI
ORDERMATIC(R), and ACCUPIC(R) are registered trademarks of SI Systems.
ROBORAIL(TM), DISPEN-SI-MATIC(TM), and SINTHESIS(TM) are trademarks of SI
Systems.
Ermanco
-------
Ermanco holds seven patents, of which all seven have been issued in the
United States, with lives that expire from March 2005 through February 2021; in
addition, Ermanco has five pending patent applications. Significant design
features of sortation and accumulation conveyor systems are covered by patents
or patent applications in the United States.
XenoROL(R), EWX100(R), Command Systems Software (CSS)(R), ERS(R), ESA(R),
LightWORX(R), NBS(R), XcelSORT(R), XenoPRESSURE(R), XenoSORT(R),
XenoTRACTION(R), NBS(R)30, NBS(R)90, NBS(R)90SP, IntelliROL(R), and AccuROL(R)
are registered trademarks of Ermanco. NBA(TM), NBT(TM), CRUZ(TM), RLC(TM),
GAPmaster(TM), QUIKmeld(TM), AccuLIGHT(TM), and Dynamic Sensors(TM) are
trademarks of Ermanco.
Ermanco currently has a license agreement with a foreign company. This
agreement permits the licensee to manufacture conveyors using Ermanco branded
technology. Royalties are received based on sales volume. Royalty income
received from license agreements in the years ended December 31, 2004, 2003, and
2002 was $42,000, $30,000, and $17,000, respectively.
Product Development
-------------------
Total product development costs, including patent expense, were $314,000,
$400,000, and $358,000 for the years ended December 31, 2004, 2003, and 2002,
respectively. The Company aggressively pursues continual research of new product
development opportunities, with a concentrated effort to improve existing
technologies that improve customer efficiency. The Company also develops new
products and integration capabilities that are financed through customer
projects.
SI Systems
----------
Product development costs, including patent expense, for SI Systems were
$176,000, $259,000, and $180,000 for the years ended December 31, 2004, 2003,
and 2002, respectively.
SI Systems' development programs in the year ended December 31, 2004 were
aimed at improvements to Order Fulfillment systems technologies.
SI Systems' development programs in the year ended December 31, 2003
included SINTHESIS(TM) computer software for warehousing and distribution center
operations and improvements to Order Fulfillment systems technologies.
SI Systems' development programs in the year ended December 31, 2002
included improvements to Order Fulfillment systems technologies.
9
Ermanco
-------
Product development costs, including patent expense, for Ermanco were
$138,000, $141,000, and $178,000 for the years ended December 31, 2004, 2003,
and 2002, respectively.
Ermanco's development programs in the year ended December 31, 2004 were
aimed at enhancements to sortation and accumulation conveyor technologies.
Ermanco's development programs in the year ended December 31, 2003 included
the NBA(TM)23 narrow belt accumulation conveyor and improvements to narrow belt
sorter conveyor technologies.
Ermanco's development programs in the year ended December 31, 2002 included
the new NBA(TM)23 narrow belt accumulation conveyor and improvements to narrow
belt sorter conveyor technologies.
Employees
---------
As of December 31, 2004, the Company employed four executive officers.
The Company provides life insurance, major medical insurance, retirement
programs, and paid vacation and sick leave benefits, and considers its relations
with employees to be satisfactory.
SI Systems
----------
As of December 31, 2004, the Company's Easton, Pennsylvania operation
employed 43 office employees, including salespersons, draftspersons, and
engineers. SI Systems also operates as a project manager in connection with the
installation, integration, and service of its products generally utilizing
subcontractors.
Ermanco
-------
As of December 31, 2004, the Company's Spring Lake, Michigan operation
employed 163 persons, including 64 office employees and 99 manufacturing
employees. All manufacturing employees are collective bargaining personnel. The
current collective bargaining agreement expires on May 31, 2007.
Item 2. Properties
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SI Systems' principal office is located in a 173,000 square foot concrete,
brick, and steel facility in Easton, Pennsylvania. In connection with the
February 2003 sale of the Company's Easton, Pennsylvania facility, the Company
entered into a leaseback arrangement for 25,000 square feet of office space for
five years. The leasing agreement requires fixed monthly rentals of $17,703
(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 lease expires
on February 21, 2008.
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement, as amended,
requires fixed monthly rentals of $29,310 (with annual increases of 2.5%). The
terms of the lease require the payment by Ermanco of all taxes, insurance, and
other ownership-related costs of the property. The lease, as amended on April 1,
2004, expires on September 30, 2008.
The Company believes that its Spring Lake, Michigan facility is adequate
for its current operations. The Company's operations experience fluctuations in
workload due to the timing and receipt of new orders and customer job completion
requirements. Currently, the Company's facilities are adequate to handle these
fluctuations. In the event of an unusual demand in workload, the Company
supplements its internal operations with outside subcontractors that perform
services for the Company in order to complete contractual requirements for its
customers. The Company will continue to utilize internal personnel and its own
facilities and, when necessary and/or cost effective, outside subcontractors to
complete contracts in a timely fashion in order to address the needs of its
customers.
10
Item 3. Legal Proceedings
------- -----------------
In July 2003, a competitor filed an action against the Company in the
United States District Court for the District of New Jersey alleging that
certain of the Company's products infringed patents held by the competitor and
also asserting claims for breach of contract, unjust enrichment, unfair
competition, tortious interference with prospective economic advantage, and
violation of New Jersey's consumer fraud act as a result of alleged improper use
of the competitor's trade secrets, technology, and other proprietary
information. Based on these allegations, the competitor was seeking monetary
damages and injunctive relief against the Company.
In February 2004, a settlement was reached between the Company and the
competitor. Under the settlement, the competitor dismissed the action and agreed
that the Company's products involved in the litigation are immune from suit for
infringement of any of the competitor's intellectual property rights. In
exchange, Paragon agreed to dismiss its counterclaims and paid the competitor
$1,125,000. Total costs associated with the litigation recognized during 2003,
inclusive of settlement and legal costs, were $1,375,000.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2004.
11
PART II
-------
Item 5. Market For The Registrant's Common Stock And Related Security
------- -------------------------------------------------------------
Holder Matters
--------------
The Company's common stock trades on the American Stock Exchange (Amex)
under the symbol "PTG." The high and low sales prices for the years ended
December 31, 2004 and 2003 are as follows:
For the Year Ended For the Year Ended
December 31, 2004 December 31, 2003
---------------------------- ----------------------------
High Low High Low
------------ ------------ ------------ ------------
First Quarter..................... 11.35 9.46 8.80 8.00
Second Quarter.................... 10.40 9.50 10.28 8.40
Third Quarter..................... 9.90 9.00 10.80 9.70
Fourth Quarter ................... 10.03 8.76 10.70 9.20
The Company did not pay cash dividends during the years ended December 31,
2004, 2003, and 2002, and has no present intention to declare cash dividends.
Any determination to pay dividends in the future will be at the discretion of
the Company's Board of Directors and will be dependent upon the Company's
results of operations, financial condition, and other factors deemed relevant by
the Company's Board of Directors.
The number of holders of record of the Company's common stock as of
December 31, 2004, as shown by the records of the Company's transfer agent was
310. This figure does not include individual participants in security position
listings.
The closing market price of the Company's common stock on March 24, 2005
was $7.85.
Issuer Purchases of Equity Securities
-------------------------------------
The following table represents the periodic repurchases of equity
securities made by the Company during the three months ended December 31, 2004:
-----------------------------------------------------------------------------------------------------------
Total Number Approximate
Average of Shares Approximate Dollar Value
Price Paid Repurchased Dollar Value of Shares
Total Per Share as Part of a of Shares That May Yet
Number (Including Publicly Purchased Be Purchased
Fiscal of Shares Brokerage Announced Under the Under the
Period Repurchased Commissions) Program Program Program
-----------------------------------------------------------------------------------------------------------
10/01/04 - 10/31/04 15,700 $ 9.19 15,700 $ 144,208 $ 674,368
11/01/04 - 11/30/04 - $ - - $ - $ 674,368
12/01/04 - 12/31/04 - $ - - $ - $ 674,368
------ ---- ------ -------
15,700 $ 9.19 15,700 $ 144,208
====== ==== ====== =======
-----------------------------------------------------------------------------------------------------------
In August 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. As of December 31,
2004, the Company had repurchased 34,700 shares of common stock at a weighted
average cost, including brokerage commissions, of $9.38 per share. Cash
expenditures for the stock repurchases were $325,632. As of December 31, 2004,
$674,368 remained available for repurchases under the stock repurchase program.
Based on market conditions and other factors, additional repurchases may be made
from time to time, in compliance with SEC regulations, in the open market or
through privately negotiated transactions at the discretion of the Company.
There is no expiration date with regards to the stock repurchase program.
12
Item 6. Selected Financial Data
------- -----------------------
The following table sets forth the Company's selected consolidated
financial information for each of the years in the five-year period ended
December 31, 2004. The selected consolidated financial data presented below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and our Consolidated Financial
Statements and Notes thereto included in this report. The historical results
presented herein may not be indicative of future results. The information
presented below is in thousands, except per share amounts.
For the Years Ended
------------------------------------------------------------------
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
------------- ------------ ------------ ------------- ------------
Net sales................... $42,255 37,295 38,224 50,752 64,306
Net earnings (loss)......... 1,473 3,785 663 (62) 3,480
Basic earnings (loss)
per share................. .34 .89 .16 (.01) .83
Diluted earnings (loss)
per share................. .34 .87 .15 (.01) .82
Total assets................ 32,705 33,774 36,703 41,343 45,917
Long-term liabilities....... 2,489 2,159 9,402 11,074 13,744
Cash dividends per
share..................... - - - - -
13
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations
---------------------
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and related notes thereto included in this Annual Report on
Form 10-K for the year ended December 31, 2004. The discussion and analysis
contains "forward-looking statements" based on management's current
expectations, assumptions, estimates, and projections. These forward-looking
statements involve risks and uncertainties. The Company's actual results could
differ materially from those included in these "forward-looking statements" as a
result of certain factors, as more fully discussed in Exhibit 99.1.
------------------------------
Business Overview
-----------------
Paragon Technologies, Inc. provides a variety of material handling
solutions, including systems, technologies, products, and services for material
flow applications. The Company has gone to market with a multiple brand,
multiple channel strategy under the SI Systems and Ermanco brands.
Founded in 1958, SI Systems material handling solutions are based on core
technologies in horizontal transportation and order fulfillment and are aimed at
improving productivity for manufacturing, assembly, and distribution center
operations. Since 1964, Ermanco conveyor technologies and integrated conveyor
systems are based on core technologies in transportation, accumulation, and
sortation and continue to address the needs of the distribution, assembly, and
manufacturing marketplace. Ermanco is known as the originator of the
line-shaft-driven, live-roller conveyor.
------------------------------
Key Performance Metrics Relevant to the Company
-----------------------------------------------
Capacity Utilization
--------------------
Capacity Utilization, as documented in the Federal Reserve Statistical
Release(1), is a key economic indicator that the Company follows as a barometer
that may lead to capital spending for material handling systems. Capacity
Utilization attempts to measure what percent of available capacity is actually
being utilized. Management believes that when Capacity Utilization rises above
80%, as occurred in fiscal 2000, the Company may see an increase in the rate of
new orders, and therefore, an increase in backlog and sales may also occur. The
backlog of orders represents the uncompleted portion of systems contracts along
with the value of parts and services from customer purchase orders related to
goods that have not been shipped or services that have not been rendered.
Backlog is generally indicative of customer demand for the Company's products.
As the demand for the Company's products increases, the backlog of orders, the
rate of new orders, and sales also typically increases. The following table
depicts the Company's backlog, orders, sales, and Capacity Utilization for the
years ended December 31, 2004, 2003, 2002, 2001, and 2000:
(Dollars in Thousands) 2004 2003 2002 2001 2000
----------- ----------- ----------- ---------- ----------
Backlog of orders -- Beginning....... $ 10,525 6,924 13,342 22,913 23,685
Add: orders........................ 42,936 40,896 31,806 41,181 63,534
Less: sales........................ 42,255 37,295 38,224 50,752 64,306
------ ------ ------ ------ ------
Backlog of orders -- Ending.......... $ 11,206 10,525 6,924 13,342 22,913
====== ====== ====== ====== ======
Capacity Utilization(1).............. 78.0% 74.8% 75.6% 77.4% 82.6%
14
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations
---------------------
Key Performance Metrics Relevant to the Company (Continued)
-----------------------------------------------
Current Ratio
-------------
The Company's current ratio, which is the ratio of current assets to
current liabilities, has been relatively consistent. Management of the Company
monitors the current ratio as a measure of determining liquidity and believes
the current ratio illustrates that the Company's financial resources are
adequate to satisfy its future cash requirements through the next year. The
following table depicts the Company's current assets, current liabilities, and
current ratio for the years ended December 31, 2004, 2003, 2002, 2001, and 2000:
(Dollars in Thousands) 2004 2003 2002 2001 2000
----------- ----------- ----------- ---------- ----------
Current assets...................... $ 13,802 14,691 15,444 19,200 22,850
------ ------ ------ ------ ------
Current liabilities................. $ 6,908 9,554 9,416 13,357 15,193
Current ratio..................... 2.00 1.54 1.64 1.44 1.50
Debt to Equity Ratio
--------------------
With an emphasis over the past several years on generating cash flows to
eliminate the Company's senior and subordinated debt, the Company has eliminated
its financial leverage as evidenced by its debt to equity ratio, which is the
ratio of total debt to stockholders' equity. Management believes the absence of
debt provides greater protection for its stockholders and enhances the Company's
ability to obtain additional financing, if required. The following table
illustrates the calculation of the debt to equity ratio for the years ended
December 31, 2004, 2003, 2002, 2001, and 2000:
(Dollars in Thousands) 2004 2003 2002 2001 2000
----------- ----------- ----------- ---------- ----------
Current installments of
long-term debt....................... $ - - 1,437 2,305 1,521
Long-term debt......................... - - 7,263 9,900 12,780
------ ------ ------ ------ ------
Total debt............................. - - 8,700 12,205 14,301
------ ------ ------ ------ ------
Total stockholders' equity............. $ 23,308 22,061 17,885 16,912 16,980
====== ====== ====== ====== ======
Debt to equity ratio................... - - .49 .72 .84
------------------------------
Critical Accounting Policies and Estimates
------------------------------------------
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses, and other financial information, including the related disclosure
of commitments and contingencies at the date of our financial statements. Actual
results may, under different assumptions and conditions, differ significantly
from our estimates.
We believe that our accounting policies related to revenue recognition on
system sales, warranty, inventories, allowance for doubtful accounts, and asset
impairment as described below, are our "critical accounting policies." These
policies have been reviewed with the Audit Committee of the Board of Directors
and are discussed in greater detail below.
15
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations
---------------------
Critical Accounting Policies and Estimates (Continued)
------------------------------------------
Revenue Recognition on Systems Sales
------------------------------------
Revenues on systems contracts, accounted for in accordance with SOP 81-1 of
the American Institute of Certified Public Accountants, are recorded on the
basis of the Company's estimates of the percentage of completion of individual
contracts. Gross margin is recognized on the basis of the ratio of aggregate
costs incurred to date to the most recent estimate of total costs. As contracts
may extend over one or more years, revisions in cost and profit estimates during
the course of the work are reflected in the accounting periods in which the
facts requiring revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued. As of
December 31, 2004, there are no contracts that are anticipated to result in a
loss.
The Company believes that it has the ability to reasonably estimate the
total costs and applicable gross profit margins at the inception of the contract
for all of its systems contracts. However, where cost estimates change, there
could be a significant impact on the amount of revenue recognized. The Company's
failure to estimate accurately can result in cost overruns which will result in
the loss of profits if the Company determines that it has significantly
underestimated the costs involved in completing contracts. The Company has not
had any significant cost overruns resulting in loss of profits during the past
three years.
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, ranging from one to
two percent depending on the type of system sold, and a detailed review of
products still in the warranty period. Historically, the level of warranty
reserve has been appropriate based on management's assessment of estimated
future warranty claims. However, if unanticipated warranty issues arise in the
future, there could be a significant impact on the recorded warranty reserve.
The recorded warranty reserve as of December 31, 2004 is $655,000.
Inventories
-----------
Inventories are valued at the lower of average cost or market. The Company
provides an inventory reserve determined by a specific identification of
individual slow moving items and other inventory items based on historical
experience. The reserve is considered to be a write-down of inventory to a new
cost basis. Upon disposal of inventory, the cost and related inventory reserve
are removed from the accounts. Historically, the level of inventory reserve has
been appropriate based on management's assessment of estimated future inventory
disposals.
Allowance for Doubtful Accounts
-------------------------------
The Company provides an allowance for doubtful accounts determined by a
specific identification of individual accounts and other accounts based on
historical experience. The Company writes off receivables upon determination
that no further collections are probable. Historically, receivable write-offs
have not had a material impact on the Company's financial statements.
16
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations
---------------------
Critical Accounting Policies and Estimates (Continued)
------------------------------------------
Asset Impairment
----------------
During 2004, the Company performed the required impairment test of goodwill
and determined that there was no impairment. In assessing the recoverability of
the Company's goodwill, the Company must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of its reporting
units. If these estimates or their related assumptions change, the Company may
be required to record impairment charges in the future. The book value of
goodwill as of December 31, 2004 is $17,657,000.
------------------------------
17
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2004 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2003
-----------------
Earnings Summary
----------------
The Company had net earnings of $1,473,000 (or $0.34 basic earnings per
share) for the year ended December 31, 2004, compared to net earnings of
$3,785,000 (or $0.89 basic earnings per share) for the year ended December 31,
2003. The decrease in net earnings was primarily due to the prior year
comparable period containing:
o a pre-tax gain on the sale of the Company's ownership interest in the
SI/BAKER joint venture of $4,901,000;
o a pre-tax gain on the sale-leaseback of the Company's Easton,
Pennsylvania facility of $1,363,000;
o a restructuring credit of $264,000 pertaining to the final settlement
of the remaining pension obligations associated with the Company's
terminated pension plan and the reversal of a previously established
severance accrual that was no longer required;
o equity in income of the Company's former SI/BAKER joint venture of
$256,000; and
o royalty income from the Company's former SI/BAKER joint venture of
$226,000.
Partially offsetting the above decrease in net earnings for the year ended
December 31, 2004 was:
o an increase during 2004 in total revenues and gross profit of
$4,960,000 and $1,530,000, respectively, as described below;
o the prior year comparable period containing settlement and legal costs
of $1,375,000 associated with an action against the Company by a
competitor relating to the Company's intellectual property; and
o a reduction of $672,000 in interest expense as a result of the
elimination of the Company's senior and subordinated debt in September
2003.
Net Sales and Gross Profit on Sales
-----------------------------------
2004 2003
----------------- -----------------
Net sales.............................................. $ 42,255,000 37,295,000
Cost of sales.......................................... 31,277,000 27,847,000
---------- ----------
Gross profit on sales.................................. $ 10,978,000 9,448,000
========== -=========
Gross profit as a percentage of sales.................. 26.0% 25.3%
==== ====
The net sales increase was attributable to an increase in Ermanco branded
sales of $5,341,000, partially offset by a decline of approximately $381,000 in
SI Systems branded sales. The increase in Ermanco branded sales was primarily
attributable to a larger backlog of Ermanco branded orders entering fiscal 2004
when compared to the backlog of Ermanco branded orders entering fiscal 2003. The
decline in SI Systems branded sales was associated with delays in customer
buying decisions and competitive pressures.
Gross profit, as a percentage of sales, for the year ended December 31,
2004, when compared to the year ended December 31, 2003, was favorably impacted
by approximately 1.5% due to product mix, and unfavorably impacted by
approximately .8% due primarily to costs related to enhancing the Company's
operations.
18
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results of Operations - Year Ended December 31, 2004 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2003 (Continued)
-----------------
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $8,703,000 were lower by
$733,000 for the year ended December 31, 2004 than for the year ended December
31, 2003. The decrease of $733,000 was comprised of:
o settlement and legal costs of $1,375,000 in 2003 associated with an
action against the Company by a competitor relating to the Company's
intellectual property;
o severance charges of $387,000 in 2003 versus $163,000 in 2004; and
o collections of $172,000 during 2004 on accounts receivable previously
recognized as uncollectible.
Partially offsetting these decreases were the addition of resources aimed
at expanding the customer base and an increase in salaries and fringes totaling
$557,000, and an increase in consulting and marketing expenses primarily
associated with product promotion and marketing research totaling $414,000.
Restructuring Charges (Credits)
------------------------------
In 2001, the Company restructured its business operations, including
curtailment of a defined benefit plan. In February 2003, the Company settled its
remaining obligations by purchasing annuities for those participants who elected
that payment option and correspondingly recorded a restructuring credit of
$170,000 during 2003. In addition, during 2003 the Company recorded a
restructuring credit of $94,000 associated with the reversal of a previously
established severance accrual that was no longer required.
Interest Expense
----------------
In September 2003, the Company repaid all of its outstanding senior and
subordinated debt. The Company had no interest expense related to senior and
subordinated debt in the year ended December 31, 2004 as compared to $676,000 of
interest expense for the year ended December 31, 2003.
Equity in Income of Joint Ventures
----------------------------------
In September 2003, the Company sold its entire ownership interest in
SI/BAKER, INC. During the year ended December 31, 2003, equity in income of the
SI/BAKER joint venture was $256,000.
Gain on Sale of SI/BAKER Joint Venture
--------------------------------------
In September 2003, the Company sold its entire ownership interest in
SI/BAKER, INC. The sale resulted in a gain of $4,901,000 in 2003.
Gain on Disposition of Property, Plant and Equipment
----------------------------------------------------
The gain on the disposition of property, plant and equipment of $1,354,000
for 2003 was primarily attributable to the sale-leaseback on the Company's
Easton, Pennsylvania facility in February 2003. The sale-leaseback resulted in a
total gain of $2,189,000, of which $1,363,000 was recorded in 2003. The
remaining gain of $826,000 was deferred and is being recognized as a reduction
in rent expense over the five-year term of the lease.
19
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results of Operations - Year Ended December 31, 2004 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2003 (Continued)
-----------------
Other Income, Net
-----------------
In September 2003, the Company sold its entire ownership interest in
SI/BAKER, INC. The unfavorable variance of $239,000 in other income, net for the
year ended December 31, 2004 as compared to the year ended December 31, 2003 was
primarily attributable to revenue-based royalty income from the Company's
SI/BAKER joint venture recognized during the first nine months of 2003.
Income Tax Expense
------------------
The Company recognized income tax expense of $743,000 during the year ended
December 31, 2004, compared to income tax expense of $2,424,000 during the year
ended December 31, 2003. Income tax expense was generally recorded at statutory
federal and state tax rates. Income tax expense for the year ended December 31,
2004 was lower than the statutory federal and state tax rates, primarily as a
result of a change in the state effective tax rate.
------------------------------
Results of Operations - Year Ended December 31, 2003 Compared to the Year
-------------------------------------------------------------------------
Ended December 31, 2002
-----------------------
Earnings Summary
----------------
The Company had net earnings of $3,785,000 (or $0.89 basic earnings per
share) for the year ended December 31, 2003, compared to net earnings of
$663,000 (or $0.16 basic earnings per share) for the year ended December 31,
2002. The increase in net earnings was primarily due to:
o a pre-tax gain on the sale of the Company's ownership interest in the
SI/BAKER joint venture of $4,901,000;
o a pre-tax gain on the sale-leaseback of the Company's Easton,
Pennsylvania facility of $1,363,000;
o a reduction in selling, general and administrative expenses of $497,000,
exclusive of settlement and legal costs mentioned below; and
o a reduction in interest expense of $370,000.
Partially offsetting the favorable impact of the aforementioned items was:
o settlement and legal costs of $1,375,000 associated with an action
against the Company by a competitor relating to the Company's
intellectual property; and
o a restructuring credit of $264,000 in 2003 pertaining to the final
settlement of the remaining pension obligations associated with the
Company's terminated pension plan and the reversal of a previously
established severance accrual that was no longer required versus a
restructuring credit of $859,000 in 2002 pertaining to the partial
settlement of the remaining pension obligations associated with the
Company's terminated pension plan.
Net Sales and Gross Profit on Sales
-----------------------------------
2003 2002
---------------- ----------------
Net sales............................................. $ 37,295,000 38,224,000
Cost of sales......................................... 27,847,000 28,951,000
---------- ----------
Gross profit on sales................................. $ 9,448,000 9,273,000
========== ==========
Gross profit as a percentage of sales................. 25.3% 24.3%
==== ====
20
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results of Operations - Year Ended December 31, 2003 Compared to the Year
-------------------------------------------------------------------------
Ended December 31, 2002 (Continued)
-----------------------
Net Sales and Gross Profit on Sales (Continued)
-----------------------------------
The net sales decrease was attributable to a decreased volume of SI
Systems' branded sales of $2,823,000 associated with the current economic
slowdown and competitive pricing pressures, offset by an increase in Ermanco
branded sales of $1,894,000.
The increase in Ermanco branded sales was primarily due to an equivalent
increase in sales to health and beauty aids and mail processing related
customers as a result of a slight recovery in these industry sectors in 2003 as
compared to 2002.
Gross profit, as a percentage of sales, for the year ended December 31,
2003 was favorably impacted by approximately 2.1% due to a reduction in overhead
costs and approximately .5% due to the favorable performance on the Company's
contracts and product mix during 2003 as compared to 2002. Gross profit, as a
percentage of sales, for 2002 was favorably impacted by approximately 1.5% as a
result of the reversal of previously established contract accruals due to
changes in cost estimates.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $9,436,000 were higher by
$878,000 for the year ended December 31, 2003 than for the year ended December
31, 2002. The increase of $878,000 was comprised of:
o settlement and legal costs of $1,375,000 associated with an action
against the Company by a competitor relating to the Company's
intellectual property; and
o severance charges of $387,000 in 2003 versus $154,000 in 2002.
Partially offsetting the aforementioned unfavorable variance were cost
savings of approximately $700,000 attributable to headcount reductions in the
prior fiscal year and an emphasis on cost reduction, including reduced facility
operating costs as a result of the Company's sale of its Easton, Pennsylvania
facility.
Restructuring Charges (Credits)
------------------------------
In 2001, the Company restructured its business operations, including
curtailment of a defined benefit plan, and recorded a charge of $1,538,000 for
restructuring costs. In December 2002, the Company partially settled its
obligations by making lump-sum distributions to those participants who elected
that payment option and correspondingly recorded a restructuring credit of
$859,000 during 2002. In February 2003, the Company settled its remaining
obligations by purchasing annuities for those participants who elected that
payment option and correspondingly recorded a restructuring credit of $170,000
during 2003. In addition, during 2003 the Company recorded a restructuring
credit of $94,000 associated with the reversal of a previously established
severance accrual that was no longer required.
Interest Expense
----------------
Interest expense of $676,000 was lower by $370,000 for the year ended
December 31, 2003 than for the year ended December 31, 2002. The decrease in
interest expense was attributable to the reduced level of long-term debt due to
principal payments and lower interest rates and the reversal of approximately
$174,000 of previously accrued interest on subordinated notes payable and the
impact of the change in the fair value of the interest rate swap agreement.
Partially offsetting the favorable variance were non-cash interest charges of
$306,000 associated with the settlement of the interest rate swap contract.
21
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results of Operations - Year Ended December 31, 2003 Compared to the Year
-------------------------------------------------------------------------
Ended December 31, 2002 (Continued)
-----------------------
Equity in Income of Joint Ventures
----------------------------------
Equity in income of joint venture represents the Company's proportionate
share (50%) of its investment in the SI/BAKER joint venture that was being
accounted for under the equity method until the September 19, 2003 Closing Date
of the Sale of the Company's ownership interest in the SI/BAKER joint venture.
The favorable variance of $198,000 for the year ended December 31, 2003 in the
equity in income of the SI/BAKER joint venture was due to increased operating
results of SI/BAKER in 2003 as compared to 2002.
Gain on Sale of SI/BAKER Joint Venture
--------------------------------------
In September 2003, the Company sold its entire ownership interest in
SI/BAKER, INC. The sale resulted in a gain of $4,901,000 in 2003.
Gain on Disposition of Property, Plant and Equipment
----------------------------------------------------
The gain on the disposition of property, plant and equipment of $1,354,000
was higher by $1,260,000 for 2003 as compared to 2002. In 2003, the disposition
of property, plant and equipment was primarily attributable to the
sale-leaseback on the Company's Easton, Pennsylvania facility. The
sale-leaseback resulted in a total gain of $2,189,000, of which $1,363,000 was
recorded in 2003. The remaining gain of $826,000 was deferred and is being
recognized as a reduction in rent expense over the five-year term of the lease.
In 2002, the Company sold fixed assets that resulted in a gain of $94,000 in
2002.
Other Income, Net
-----------------
The unfavorable variance of $74,000 in other income, net for the year ended
December 31, 2003 as compared to the year ended December 31, 2002 was primarily
attributable to 2002 containing $300,000 of short-term rental income relating to
certain real property of the Company's Easton, Pennsylvania facility. Partially
offsetting the unfavorable variance was an increase of $206,000 in revenue-based
royalty income from the Company's SI/BAKER joint venture and license agreements
related to material handling system sales during the year ended December 31,
2003.
Income Tax Expense
------------------
The Company recognized income tax expense of $2,424,000 during the year
ended December 31, 2003, compared to income tax expense of $267,000 during the
year ended December 31, 2002. Income tax expense was generally recorded at
statutory federal and state tax rates. Income tax expense for the year ended
December 31, 2002 was lower than the statutory federal and state tax rates
primarily as a result of a tax benefit of approximately $109,000 for a dividend
received deduction for distributions from the Company's former SI/BAKER joint
venture.
------------------------------
22
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Liquidity and Capital Resources
-------------------------------
The Company's cash and cash equivalents decreased to $3,602,000 at December
31, 2004 from $5,591,000 at December 31, 2003. The decrease resulted primarily
from:
o cash used by operating activities totaling $1,473,000;
o purchases of capital equipment of $261,000; and
o repurchase and retirement of common stock of $325,000.
Cash used by operating activities of $1,473,000 during the year ended
December 31, 2004 as compared to cash provided by operating activities of
$329,000 during the year ended December 31, 2003 decreased primarily due to the
payment of settlement and legal costs of $1,197,000 associated with an action
against the Company by a competitor relating to the Company's intellectual
property. Also contributing to cash provided by operating activities during the
year ended December 31, 2003 was the receipt of a federal income tax refund of
$1,093,000 and the receipt of a $1,000,000 cash dividend from the SI/BAKER joint
venture.
In 2003, the Company repaid all of its outstanding term debt and
subordinated debt.
The Company's line of credit facility may not exceed $5,000,000; $4,800,000
is available and is to be used primarily for working capital purposes. The line
of credit facility contains various non-financial covenants and is secured by
all accounts receivables and inventory. As of December 31, 2004, the Company did
not have any borrowings under the line of credit facility, and the line of
credit facility expires effective June 30, 2005. The Company expects to renew
the line of credit facility under similar terms and conditions during 2005.
The Company anticipates that its financial resources, consisting of cash
generated from operations and its line of credit, will be adequate to satisfy
its future cash requirements through the next year. Sales volume, as well as
cash liquidity, may experience fluctuations due to the unpredictability of
future contract sales and the dependence upon a limited number of large
contracts with a limited number of customers.
The Company is currently exploring various business strategies designed to
enhance the value of the Company's assets for its stockholders over the long
term. The Company has retained the investment banking firm, Boenning &
Scattergood, Inc., to advise the Company in evaluating its strategic options.
The Company is continuing to evaluate and actively explore a range of possible
options, including mergers, acquisitions, the possible sale of the Company or
one or more of its divisions. The Company may not be able to effect any of these
strategic options on favorable terms or at all.
------------------------------
23
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Contractual Obligations
-----------------------
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement, as amended,
requires fixed monthly rentals of $29,310 (with annual increases of 2.5%). The
terms of the lease require the payment by Ermanco of all taxes, insurance, and
other ownership related costs of the property. The lease, as amended on April 1,
2004, expires on September 30, 2008.
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 $17,703 (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 lease expires on February 21, 2008.
The Company also leases certain office equipment, computer equipment, and
software under various operating leases with terms extending through September
2007.
Future contractual obligations and commercial commitments at December 31,
2004 as noted above are as follows:
Payments Due by Period
-----------------------------------------------------------------------------
Less Than
Total 1 Year 2 Years 3 Years 4 Years 5 Years
----- --------- ------- ------- ------- -------
Contractual
obligations:
Operating
leases........ $ 2,150,000 636,000 590,000 606,000 318,000 -
--------- -------- ------- ------- ------- -------
Total......... $ 2,150,000 636,000 590,000 606,000 318,000 -
========= ======= ======= ======= ======= =======
Amount of Commitment
Expiration Per Period
------------------------------------------------------------------
Total Amounts Less Than
Committed 1 Year 2 Years 3 Years 4 Years 5 Years
------------- --------- ------- ------- ------- -------
Other
commercial
commitments:
Letters of
credit........ $200,000 200,000 - - - -
In addition to the obligations noted above, the Company also has an
employment agreement with Leon C. Kirschner, Chief Operating Officer of the
Company and President of Ermanco Incorporated. Terms of the employment agreement
include a base salary of $272,328 per year. Mr. Kirschner has the right to
terminate the employment agreement voluntarily by giving the Company written
notice of such termination no less than 180 days prior to the effective date of
the termination. Under certain circumstances, the employment agreement provides
for post termination severance payments.
Off-Balance Sheet Arrangements
------------------------------
As of December 31, 2004, the Company had no off-balance sheet arrangements
in the nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity, or market risk support to unconsolidated entities for any
such assets), or obligations (including contingent obligations) arising out of
variable interests in unconsolidated entities providing financing, liquidity,
market risk, or credit risk support to the Company, or that engage in leasing,
hedging, or research and development services with the Company.
------------------------------
24
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Recently Issued Accounting Pronouncements
-----------------------------------------
In December 2003, the Company adopted SFAS No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("FAS 132R") as
amended. This standard retains the existing disclosures and requires additional
disclosures to provide details about pension plan assets, benefit obligations,
cash flows, benefit costs, and related information. The disclosure requirements
are included in the Company's financial statements.
In November 2004, the Financial Accounting Standards Board issued SFAS No.
151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS
151 provides for certain fixed production overhead cost to be reflected as a
period cost and not capitalized as inventory. FAS 151 is effective for the
beginning of 2006. The adoption of FAS 151 is not expected to have a material
impact on the Company's financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised) "Share-Based Payment" ("FAS 123R"). FAS 123R addresses all forms
of share-based payment awards, including shares issued under employee stock
purchase plans, stock options, restricted stock, and stock appreciation rights.
It will require companies to recognize in the statement of operations the
grant-date fair value of stock options and other equity-based compensation
issued to employees, but expresses no preference for a type of valuation model.
The statement eliminates the intrinsic value-based method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, that the Company current uses. The Company is required to adopt
FAS 123R beginning in the third quarter of 2005. The adoption of FAS 123R is not
expected to have a material impact on the Company's financial statements.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
------- ----------------------------------------------------------
The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risk, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments are material
to its results of operations.
25
Item 8. Consolidated Financial Statements and Supplementary Data
------- --------------------------------------------------------
I N D E X
o Report of Independent Registered Public Accounting Firm.
o Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2004 and 2003.
Consolidated Statements of Operations for the years ended December 31,
2004, 2003, and 2002.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003, and 2002.
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003, and 2002.
Notes to Consolidated Financial Statements.
o Financial Statement Schedule for the years ended December 31, 2004, 2003,
and 2002:
II - Valuation and qualifying accounts
o All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
26
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Paragon Technologies, Inc.
We have audited the consolidated financial statements of Paragon Technologies,
Inc. and subsidiary as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Paragon
Technologies, Inc. and subsidiary as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
Philadelphia, PA
March 4, 2005
27
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2004 and 2003
(In Thousands, Except Share Data)
December 31, December 31,
2004 2003
------------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents.......................... $ 3,602 5,591
Receivables:
Trade (net of allowance for doubtful
accounts of $231 as of December 31,
2004 and $265 as of December 31,
2003).......................................... 5,756 5,277
Notes and other receivables...................... 244 38
------ ------
Total receivables.............................. 6,000 5,315
------ ------
Costs and estimated earnings in excess of
billings......................................... 1,059 521
Inventories:
Raw materials.................................... 1,175 926
Work-in-process.................................. 246 106
Finished goods................................... 195 159
------ ------
Total inventories.............................. 1,616 1,191
------ ------
Deferred income tax benefits....................... 889 1,444
Prepaid expenses and other current assets.......... 636 629
------ ------
Total current assets............................. 13,802 14,691
------ ------
Property, plant and equipment, at cost:
Leasehold improvements............................. 228 228
Machinery and equipment............................ 3,752 3,643
------ ------
3,980 3,871
Less: accumulated depreciation.................... 2,744 2,455
------ ------
Net property, plant and equipment................ 1,236 1,416
------ ------
Goodwill.............................................. 17,657 17,657
Other assets.......................................... 10 10
------ ------
Total assets..................................... $ 32,705 33,774
====== ======
See accompanying notes to consolidated financial statements.
28
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2004 and 2003
(In Thousands, Except Share Data)
December 31, December 31,
2004 2003
------------------- ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable...................................... $ 3,000 2,671
Customers' deposits and billings in excess of
costs and estimated earnings........................ 1,560 2,180
Accrued salaries, wages, and commissions.............. 428 304
Income taxes payable.................................. 58 894
Accrued product warranty.............................. 655 925
Deferred gain on sale-leaseback....................... 165 165
Accrued other liabilities............................. 1,042 2,415
------ ------
Total current liabilities......................... 6,908 9,554
------ ------
Long-term liabilities:
Deferred gain on sale-leaseback....................... 358 523
Deferred income taxes payable......................... 2,131 1,594
Deferred compensation................................. - 42
------ ------
Total long-term liabilities....................... 2,489 2,159
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and outstanding
4,265,310 shares as of December 31, 2004
and 4,277,595 shares as of December 31,
2003................................................ 4,265 4,278
Additional paid-in capital............................ 7,996 7,678
Retained earnings..................................... 11,047 10,105
------ ------
Total stockholders' equity........................ 23,308 22,061
------ ------
Total liabilities and stockholders' equity........ $ 32,705 33,774
====== ======
See accompanying notes to consolidated financial statements.
29
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements Of Operations
For the Years Ended December 31, 2004, 2003, and 2002
(In Thousands, Except Share and Per Share Data)
December 31, December 31, December 31,
2004 2003 2002
---------------- ---------------- ----------------
Net sales................................. $ 42,255 37,295 38,224
Cost of sales............................. 31,277 27,847 28,951
--------- ---------- ---------
Gross profit on sales.................. 10,978 9,448 9,273
--------- ---------- ---------
Selling, general and administrative
expenses 8,703 9,436 8,558
Product development costs................. 314 400 358
Restructuring charges (credits)........... - (264) (859)
Interest expense.......................... 4 676 1,046
Interest income........................... (76) (76) (112)
Equity in income of joint venture......... - (256) (58)
Gain on sale of SI/BAKER
joint venture.......................... - (4,901) -
Gain on disposition of
property, plant and equipment.......... - (1,354) (94)
Other income, net......................... (183) (422) (496)
--------- --------- ---------
8,762 3,239 8,343
--------- --------- ---------
Earnings before income
taxes.................................. 2,216 6,209 930
Income tax expense........................ 743 2,424 267
--------- --------- ---------
Net earnings........................... $ 1,473 3,785 663
========= ========= =========
Basic earnings per share.................. $ .34 .89 .16
========= ========= =========
Diluted earnings per share................ $ .34 .87 .15
========== ========= =========
Weighted average shares
outstanding............................ 4,278,065 4,269,274 4,231,878
Dilutive effect of stock options.......... 72,232 95,438 64,706
Dilutive effect of phantom stock
units.................................. - - 3,609
--------- --------- ---------
Weighted average shares
outstanding assuming dilution.......... 4,350,297 4,364,712 4,300,193
========== ========== =========
See accompanying notes to consolidated financial statements.
30
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2004, 2003, and 2002
(In Thousands, Except Share Data)
Accumulated
Common Shares Additional Other Total
------------------ Paid-In Retained Comprehensive Stockholders' Comprehensive
Number Amount Capital Earnings Loss Equity Income (Loss)
-------- -------- ---------- -------- ------------- ------------- -------------
Balance at December 31, 2001.............. 4,221,635 $ 4,222 7,102 5,841 (253) 16,912
Net earnings.............................. - - - 663 - 663 663
Loss reclassified from other
comprehensive income, net of
tax of $49............................. - - - - 197 197
Change in fair value of derivative,
net of tax of $47...................... - - - - (188) (188) (188)
-----
Comprehensive income...................... - - - - - - 475
=====
Stock options exercised................... 5,563 5 31 - - 36
Issuance of common shares as interest
payment on subordinated notes.......... 28,900 29 211 - - 240
Other incentive plan activity............. - - 25 - - 25
--------- ----- ----- ------ --- ------
Balance at December 31, 2002.............. 4,256,098 4,256 7,369 6,504 (244) 17,885
Net earnings.............................. - - - 3,785 - 3,785 3,785
Loss reclassified from other
comprehensive income, net of
tax of $62............................. - - - - 98 98
Amortization of other comprehensive
income, net of tax of $138............. - - - - 219 219
Change in fair value of derivative,
net of tax of $43...................... - - - - (73) (73) (73)
-----
Comprehensive income...................... - - - - - - 3,712
=====
Stock options exercised................... 11,218 12 153 (184) - (19)
Tax benefit of stock option exercises..... - - 40 - - 40
Issuance of common shares as interest
payment on subordinated notes.......... 10,279 10 80 - - 90
Other incentive plan activity............. - - 36 - 36
--------- ----- ----- ------ --- ------
Balance at December 31, 2003.............. 4,277,595 4,278 7,678 10,105 - 22,061
Net earnings.............................. - - - 1,473 - 1,473 1,473
-----
Comprehensive income...................... - - - - - - 1,473
=====
Stock options exercised................... 22,415 22 353 (305) - 70
Acquisition and retirement of
common stock........................... (34,700) (35) (64) (226) - (325)
Other incentive plan activity............. - - 29 - - 29
--------- ----- ----- ------ --- ------
Balance at December 31, 2004.............. 4,265,310 $ 4,265 7,996 11,047 - 23,308
========= ===== ===== ====== === ======
See accompanying notes to consolidated financial statements.
31
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004, 2003, and 2002
(In Thousands)
December 31, December 31, December 31,
2004 2003 2002
----------------- ----------------- -----------------
Cash flows from operating activities:
Net earnings................................ $ 1,473 3,785 663
Adjustments to reconcile net
earnings to net cash provided (used)
by operating activities:
Depreciation of plant and
equipment............................ 441 472 661
Amortization of intangibles............ - 57 49
Gain on disposition of
property, plant and equipment........ - (1,354) (94)
Gain on sale of SI/BAKER joint
venture.............................. - (4,901) -
Amortization of deferred gain on
sale-leaseback....................... (165) (138) -
Equity in income of joint venture...... - (256) (58)
Cash dividends received from
joint venture........................ - 1,000 400
Issuance of common shares
as interest payment on
subordinated notes................... - 90 240
Other non-cash items
affecting earnings................... 29 36 25
Noncash interest charges
associated with settlement of
interest rate swap contract.......... - 292 -
Change in operating assets and
liabilities:
Receivables....................... (685) (90) 2,373
Costs and estimated earnings
in excess of billings........... (538) (393) 116
Inventories....................... (425) 184 1,018
Deferred tax expenses............. 1,092 51 1,389
Prepaid expenses and other
current assets.................. (7) 66 (46)
Other noncurrent assets........... - 1 1
Accounts payable.................. 329 268 (916)
Customers' deposits and
billings in excess of costs
and estimated earnings.......... (620) (91) (1,074)
Accrued salaries, wages,
and commissions................. 124 (240) (132)
Income taxes payable.............. (836) 740 108
Accrued product warranty.......... (270) 31 31
Accrued other liabilities......... (1,373) 702 (1,090)
Deferred compensation............. (42) 17 (109)
------ ------ ------
Net cash provided (used) by
operating activities...................... (1,473) 329 3,555
------ ------ ------
32
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2004, 2003, and 2002
(In Thousands)
December 31, December 31, December 31,
2004 2003 2002
----------------- ----------------- -----------------
Cash flows from investing activities:
Proceeds from the disposition of
property, plant and equipment............. - 2,738 200
Proceeds from the divestment of
joint ventures, net of advisory fees...... - 5,482 125
Additions to property, plant and
equipment................................. (261) (237) (275)
------ ------ ------
Net cash provided (used) by investing
activities................................ (261) 7,983 50
------ ------ ------
Cash flows from financing activities:
Sale of common shares in connection
with employee incentive stock
option plan............................... 70 12 36
Repurchase and retirement of
common stock.............................. (325) - -
Decrease (increase) in restricted cash....... - 865 (865)
Repayment of long-term debt.................. - (8,700) (3,505)
Settlement of interest rate swap
contract.................................. - (283) -
------ ------ ------
Net cash used by
financing activities...................... (255) (8,106) (4,334)
------ ------ ------
Increase (decrease) in cash
and cash equivalents...................... (1,989) 206 (729)
Cash and cash equivalents,
beginning of period....................... 5,591 5,385 6,114
------ ------ ------
Cash and cash equivalents,
end of period............................. $ 3,602 5,591 5,385
===== ====== ======
See accompanying notes to consolidated financial statements.
33
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
Description of Business and Concentration of Credit Risk
--------------------------------------------------------
The Company's Easton, Pennsylvania operation (hereafter referred to as "SI
Systems") is a specialized systems integrator supplying SI Systems' branded
automated material handling systems to manufacturing, assembly, order
fulfillment, and distribution operations customers located primarily in North
America, including the U.S. government. The automated material handling systems
are marketed, designed, sold, installed, and serviced by its own staff or
subcontractors, as labor-saving devices to improve productivity, quality, and
reduce costs. SI Systems' 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. Integrated material handling solutions involve
both standard and specially designed components and include integration of
non-proprietary automated handling technologies so as to provide turnkey
solutions for its customers' unique material handling needs. The 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's Spring Lake, Michigan operation (hereafter referred to as
"Ermanco"), is a manufacturer of Ermanco branded light to medium duty unit
handling conveyor and sortation products, serving the material handling industry
through a worldwide network of approximately 100 experienced material handling
equipment distributors and one licensee. Ermanco also provides complete conveyor
systems for a variety of applications, including distribution centers and
automated manufacturing, 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.
In the years ended December 31, 2004, 2003, and 2002, no customer accounted
for over 10% of sales.
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 progress payments for
system-type projects. Many of Ermanco's sales are to distributors who have
non-exclusive agreements with the Company. As of December 31, 2004, two
customers owed the Company $665,000 and $645,000, respectively, in trade
receivables. No other customer owed the Company in excess of 10% in trade
receivables. The Company believes that the concentration of credit risk in its
trade receivables is substantially mitigated by the Company's ongoing credit
evaluation process as well as the general creditworthiness of its customer base.
Reclassification
----------------
Certain amounts reported for prior years have been reclassified to conform
to the current year's presentation.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of SI Systems
and Ermanco, a wholly-owned subsidiary, after elimination of intercompany
balances and transactions.
34
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
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 allowance for doubtful
accounts, inventory reserve, warranty reserve, revenue recognition, and
impairment of long-lived assets.
Financial Instruments
---------------------
The Company believes the market values of its short-term assets and
liabilities, which are financial instruments, approximate their carrying values
due to the short-term nature of the instruments.
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash on deposit, amounts invested on an overnight basis with a
bank, and other highly liquid investments purchased with an original maturity of
three months or less. The Company does not believe it is exposed to any
significant credit risk on cash and cash equivalents.
Allowance for Doubtful Accounts
-------------------------------
The Company provides an allowance for doubtful accounts determined by a
specific identification of individual accounts and other accounts based on
historical experience. The Company writes off receivables upon determination
that no further collections are probable.
Inventories
-----------
Inventories are valued at the lower of average cost or market. Inventories
primarily consist of materials purchased or manufactured for stock.
Property, Plant and Equipment
-----------------------------
Plant and equipment generally are depreciated on the straight-line method
over the estimated useful lives of individual assets. The ranges of lives used
in determining depreciation rates for machinery and equipment is 3 - 10 years.
Maintenance and repairs are charged to operations; betterments and renewals are
capitalized. Upon sale or retirement of plant and equipment, the cost and
related accumulated depreciation are removed from the accounts and the resultant
gain or loss, if any, is credited or charged to earnings.
Investments in Joint Ventures
-----------------------------
On March 1, 1993, the Company and Automated Prescription Systems, Inc.
formed a 50/50 joint venture, SI/BAKER, INC. ("SI/BAKER"). In 1998, Automated
Prescription Systems, Inc. was renamed McKesson Automation Systems Inc.
("McKesson"). On September 19, 2003, the Company sold its entire ownership
interest in SI/BAKER to McKesson and received cash proceeds of $5,600,000. Prior
to the sale, the Company received royalty income from SI/BAKER at a rate of 2%
of SI/BAKER's gross sales for marketing and sales efforts on behalf of SI/BAKER.
The Company accounted for its investment in the joint venture on the equity
basis by recognizing its proportionate share (50%) of SI/BAKER's net earnings.
The sale resulted in a gain of $4,901,000 in 2003.
35
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Intangibles
-----------
Goodwill
--------
SFAS No. 142, "Goodwill and Other Intangible Assets," requires that
goodwill and intangible assets with indefinite lives no longer be amortized.
Goodwill is instead tested for impairment, using a fair value based method.
The Company completed its tests for impairment of goodwill in accordance
with SFAS No. 142 as of December 31, 2004, 2003, and 2002, and those reviews did
not indicate any impairment. The book value of goodwill as of December 31, 2004
is $17,657,000. During the years ended December 31, 2004, 2003, and 2002,
goodwill and other intangible amortization was $0, $57,000, and $49,000,
respectively. The Company had no acquisitions of goodwill or other intangible
assets during 2004, 2003, and 2002.
Deferred Debt Issuance Cost
---------------------------
Deferred debt issuance costs are amortized over the period of the related
facility.
During 2003, the Company prepaid its outstanding term loan with its
principal bank and fully expensed the related unamortized debt issuance costs.
Asset Impairment
----------------
The Company reviews the recovery of the net book value of long-lived assets
whenever events and circumstances indicate that the net book value of an asset
may not be recoverable from the estimated undiscounted future cash flows
expected to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the net book value, an
impairment loss is recognized equal to an amount by which the net book value
exceeds the fair value of assets.
Revenue Recognition
-------------------
Revenues on systems contracts, accounted for in accordance with SOP 81-1 of
the American Institute of Certified Public Accountants, are recorded on the
basis of the Company's estimates of the percentage of completion of individual
contracts. Gross margin is recognized on the basis of the ratio of aggregate
costs incurred to date to the most recent estimate of total costs. As contracts
may extend over one or more years, revisions in cost and profit estimates during
the course of the work are reflected in the accounting periods in which the
facts requiring revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued.
Revenues on other sales of parts or equipment are recognized when title
transfers pursuant to shipping terms. There are no installation or customer
acceptance aspects of these sales.
Product Development Costs
-------------------------
The Company expenses product development costs as incurred.
Restructuring
-------------
In June 2001, the Company restructured its business operations, including
curtailment of a defined benefit plan, and recorded a charge of $1,538,000 for
restructuring costs.
In December 2002, the Company partially settled its obligations by making
lump-sum distributions to those participants who elected that payment option and
correspondingly recorded a restructuring credit of $859,000 during 2002. In
February 2003, the Company settled its remaining obligations by purchasing
annuities for those participants who elected that payment option and
correspondingly recorded a restructuring credit of $170,000 during 2003.
36
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Restructuring (Continued)
-------------
A roll-forward of restructuring activities is as follows (in thousands):
Beginning Charge/ Cash Reversal/ Ending
Balance (Credit) Spending Reclassification Balance
------------ ------------- ------------ ------------------- ------------
2004............. $ 68 - (5) - 63
2003............. $ 216 (264) (54) 170 68
2002............. $ 494 (859) (278) 859 216
The $63,000 restructuring accrual at December 31, 2004 relates to
professional fees for the 2001 restructuring that are still expected to be paid
and is included in accrued other liabilities.
During 2003, the Company recorded a restructuring credit of $94,000
associated with the reversal of a previously established severance accrual that
was no longer required.
The amounts reclassified out of the restructuring accrual and included in
accrued pension and retirement savings plan liabilities for the years ended
December 31, 2003 and 2002 were $170,000 and $859,000, respectively.
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, ranging from one to
two percent depending on the type of system sold, and a detailed review of
products still in the warranty period.
A roll-forward of warranty activities is as follows (in thousands):
Additions
Charged to
Beginning Costs and Ending
Balance Expenses Deductions Balance
------------ ----------------- ------------------ --------------
2004.................... $ 925 20 (290) 655
2003.................... $ 894 215 (184) 925
2002.................... $ 863 245 (214) 894
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.
37
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Stock-Based Compensation
------------------------
The Company grants stock options for a fixed number of shares to employees
and non-employee directors with an exercise price equal to the fair value of the
shares at the date of grant. The Company has elected to continue to account for
its stock-based compensation plans under the guidelines of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense on options granted to employees
for the stock option grants. The Company recognizes compensation expense on
options granted to non-employee directors. Additional disclosure as required
under the guidelines of SFAS No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"), as amended by FAS 148, is included below. If the Company had
elected to recognize stock-based compensation expense for options granted to
employees based on the fair value of granted options at the grant date (as
determined under FAS 123), net earnings (in thousands) and basic and diluted
earnings per share for the years ended December 31, 2004, 2003, and 2002 would
have been as follows:
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2004 2003 2002
----------------- ----------------- ----------------
Net earnings, as reported................. $ 1,473 3,785 663
Deduct: total stock-based employee
compensation determined under
fair value method, net of related
tax effects............................ (91) (80) (280)
----- ----- ---
Pro forma net earnings.................... $ 1,382 3,705 383
===== ===== ===
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2004 2003 2002
----------------- ----------------- ----------------
Earnings per share:
Basic -- as reported.................... $ .34 .89 .16
=== === ===
Basic -- pro forma...................... $ .32 .87 .09
=== === ===
Diluted -- as reported.................. $ .34 .87 .15
=== === ===
Diluted -- pro forma.................... $ .32 .85 .09
=== === ===
The above pro forma net earnings and basic and diluted earnings per share
were computed using the fair value of granted options at the date of grant as
calculated by the Black-Scholes option pricing method. No options were granted
to employees during the years ended December 31, 2004, 2003, and 2002.
The Company also grants phantom stock units to its directors as deferred
compensation. Such awards are redeemable in cash or the Company's common stock
at the director's option and are accounted for in accordance with APB Opinion
No. 25 as stock appreciation rights. Expense for the phantom stock unit plan was
not material for the years ended December 31, 2004, 2003, and 2002.
38
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Earnings Per Share
------------------
Basic and diluted earnings per share for the years ended December 31, 2004,
2003, and 2002 are based on the weighted average number of shares outstanding.
In addition, diluted earnings per share reflect the effect of dilutive
securities which include phantom stock units, and the shares that would be
outstanding assuming the exercise of dilutive stock options. The number of
shares that would be issued from the exercise has been reduced by the number of
shares that could have been purchased from the proceeds at the average market
price of the Company's common stock.
Cash Flow Hedge
---------------
In accordance with the provisions of SFAS No. 133, as amended, the Company
recognizes all derivatives on the balance sheet at fair value. On the date the
derivative instrument is entered into, the Company designates the derivative as
a hedge of a forecasted transaction (cash flow hedge) or of the variability of
cash flows to be received or paid related to a recognized asset or liability.
The Company records in accumulated other comprehensive income or loss changes in
the fair value of derivatives that are designated as and meet all the required
criteria for a cash flow hedge. The Company then reclassifies these amounts into
earnings as the underlying hedged item affects earnings. The Company records
immediately in earnings changes in the fair value of derivatives that are not
designated as hedges. As of December 31, 2004, the Company did not have any cash
flow hedges.
Off-Balance Sheet Arrangements
------------------------------
As of December 31, 2004, the Company had no off-balance sheet arrangements
in the nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity, or market risk support to unconsolidated entities for any
such assets), or obligations (including contingent obligations) arising out of
variable interests in unconsolidated entities providing financing, liquidity,
market risk, or credit risk support to the Company, or that engage in leasing,
hedging, or research and development services with the Company.
Recently Issued Accounting Pronouncements
-----------------------------------------
In December 2003, the Company adopted SFAS No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("FAS 132R") as
amended. This standard retains the existing disclosures and requires additional
disclosures to provide details about pension plan assets, benefit obligations,
cash flows, benefit costs, and related information. The disclosure requirements
are included in the financial statements.
In November 2004, the Financial Accounting Standards Board issued SFAS No.
151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS
151 provides for certain fixed production overhead cost to be reflected as a
period cost and not capitalized as inventory. FAS 151 is effective for the
beginning of 2006. The adoption of FAS 151 is not expected to have a material
impact on the Company's financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised) "Share-Based Payment" ("FAS 123R"). FAS 123R addresses all forms
of share-based payment awards, including shares issued under employee stock
purchase plans, stock options, restricted stock, and stock appreciation rights.
It will require companies to recognize in the statement of operations the
grant-date fair value of stock options and other equity-based compensation
issued to employees, but expresses no preference for a type of valuation model.
The statement eliminates the intrinsic value-based method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, that the Company currently uses. The Company is required to
adopt FAS 123R beginning in the third quarter of 2005. The adoption of FAS 123R
is not expected to have a material impact on the Company's financial statements.
39
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(2) Uncompleted Contracts
--- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows (in
thousands):
December 31, December 31,
2004 2003
---------------- ----------------
Costs and estimated earnings on
uncompleted contracts............................ $ 14,323 13,584
Less: billings to date............................. 14,824 15,243
------ ------
$ (501) (1,659)
====== ======
Included in accompanying balance sheets under the
following captions:
Costs and estimated earnings
in excess of billings.......................... $ 1,059 521
Customers' deposits and billings in
excess of costs and estimated
earnings....................................... (1,560) (2,180)
------ ------
$ (501) (1,659)
====== ======
(3) Line of Credit
--- --------------
The Company has a line of credit facility which may not exceed $5,000,000,
$4,800,000 is available, 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%.
The line of credit facility contains various non-financial covenants and is
secured by all accounts receivable and inventory. The Company was in compliance
with all covenants as of December 31, 2004. As of December 31, 2004, the Company
did not have any borrowings under the line of credit facility, and the line of
credit facility expires effective June 30, 2005. The Company expects to renew
the line of credit facility under similar terms and conditions during 2005.
(4) Long-Term Debt
--- --------------
The Company received $14,000,000 in the form of a seven-year term loan from
its principal bank to finance the acquisition of Ermanco on September 30, 1999.
The interest rate on the term loan was variable at a rate equal to the
three-month LIBOR Market Index Rate plus 2.65%.
Also in connection with the acquisition of Ermanco, on September 30, 1999,
the Company issued promissory notes to the stockholders of Ermanco, including
notes in the amounts of $1,382,861 and $1,001,382 to Steven Shulman and Leon C.
Kirschner, respectively. Mr. Shulman is a director of the Company, and Mr.
Kirschner serves as the President of Ermanco and Chief Operating Officer of the
Company. The notes, with an original term of seven years, bore interest at an
annual rate of 10% through September 30, 2002, and 12% from October 1, 2002
through the prepayment date. Interest on the promissory notes was payable
quarterly, in cash or under certain conditions, in the Company's common stock
upon approval of the Company's Board of Directors.
In 2003, the Company prepaid all of its outstanding term and subordinated
debt. The settlement of the subordinated debt resulted in a gain of $150,000,
which is included in interest expense.
40
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(5) Capital Stock Options
--- ---------------------
The following is a summary of options available for grant and changes in
options outstanding under the Company's 1997 Equity Compensation Plan ("ECP")
for the years ended December 31, 2004, 2003, and 2002:
2004 2003 2002
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Stock Options Price Stock Options Price Stock Options Price
Outstanding Per Share Outstanding Per Share Outstanding Per Share
------------- --------- ------------- --------- ------------- ---------
1997 ECP:
Balance as of January 1........ 339,122 $ 7.40 525,516 $ 7.78 556,771 $ 7.81
Granted........................ - - - - 20,000 8.20
Exercised...................... (67,789) 7.40 (39,706) 6.67 (5,563) 6.69
Lapsed......................... (61,550) 8.40 (146,688) 8.95 (45,692) 8.47
------- ---- ------- ---- ------- ----
Balance as of December 31.... 209,783 $ 7.11 339,122 $ 7.40 525,516 $ 7.78
======= ==== ======= ==== ======= ====
41
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(5) Capital Stock Options (Continued)
--- ---------------------
The following table summarizes information about stock options outstanding
as of December 31, 2004:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Number of Remaining Number of
Exercise Stock Options Life Exercise Stock Options
Price Outstanding (Years) Price Exercisable
------------- ----------------- -------------- ----------- ----------------
$7.06 7,000 .11 7.06 7,000
6.63 106,283 .84 6.63 106,283
7.50 76,500 1.61 7.50 57,375
8.12 10,000 2.47 8.12 5,000
8.27 10,000 2.27 8.27 5,000
---- -------- ---- ---- -------
$7.11 209,783 1.46 7.01 180,658
==== ======= ==== ==== =======
In July 1997, the stockholders adopted the 1997 Equity Compensation Plan
("ECP"), which will expire in July 2007. The ECP provides for grants of stock
options, restricted stock, and stock appreciation rights to selected employees,
key advisors who perform valuable services, and directors of the Company. In
addition, the ECP provides for grants of performance units to employees and key
advisors. The ECP, as amended by shareholders in August 2000 and June 2001,
authorizes up to 1,012,500 shares of common stock for issuance pursuant to the
terms of 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. The Company recognizes compensation expense
on options granted to non-employee directors. Options become exercisable in
increments of 25% on the anniversary date of the grant; thus, at the end of four
years, the options are fully exercisable. As of December 31, 2004, 209,783
options are outstanding under the plan, and all options have a term of five
years.
(6) Employee Benefit Plans
--- ----------------------
The Company maintains a defined benefit plan for employees covered by its
collective bargaining agreement. Retirement benefits are based on the employee's
years of service multiplied by the appropriate monthly benefit amount. Employee
compensation does not impact pension benefits. The Company's policy is to fund
plans in compliance with applicable laws and regulations.
The benefit obligations for the Company's defined benefit plan were (in
thousands):
2004 2003
-------------------- ---------------------
Change in benefit obligations:
Benefit obligation at beginning of year............. $ 692 1,526
Service cost (excluding administrative
expenses)......................................... 96 88
Interest cost....................................... 46 60
Actuarial loss...................................... 85 197
Benefits and expenses paid.......................... (16) (1,179)
---- -----
Benefit obligation at end of year................... $ 903 692
==== =====
42
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(6) Employee Benefit Plans (Continued)
--- ----------------------------------
The fair value of the plan assets of the Company's defined benefit plan
follows (in thousands):
2004 2003
-------------------- ---------------------
Change in plan assets:
Fair value of plan assets at beginning of year...... $ 712 1,730
Actual return on plan assets........................ 61 49
Employer contribution............................... 146 112
Expenses............................................ (10) (35)
Benefits paid....................................... (6) (1,144)
--- -----
Fair value of plan assets at end of year............ $ 903 712
=== =====
Prepaid pension asset included in the Company's balance sheets were
(in thousands):
2004 2003
-------------------- ---------------------
Reconciliation to balance sheets:
Funded status:
Plan assets in excess of benefit obligation......... $ - 20
Unrecognized net actuarial loss..................... 227 152
Unrecognized net obligation......................... (10) (11)
Unrecognized prior service costs.................... 5 5
--- -----
Prepaid pension asset recognized in the
Company's balance sheets.......................... $ 222 166
==== =====
The Company uses the projected unit credit actuarial method to compute
pension expense, which includes amortization of past service costs over the
average remaining service lives of the employees expected to receive benefits.
The net periodic pension expense (benefit) and total pension expense (benefit)
for the years ended December 31, 2004, 2003, and 2002 includes the following
components (in thousands):
2004 2003 2002
---------------- ----------------- -----------------
Service cost-benefits earned during
the period............................. $ 96 88 71
Interest cost on projected benefit
obligation............................ 46 60 216
Expected return on plan assets -
increase.............................. (60) (91) (302)
Amortization of net asset................ (1) - -
Amortization of prior service cost....... - - -
Recognized net actuarial gain............ 9 (2) (86)
--- --- ---
Net periodic pension expense
(benefit)............................. 90 55 (101)
Settlement credit........................ - (144) (859)
--- --- ---
Total pension expense (benefit).......... $ 90 (89) (960)
=== === ===
43
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(6) Employee Benefit Plans (Continued)
--- ----------------------
The weighted average rates and actuarial assumptions used to develop the
net periodic pension expense (benefit) and the projected benefit obligation for
the plans were:
2004 2003 2002
-------------------- ------------------- --------------------
Discount rate.................. 6.0% 6.5% 5.32% and 7.0%
Expected long-term rate of
return on plan assets....... 8.0% 8.0% 8.0% and 8.50%
The expected long-term rate of return on assets was developed through
analysis of historical market returns, current market conditions, the plans past
experience, and the general mix of assets held by the plans.
The Company made contributions to its defined benefit plan during the years
ended December 31, 2004 and 2003 of $146,000 and $112,000, respectively. The
Company expects total pension plan contributions to its defined benefit plan to
approximate $90,000 for the year ended December 31, 2005.
The plan's weighted-average target allocation and asset allocations by
asset category are as follows (in thousands):
Target
Allocations 2004 2003
------------------ ------------------ ------------------
Asset Category:
Equity securities................ 60% 56% 48%
Fixed income securities.......... 35% 34% 42%
Cash and equivalents............. 5% 10% 10%
--- --- ---
Total......................... 100% 100% 100%
=== === ===
The primary investment objective of the plan is to ensure, over the
long-term life of the plan, an adequate pool of assets to support the benefit
obligations to participants, retirees, and beneficiaries. A secondary objective
of the plan is to achieve a level of investment return consistent with a prudent
level of portfolio risk that will minimize the financial impact of the plan on
the Company.
The Company operates a number of defined contribution plans for employees.
The plans contain a Company match feature and one plan also contains provisions
for profit sharing contributions in the form of cash as determined annually by
the Board of Directors. Total expense for these plans was $180,000, $157,000,
and $157,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.
44
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(7) Income Taxes
--- ------------
The provision for income tax expense (benefit) consists of the following
(in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31 December 31, December 31,
2004 2003 2002
------------------ ------------------ ------------------
Federal - current.................. $ (497) 1,982 (1,146)
- deferred................. 1,099 (214) 1,326
----- ----- -----
602 1,768 180
----- ----- -----
State - current.................. 145 388 22
- deferred................. (7) 265 63
----- ----- -----
138 653 85
----- ----- -----
Foreign - current.................. 3 3 2
----- ----- -----
$ 743 2,424 267
===== ===== =====
The reconciliation between the U.S. federal statutory rate and the
Company's effective income tax rate is (in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2004 2003 2002
------------------ ----------------- ------------------
Computed tax expense (benefit)
at statutory rate of 34%......... $ 753 2,111 316
Increase (reduction) in taxes
resulting from:
State income taxes, net of
federal benefit.............. 28 431 56
Equity in income of joint
venture and dividend
received deduction from
joint venture distribution... - (272) (109)
Change in state effective
tax rate..................... (48) - -
Miscellaneous items............ 10 154 4
--- ----- ---
$ 743 2,424 267
=== ===== ===
45
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(7) Income Taxes (Continued)
--- ------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2004 and
2003 are presented below (in thousands):
December 31, December 31,
2004 2003
----------------- -----------------
Deferred tax assets:
Net operating and built-in loss carryforward
(federal loss of $172 expires through 2008).......... $ 251 188
Inventories............................................ 186 298
Accrued restructuring costs............................ 24 26
Accrued warranty costs................................. 248 355
Accrued settlement costs............................... - 420
Accruals for other expenses, not yet deductible for
tax purposes......................................... 613 741
----- -----
Total gross deferred tax assets.................... 1,322 2,028
----- -----
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation.......................... (170) (159)
Amortization........................................... (2,271) (1,854)
Other.................................................. (123) (165)
----- -----
Total gross deferred tax liabilities............... (2,564) (2,178)
----- -----
Net deferred tax assets (liabilities).............. $ (1,242) (150)
===== =====
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences at December 31, 2004.
(8) Contingencies
--- -------------
In July 2003, a competitor filed an action against the Company in the
United States District Court for the District of New Jersey alleging that
certain of the Company's products infringed patents held by the competitor and
also asserting claims for breach of contract, unjust enrichment, unfair
competition, tortious interference with prospective economic advantage, and
violation of New Jersey's consumer fraud act as a result of alleged improper use
of the competitor's trade secrets, technology, and other proprietary
information. Based on these allegations, the competitor was seeking monetary
damages and injunctive relief against the Company.
In February 2004, a settlement was reached between the Company and the
competitor. Under the settlement, the competitor dismissed the action and agreed
that the Company's products involved in the litigation are immune from suit for
infringement of any of the competitor's intellectual property rights. In
exchange, Paragon agreed to dismiss its counterclaims and paid the competitor
$1,125,000. Total costs associated with the litigation recognized during 2003,
inclusive of settlement costs and legal costs, were $1,375,000.
46
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(8) Contingencies (Continued)
--- -------------
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
(9) Commitments and Related Party Transactions
--- ------------------------------------------
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement, as amended,
requires fixed monthly rentals of $29,310 (with annual increases of 2.5%). The
terms of the lease require the payment by Ermanco of all taxes, insurance, and
other ownership related costs of the property. The lease, as amended on April 1,
2004, expires on September 30, 2008. The Company paid $387,000, $395,000, and
$394,000 in the years ended December 31, 2004, 2003, and 2002, respectively,
under this leasing arrangement.
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 $17,703 (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 lease expires on February 21, 2008. 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 remaining gain of $826,000 was deferred and is
being recognized as a reduction in rent expense over the term of the lease.
During 2004 and 2003, $165,000 and $138,000, respectively, of the deferred gain
was recognized.
The Company also leases certain office equipment, computer equipment, and
software under various operating leases with terms extending through September
2007.
Total rental expense, including short-term leases, in the years ended
December 31, 2004, 2003, and 2002 approximated $724,000, $718,000, and $555,000,
respectively.
Future minimum rental commitments at December 31, 2004 are as follows (in
thousands):
Operating Leases
-----------------------
2005............................................ $ 636
2006............................................ 590
2007............................................ 606
2008............................................ 318
2009............................................ -
-----
Total ........................................ $ 2,150
=====
The Company has an employment agreement with Leon C. Kirschner, an officer
of the Company and President of Ermanco Incorporated. The employment agreement
entitles Mr. Kirschner to receive annual compensation during the term of the
employment agreement, participate in a bonus plan, plus usual and customary
fringe benefits associated with being an employee of the Company. Under certain
circumstances, the employment agreement provides for post termination severance
payments.
See Note 11 of Notes to Consolidated Financial Statements for transactions
related to the Company's former SI/BAKER joint venture.
47
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(10) Cash Flow Information
---- ---------------------
Supplemental disclosures of cash flow information for the years ended
December 31, 2004, 2003, and 2002 are as follows (in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2004 2003 2002
---------------- ----------------- ----------------
Supplemental disclosures of cash
flow information:
Cash paid (received) during
the period for:
Interest..................... $ 4 456 761
=== === ===
Income taxes................. $ 512 720 (667)
=== === ===
Supplemental disclosures of
noncash investing and financing
activities:
Equity impact from exercise of
non-qualified stock options....... $ - 40 -
=== === ===
Withholding of common shares
for income tax withholding
obligations arising from
exercise of non-qualified
stock options..................... $ - (31) -
=== === ===
48
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(11) Joint Ventures
---- --------------
On September 19, 2003, the Company sold its entire ownership interest in its
SI/BAKER joint venture. Prior to the sale, the Company had entered into various
transactions with its former SI/BAKER joint venture as follows:
2004 2003 2002
---------------- ----------------- ----------------
Statements of Operations Data
(in thousands):
Systems and services sold under
various subcontracts................ $ - 62 194
Reimbursement for administrative and
other services provided............. - 9 24
Royalty income........................ - 226 167
Information pertaining to the Company's former investment in its SI/BAKER
joint venture is as follows (in thousands):
Balance at December 31, 2002......................................................... $ 1,325
Equity in net earnings............................................................... 256
Cash dividends....................................................................... (1,000)
Sale of the Company's 50% investment in the
SI/BAKER joint venture............................................................ (581)
------
Balance at December 31, 2003......................................................... $ -
======
Summary operating results prior to the sale of the Company's former SI/BAKER
joint venture are set forth in the following table (in thousands):
2004 2003 2002
----------------- ---------------- ------------------
Net sales.............................. $ - 11,279 8,329
====== ====== ======
Net earnings........................... $ - 513 116
====== ====== ======
49
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(12) Major Segments of Business
---- --------------------------
Operating segments are defined as components of an enterprise in which
separate financial information is available and evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company identified such segments based on both management
responsibility and types of products offered for sale.
The Company operates in two major market segments, and products are sold
worldwide as follows (in thousands):
For the year ended
December 31, 2004: SI Systems Ermanco Total
----------------- ------------ ------------ ------------
Sales........................................ $ 11,702 30,553 42,255
Earnings (loss) before interest expense,
interest income, and income taxes.......... (344) 2,488 2,144
Total assets................................. 6,167 26,538 32,705
Capital expenditures......................... 63 198 261
Depreciation and amortization expense........ 104 337 441
For the year ended
December 31, 2003: SI Systems Ermanco Total
----------------- ------------ ------------ ------------
Sales........................................ $ 12,083 25,212 37,295
Earnings before interest expense,
interest income, equity in income of
joint venture, gain on sale of
SI/BAKER joint venture, gain on
disposition of property, plant and
equipment, and income taxes................ 120 178 298
Gain on sale of SI/BAKER joint venture....... 4,901 - 4,901
Gain on disposition of property, plant
and equipment.............................. 1,354 - 1,354
Total assets................................. 5,263 28,511 33,774
Capital expenditures......................... 76 161 237
Depreciation and amortization expense........ 139 333 472
For the year ended
December 31, 2002: SI Systems Ermanco Total
----------------- ------------ ------------ ------------
Sales........................................ $ 14,906 23,318 38,224
Earnings (loss) before interest expense,
interest income, equity in income of joint
venture, and income taxes.................. 2,248 (442) 1,806
Total assets................................. 9,046 27,657 36,703
Capital expenditures......................... 64 211 275
Depreciation and amortization expense........ 233 428 661
All of the Company's sales originate in the United States, and there are no
long-lived assets existing outside the United States. International sales were
$3,514,000, $2,865,000, and $1,682,000 for the years ended December 31, 2004,
2003, and 2002, respectively.
50
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(13) Quarterly Financial Information (Unaudited)
---- -------------------------------------------
Selected Quarterly Financial Data
---------------------------------
(In thousands, except per share amounts)
For the Year Ended First Second Third Fourth
December 31, 2004 Quarter Quarter Quarter Quarter
----------------- ------- ------- ------- -------
Net sales................................. $10,576 9,638 10,754 11,287
Gross profit on sales..................... $ 2,630 2,334 3,016 2,998
Net earnings.............................. $ 341 129 465 538
Basic earnings per share.................. $ .08 .03 .11 .13
Diluted earnings per share................ $ .08 .03 .11 .12
For the Year Ended First Second Third Fourth
December 31, 2003 Quarter Quarter Quarter Quarter*
----------------- ------- ------- ------- -------
Net sales................................. $ 8,564 10,983 8,742 9,006
Gross profit on sales..................... $ 2,204 2,924 2,234 2,086
Net earnings (loss)....................... $ 1,011 617 2,412 (255)
Basic earnings (loss) per share........... $ .24 .14 .56 (.06)
Diluted earnings (loss) per share......... $ .23 .14 .55 (.06)
For the Year Ended First Second Third Fourth
December 31, 2002 Quarter Quarter Quarter Quarter
----------------- ------- ------- ------- -------
Net sales................................. $10,752 9,908 9,010 8,554
Gross profit on sales..................... $ 2,889 2,486 1,891 2,007
Net earnings (loss)....................... $ 343 123 (402) 599
Basic earnings (loss) per share........... $ .08 .03 (.09) .14
Diluted earnings (loss) per share......... $ .08 .03 (.09) .13
* The fourth quarter of 2003 included severance charges of $387,000 and
settlement and legal costs of $355,000 associated with an action against the
Company by a competitor relating to the Company's intellectual property.
(14) Stock Repurchase Program
---- ------------------------
In August 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. As of December 31,
2004, the Company had repurchased 34,700 shares of common stock at a weighted
average cost, including brokerage commissions, of $9.38 per share. Cash
expenditures for the stock repurchases were $325,632. As of December 31, 2004,
$674,368 remained available for repurchases under the stock repurchase program.
Based on market conditions and other factors, additional repurchases may be made
from time to time, in compliance with SEC regulations, in the open market or
through privately negotiated transactions at the discretion of the Company.
There is no expiration date with regards to the stock repurchase program.
51
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Schedule II
-----------
VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2004, 2003,
and 2002
(In Thousands)
Additions
Balance Charged to
at Costs Balance
Beginning and at End
of Year Expenses Deductions of Year
------------ ------------- -------------- -----------
Allowance for doubtful
accounts:
Year ended
December 31, 2004................. $ 265 123 157 231
=== === === ===
Year ended
December 31, 2003................. $ 221 44 - 265
=== === === ===
Year ended
December 31, 2002................. $ 54 171 4 221
=== === === ===
52
Item 9. Changes in and Disagreements with Accountants on Accounting and
------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
-------- -----------------------
(a) An evaluation was performed under the supervision and with the
participation of the Company's management, including its Chief Executive
Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of
the Company's disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of December 31, 2004. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act, is recorded, processed, summarized, and reported as
specified in Securities and Exchange Commission rules and forms.
(b) There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation of such controls that
occurred during the Company's most recent fiscal year likely to materially
affect the Company's internal control over financial reporting.
Item 9B. Other Information
-------- -----------------
Not applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
-------- --------------------------------------------------
Information concerning the Company's directors is as follows:
Name, Other Positions or Offices With The Company Director
and Principal Occupation for Past Five Years Since Age
-------------------------------------------------------------------------------- ----------- -----
L. Jack Bradt................................................................... 1958 77
L. Jack Bradt was the founder in 1958 and for 30 years President and CEO of SI
Handling Systems, Inc., renamed Paragon Technologies, Inc. shortly after the
Company acquired Ermanco Incorporated. Mr. Bradt has continued as a
director of the Company since its inception. He is active as a director in
a number of local, state, and national organizations involved in business,
education, human services, and government.
Theodore W. Myers............................................................... 2002 61
Theodore W. Myers is the Chairman of the Board of the Company. Mr. Myers
retired from Tucker Anthony Sutro, an investment banking firm, where he was
First Vice President and Branch Manager of the Phillipsburg, New Jersey
satellite office, where he served from 1991 to 2000.
53
Name, Other Positions or Offices With The Company Director
and Principal Occupation for Past Five Years Since Age
-------------------------------------------------------------------------------- ----------- -----
Anthony W. Schweiger............................................................ 2001 63
Anthony W. Schweiger is President and CEO of The Tomorrow Group, LLC, a
governance and management consultancy. He is also a principal of
e-brilliance, LLC, a software and IT education consultancy. Mr. Schweiger's
business experience includes governance oversight, capital market management,
risk management, technology, and strategic planning. Since 1992, he has been
a director and Governance Chair of Radian Group Inc., a NYSE traded global
provider of credit enhancement products. He also serves on Radian's Audit and
Executive Committees. Since 2004, Mr. Schweiger has been a director and Audit
Chair and Governance Chair of United Financial Mortgage Corp. He has also
been an investor and director of Input Technologies, LLC, a supplier of
human-to-machine interface products and services since February 1998. In his
capacity as a consultant, Mr. Schweiger advises various service and
technology businesses on governance, operational, and strategic issues.
Steven Shulman.................................................................. 1999 64
Steven Shulman has been an investment banker through his wholly-owned company,
The Hampton Group. Currently, Mr. Shulman is a shareholder and director in
a diversified group of companies, including Transportation Technologies,
Inc., TNP Enterprises, Inc., Terrace Food Group, Inc., PlasmaSol Corp., C3i
Inc., Beacon Capital Partners, Inc., and Ark Restaurants Corp. In
addition, he serves as Chairman of Terrace Food Group, Inc. Mr. Shulman
serves as Vice Chairman of the Board of Stevens Institute of Technology.
Mr. Shulman was also a director of Ermanco Incorporated at the time of its
acquisition by the Company on September 30, 1999.
Leonard S. Yurkovic............................................................. 2002 67
Leonard S. Yurkovic returned to the Company as President and CEO in October
2003 and is also the Vice Chairman of the Board of the Company. Mr. Yurkovic
started with the Company in 1979 as Vice President - Finance. Throughout the
1980s, Mr. Yurkovic was appointed to several executive-level positions at the
Company, having been named President and Chief Operating Officer in 1985,
Managing Director of European Operations in 1987, and then President and
Chief Executive Officer in 1988. Mr. Yurkovic originally retired from the
Company as CEO and a member of the Board of Directors in 1999.
The names, ages, and offices with the Company of its executive officers are
as follows:
Name Age Office
---- --- ------
Leonard S. Yurkovic 67 President and Chief Executive Officer, Director
Leon C. Kirschner 64 Chief Operating Officer, President - Ermanco
Ronald J. Semanick 43 Vice President - Finance, Chief Financial Officer,
Treasurer, and Secretary
Gordon A. Hellberg 51 Vice President - Sales, Vice President - Sales of Ermanco
Incorporated
54
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------
Information regarding Mr. Yurkovic is provided above.
Mr. Kirschner is the Chief Operating Officer of the Company and the
President of Ermanco since 1983. From 1968 to 1983, Mr. Kirschner was the Senior
Vice President of W&H Systems. Mr. Kirschner began his career in 1961 as an
engineer at Celanese Plastics, and from 1963 to 1968 he worked for P.P.G.
Industries as Plant Engineer. Mr. Kirschner holds an M.B.A. from New York
University and a B.S. in Engineering from Stevens Institute of Technology.
Mr. Semanick was appointed Vice President - Finance, Chief Financial
Officer, and Treasurer of the Company on May 10, 2000, and was appointed
Secretary of the Company on July 13, 1994. Previously, Mr. Semanick held the
positions of Controller, Manager of Financial Accounting, Senior Financial
Accountant, and Financial Accountant. Prior to joining the Company in 1985, Mr.
Semanick was employed as a Certified Public Accountant by Arthur Andersen &
Company of Philadelphia, Pennsylvania. Mr. Semanick received a Bachelor's Degree
in Accounting from Moravian College and his MBA in Finance from Wilkes
University. Mr. Semanick is a Certified Public Accountant in Pennsylvania.
Mr. Hellberg was appointed Vice President - Sales of the Company on March
10, 2004, and has served Ermanco in various management positions since 1987,
including Vice President - Sales. Mr. Hellberg's previous employers include with
Haworth, Inc., L.S.I./Rapistan Division, and psb - Advanced Material Handling
Systems, Inc. Mr. Hellberg received his B.S. in Engineering from Western
Michigan University.
SECTION 16(a) -- BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and persons who beneficially own more than 10% of our
common stock (collectively, the "reporting persons") to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Based on our records and other information, we believe that in 2004 all of our
directors and executive officers met all applicable Section 16(a) filing
requirements.
------------------------------
Audit Committee
---------------
The Audit Committee consists of three directors, Messrs. Bradt, Myers, and
Schweiger, all of whom are "independent" as defined by the rules of the
Securities and Exchange Commission and American Stock Exchange. The Board of
Directors has determined that the Audit Committee does not currently have a
member who qualifies as an "audit committee financial expert" as defined in
regulations of the Securities and Exchange Commission under the Sarbanes-Oxley
Act of 2002. Although no one member of the Audit Committee appears to meet all
of the requirements of the definition of "audit committee financial expert", the
Board of Directors believes that the members of the Audit Committee collectively
possess the required attributes concerning the understanding of U.S. generally
accepted accounting principles and financial statements, the application of such
principles in connection with accounting for estimates, accruals and reserves,
the understanding of internal control over financial reporting and the
understanding of Audit Committee functions.
55
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------
Code of Conduct
---------------
The Company has a Code of Business Conduct and Ethics, which is attached as
Exhibit 14 to this annual report and can be viewed on the Company's website at
www.ptgamex.com. The Company requires all employees, officers, and directors to
adhere to this Code in addressing the legal and ethical issues encountered in
conducting their work. The Code of Business Conduct and Ethics requires that the
Company's employees avoid conflicts of interest, comply with all laws and other
legal requirements, conduct business in an honest and ethical manner, and
otherwise act with integrity and in the Company's best interest. The Company's
Code of Business Conduct and Ethics is intended to comply with Item 406 of the
SEC's Regulation S-K and the rules of the American Stock Exchange.
The Code of Business Conduct and Ethics includes procedures for reporting
violations of the Code, which are applicable to all employees. The
Sarbanes-Oxley Act of 2002 requires companies to have procedures to receive,
retain, and treat complaints received regarding accounting, internal accounting
controls, or auditing matters and to allow for the confidential and anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters. The Code of Business Conduct and Ethics also includes these
required procedures.
------------------------------
Item 11. Executive Compensation
-------- ----------------------
Set forth below is certain information relating to compensation received by
the Company's Chief Executive Officer and other executive officers (the "Named
Executive Officers") of the Company.
Summary Compensation Table
Long
Term
Comp.
Awards
Fiscal Other Annual Stock All Other
Year Salary Bonus Compensation Options Compensation
Name and Position Ended ($)(1) ($) ($)(2) (#)(3) ($)(4)
------------------- -------- -------- ----- ------------ ------- ------------
Leonard S. Yurkovic 12/31/04 $212,160 $ - $9,600 - $28,838
President and 12/31/03 48,960 - 2,215 - 7,894
Chief Executive 12/31/02 - - - 10,000 -
Officer (5)
Leon C. Kirschner 12/31/04 272,328 - 9,600 - 2,050
Chief Operating 12/31/03 260,545 - 9,600 - 2,000
Officer and 12/31/02 272,328 - 8,800 - 2,000
President of
Ermanco
Incorporated
Gordon A. Hellberg 12/31/04 136,927 - 8,991 - 1,040
Vice President - 12/31/03 117,678 - 7,164 - 1,060
Sales and Vice 12/31/02 126,950 - 6,628 - 1,040
President - Sales
of Ermanco
Incorporated (6)
Ronald J. Semanick 12/31/04 119,755 - 9,600 - 4,967
Vice President - 12/31/03 112,236 - 9,969 - 4,843
Finance, Chief 12/31/02 115,000 - 9,600 - 4,452
Financial Officer,
and Treasurer
56
Item 11. Executive Compensation (Continued)
-------- ----------------------
Summary Compensation Table (Continued)
-------------------------
(1) This column includes employee pre-tax contributions to the Company's
401(k) Retirement Savings Plans.
(2) This column consists of an auto allowance for the business usage of
personal automobiles for Messrs. Yurkovic and Semanick, and also
automobile benefits for Messrs. Kirschner and Hellberg. The monthly auto
allowance is $800.
(3) Options become exercisable in increments of 25% on the anniversary date
of the grant. Thus at the end of four years the options are fully
exercisable. All options have a term of five years.
(4) This column includes the amounts expensed for financial reporting
purposes for Company contributions to the Company's 401(k) Retirement
Savings Plans pertaining to basic, matching, and profit sharing
contributions for all Named Executive Officers. This column includes
meals and lodging expenses of $20,515 and $6,262 for 2004 and 2003,
respectively, for Mr. Yurkovic while away from his Maryland residence and
working at the Company's headquarters in Easton, Pennsylvania.
(5) Mr. Yurkovic became President and Chief Executive Officer of the
Company in October 2003. His fiscal year 2003 compensation
represents compensation from October 2003 through December 2003.
(6) Mr. Hellberg as appointed Vice President - Sales of the Company on
March 10, 2004. His fiscal year 2004 compensation
represents total compensation for the entire fiscal year 2004.
57
Item 11. Executive Compensation (Continued)
-------- ----------------------
Stock Options Granted to Named Executive Officers During the Year Ended
December 31, 2004.
There were no options for the purchase of the Company's common stock awarded to
the Named Executive Officers during the year ended December 31, 2004.
Stock Options Exercised During the Year Ended December 31, 2004 and Held by
Named Executive Officers as of December 31, 2004.
The following table sets forth certain information regarding options for
the purchase of the Company's common stock that were exercised and/or held by
the Company's Named Executive Officers during the year ended December 31, 2004.
Aggregated Option Exercises in the Year Ended December 31, 2004
and Year-End Option Values
--------------------------
Number of Value of
Shares Covered Unexercised
# of By Unexercised In-The-Money
Shares Options at Options at
Acquired December 31, 2004 December 31, 2004
On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
------------------- -------- -------- ----------------- -----------------
Leonard S. Yurkovic - $ - 5,000/5,000 $ 8,900/8,900
Leon C. Kirschner 50,000 (1) 92,188 43,750/6,250 126,875/15,000
Ronald J. Semanick 7,839 (2) 26,229 15,833/1,250 48,572/3,000
Gordon A. Hellberg - - 17,750/1,250 51,788/3,000
(1) On June 23, 2004, Mr. Kirschner acquired 50,000 shares of common stock by
exercising 50,000 options to obtain the shares
(2) On June 23, 2004, Mr. Semanick acquired 7,839 shares of common stock by
exercising 7,839 options to obtain the shares.
Employment Agreement with Leon C. Kirschner
-------------------------------------------
The Company entered into an employment agreement with Leon C. Kirschner, a
former stockholder of Ermanco Incorporated, on October 1, 1999. In accordance
with the employment agreement, Mr. Kirschner was appointed as Corporate Vice
President and a director of the Company and President of Ermanco Incorporated.
On June 25, 2001, Mr. Kirschner was appointed Chief Operating Officer of the
Company. The employment agreement was amended and restated effective August 28,
2002. Terms of the employment agreement include a base salary of $272,328 per
year. The employment agreement entitles Mr. Kirschner to participate in the
Company's Management Incentive Plan that provides for the opportunity to receive
a bonus based upon the achievement of goals as defined for each fiscal year by
the Board of Directors. Effective January 6, 2003, Mr. Kirschner's annual salary
was temporarily reduced by 10% to $245,095 as part of a cost reduction
initiative. Effective June 30, 2003, Mr. Kirschner's annual salary was adjusted
to $258,712 and, effective October 13, 2003, Mr. Kirschner's annual salary was
restored to $272,328.
Under the terms of the employment agreement, Mr. Kirschner shall perform
his duties and responsibilities at the Company's Spring Lake, Michigan facility
or at such other location in western Michigan as may be established from time to
time by the President and CEO of the Company.
58
Item 11. Executive Compensation
-------- ----------------------
Employment Agreement with Leon C. Kirschner (Continued)
-------------------------------------------
The Company has the right to terminate Mr. Kirschner's employment with or
without cause. Cause is defined as any material breach of the employment
agreement, disloyalty to the Company, willful misconduct, and conviction of a
felony or other criminal act. Mr. Kirschner has the right to terminate the
employment agreement voluntarily by giving the Company written notice of such
termination no less than 180 days prior to the effective date of the
termination. The employment agreement may also be terminated upon a change in
control of the Company. The employment agreement provides for severance benefits
that allow Mr. Kirschner to receive his salary for a period of 18 months plus a
lump sum payment in an amount equal to one and one-half times the average of the
bonus paid for the two (2) fiscal years preceding the year in which the
termination becomes effective in the event of termination upon a change of
control. In the event of termination without cause, the employment agreement
also provides for severance benefits that allow Mr. Kirschner to receive his
salary and health insurance coverage for a period of one year following
effective date of the termination.
Other benefits normally made available by the Company to executive
officers, including participation in a health plan, retirement savings plan, and
receipt of automobile benefits are also made available to Mr. Kirschner under
the employment agreement.
------------------------------
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company receive no additional
remuneration for their services as directors. The Chairman of the Board of
Directors and other non-employee directors receive an annual retainer of $24,000
and $12,000, respectively; a fee of $1,500 for each Board meeting attended; a
fee of $600 per day for all Company-related activities undertaken at the request
of the Chairman of the Board or the Chief Executive Officer of the Company; a
fee of $300 per interview for all Company-related activities undertaken in
connection with interviewing qualified candidates to fill vacancies in key
positions within the Company; and a fee of $250 for each Board Meeting held by
telephone conference.
The Chairman of the Audit Committee receives an annual retainer of $5,000,
and directors are paid for serving on Committees of the Board of Directors.
Committee members receive a fee of $250 for each Committee Meeting held by
telephone conference, a fee of $250 for each Committee Meeting held in
conjunction with a Board Meeting, and a fee of $1,500 for each Committee Meeting
except those held in conjunction with a Board Meeting. Directors are also
reimbursed for their customary and usual expenses incurred in attending Board
and Committee Meetings including those for travel, food, and lodging.
The Company permits its directors, at their election, to defer receipt of
payment of directors' fees. During the year ended December 31, 2004, $3,250 of
directors' fees was deferred. Deferred directors' fees accrue interest at the
prime rate of interest charged by the Company's principal bank or may be
invested in units equivalent to shares of common stock of the Company. During
the year ended December 31, 2004, there were no distributions under the
Directors' Deferred Compensation Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently comprised of Mr. Shulman, Chairman,
and Messrs. Bradt and Schweiger. Mr. Bradt was formerly the CEO of the Company.
No executive officer of the Company serves as a member of the Board of Directors
or Compensation Committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee. Mr. Shulman is a party to certain transactions with the Company as
described in Item 13, Certain Relationships and Related Transactions.
59
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
and Related Stockholder Matters
-------------------------------
The following table sets forth certain information as of March 24, 2005
(unless otherwise noted) regarding the ownership of common stock (i) by each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding common stock, (ii) by each director or nominee of the Company, (iii)
by the executive officers of the Company named in the Summary Compensation
Table, and (iv) by all current executive officers and directors of the Company
as a group. Unless otherwise stated, the beneficial owners exercise sole voting
and/or investment power over their shares.
Right to
Number of Acquire Under
Shares Options
Beneficially Exercisable Percentage
Beneficial Owner Owned Within 60 Days of Class (1)
---------------- ------------ ---------------- ------------
Emerald Advisers, Inc. (2)................ 1,290,140 - 30.2%
1703 Oregon Pike
Suite 101
Lancaster, PA 17601
L. Jack Bradt (3)......................... 312,324 10,000 7.5%
580 Riverwoods Way
Bethlehem, PA 18018
Leon C. Kirschner......................... 190,091 43,750 5.4%
Theodore W. Myers (4)..................... 26,200 7,500 *
Anthony W. Schweiger ..................... 30,000 7,500 *
Steven Shulman............................ 169,109 10,000 4.2%
Leonard S. Yurkovic....................... 58,000 5,000 1.5%
Ronald J. Semanick........................ 7,839 15,833 *
Gordon A. Hellberg........................ 1,520 10,750 *
All current directors and
executive officers as a group
(8 persons) (3) (4) ................... 795,083 110,333 20.7%
-----------------------------------
*Less than 1%.
(1) The percentage for each individual, entity or group is based on the
aggregate number of shares outstanding as of March 24, 2005 (4,266,710) and
all shares issuable upon the exercise of outstanding stock options held by
each individual or group that are presently exercisable or exercisable
within 60 days after March 24, 2005.
(2) This information is presented in reliance on information disclosed in a
Schedule 13G/A filed with the Securities and Exchange Commission on
February 2, 2005.
(3) Includes 45,883 shares held by members of Mr. Bradt's immediate family. Mr.
Bradt disclaims beneficial ownership of such shares.
(4) Includes 2,800 shares held by members of Mr. Myers' immediate family. Mr.
Myers disclaims beneficial ownership of such shares.
60
Item 12. Security Ownership of Management and Certain Beneficial Owners
-------- --------------------------------------------------------------
(Continued)
Equity Compensation Plan Information
------------------------------------
The Company maintains the 1997 Equity Compensation Plan (the "1997 Plan")
pursuant to which it may grant equity awards to eligible persons. The Company
also maintains a deferred compensation plan for directors (the "Directors'
Plan") which is described in more detail below.
The following table gives information about equity awards under the
Company's 1997 Plan and the Directors' Plan.
(a) (b) (c)
-------------------- -------------------- -----------------------
Number of
securities remaining
Number of available for future
securities to be Weighted- issuance under
issued upon average exercise equity
exercise of price of compensation plans
outstanding outstanding (excluding
options, warrants options, warrants securities reflected
Plan Category and rights and rights in column (a))
------------------------------ -------------------- -------------------- -----------------------
Equity compensation 209,783 $ 7.11 669,347
plans approved by
security holders..........
Equity compensation
plans not approved by
security holders.......... - - 2,239
------- ---- -------
Total........................ 209,783 $ 7.11 671,586
======= ==== =======
Directors' Plan
---------------
Directors may elect to defer receipt of payment of directors' fees.
Deferred directors' fees accrue interest at the prime rate of interest charged
by the Company's principal bank or may be invested in phantom units equivalent
to shares of common stock of the Company. There are currently no phantom units
outstanding.
61
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
To complete the acquisition of Ermanco on September 30, 1999, the Company
issued $3,000,000 in subordinated promissory notes to the stockholders of
Ermanco, including notes in the original principal amounts of $1,382,861 and
$1,001,382 to Steven Shulman and Leon C. Kirschner, respectively. During 2003,
the Company prepaid all of its outstanding subordinated debt. Mr. Shulman is a
director of the Company, and Mr. Kirschner serves as the President of Ermanco
and Chief Operating Officer of the Company. Note 4 of the Notes to Consolidated
Financial Statements provides additional information regarding the promissory
notes issued to the fourteen stockholders of Ermanco, eight of whom continue to
be employees of the Company.
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement, as amended,
requires fixed monthly rentals of $29,310 (with annual increases of 2.5%). The
terms of the lease require the payment by Ermanco of all taxes, insurance, and
other ownership-related costs of the property. The lease, as amended on April 1,
2004, expires on September 30, 2008.
The Company has an employment agreement with Leon C. Kirschner, an officer
of the Company and President of Ermanco Incorporated. The employment agreement
entitles Mr. Kirschner to receive annual compensation during the term of the
employment agreement, participate in a bonus plan, plus usual and customary
fringe benefits associated with being an employee of the Company. Under certain
circumstances, the employment agreement provides for post termination severance
payments.
Item 14. Principal Accountant Fees and Services
-------- --------------------------------------
KPMG LLP ("KPMG") served as the Company's independent registered public
accountants for 2004 and 2003.
Audit Fees
----------
KPMG's fees for professional services rendered in connection with the audit
of financial statements included in the Company's Form 10-K and review of
financial statements included in the Company's Forms 10-Q and all other SEC
regulatory filings were $145,000 for 2004 and $159,800 for 2003.
Audit-Related Fees
------------------
KPMG's fees for audit-related services were $10,000 for 2004 and $10,000
for 2003. These services were rendered in connection with audits of the
Company's employee benefit plans.
Tax Fees
--------
KPMG's fees for tax compliance and tax consultation services related to our
annual federal and state tax returns were $63,100 for 2004 and $80,850 for 2003.
All Other Fees
--------------
No other fees were charged by KPMG to the Company other than those
referenced above.
In accordance with our Audit Committee Charter, the Audit Committee
approves in advance any and all audit services, including audit engagement fees
and terms, and non-audit services provided to us by our independent registered
public accountants (subject to the de minimus exception for non-audit services
contained in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as
amended), all as required by applicable law or listing standards. The
independent auditors and our management are required to periodically report to
the Audit Committee the extent of services provided by the independent
registered public accountants and the fees associated with these services.
62
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
-------- ------------------------------------------
(a) 1. Index to Consolidated Financial Statements
Report of Independent
Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002
Notes to Consolidated Financial Statements
2. Index to Financial Statement Schedule
II Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
3. Exhibits:
2.1 Stock Purchase Agreement dated as of August 6, 1999 among SI
Handling Systems, Inc., Ermanco Incorporated, and the
stockholders of Ermanco Incorporated (incorporated by
reference to Exhibit 2.1 to Form 10-Q for the quarterly period
ended August 29, 1999).
2.2 Stock Purchase Agreement by and among McKesson Automation
Systems, Inc., Paragon Technologies, Inc., and SI/BAKER,
INC. dated September 19, 2003 (incorporated by reference to
Exhibit 2.2 on Form 8-K, filed on October 1, 2003).
3.1 Articles of Incorporation of Paragon Technologies, Inc.,
a Delaware corporation (incorporated by reference to
Exhibit 3.1 on Form 8-K, filed on December 11, 2001).
3.2 Bylaws of Paragon Technologies, Inc., a Delaware corporation
(incorporated by reference to Exhibit 3.2 on Form 8-K,
filed on December 11, 2001).
10.1 Executive Officer Incentive Plan* (incorporated by reference
to Exhibit 10.5 to Annual Report on Form 10-K for the
fiscal year ended February 26, 1995).
10.2 Directors' Deferred Compensation Plan* (incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-8 [No. 333-10181]).
10.3 1997 Equity Compensation Plan* (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on
Form S-8 [No. 333-36397]).
10.4 Executive Employment Agreement with William R. Johnson
dated March 29, 1999* (incorporated by reference to Exhibit
10.10 to Form 10-Q for the quarterly period ended May 30,
1999).
10.5 Employment Agreement with Leon C. Kirschner* (incorporated
by reference to Exhibit 10.11 to Form 8-K filed on
October 15, 1999).
10.6 Line of Credit Loan Agreement entered into September 30, 1999
by and between SI Handling Systems, Inc., Ermanco
Incorporated, and First Union National Bank (incorporated by
reference to Exhibit 10.12 to Form 8-K filed on October 15,
1999).
63
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.7 Promissory Note related to the Line of Credit Loan Agreement
entered into September 30, 1999 by and between SI Handling
Systems, Inc., Ermanco Incorporated, and First Union National
Bank (incorporated by reference to Exhibit 10.13 to Form 8-K
filed on October 15, 1999).
10.8 First Amendment to Term Note and Loan Agreement dated March
30, 2000 (incorporated by reference to Exhibit 10.17 to
Form 10-Q, filed on May 15, 2000).
10.9 Registration Rights Agreement (incorporated by reference to
Exhibit 10.1 to Form S-3, filed on July 5, 2000).
10.10 Amended and Restated Executive Employment Agreement with
William R. Johnson dated October 1, 2001* (incorporated by
reference to Exhibit 10.22 to Amendment No. 1 to Annual
Report on Form 10-K for the year ended December 31, 2001).
10.11 Amended and Restated Executive Employment Agreement with
Leon C. Kirschner dated August 28, 2002* (incorporated by
reference to Exhibit 10.23 to Form 10-Q, filed on November
14, 2002).
10.12 Sixth Amendment to Line of Credit Note and Loan Agreement
dated August 9, 2002 (incorporated by reference to Exhibit
10.24 to Form 10-Q, filed on November 14, 2002).
10.13 Sixth Amendment to Promissory Note and Loan Agreement (Term
Loan) dated November 13, 2002 (incorporated by reference to
Exhibit 10.25 to Annual Report on Form 10-K for the year ended
December 31, 2002).
10.14 Seventh Amendment to Line of Credit Note and Loan Agreement
(Line of Credit) dated November 13, 2002 (incorporated by
reference to Exhibit 10.26 to Annual Report on Form 10-K for
the year ended December 31, 2002).
10.15 Agreement of Sale between J. G. Petrucci Company, Inc. or its
Assigns and Paragon Technologies, Inc. dated November
8, 2002 (incorporated by reference to Exhibit 10.27 to
Form 10-Q, filed on May 14, 2003).
10.16 Amendment I to Agreement of Sale between J. G. Petrucci
Company, Inc. and Paragon Technologies, Inc. dated January
2, 2003 (incorporated by reference to Exhibit 10.28 to
Form 10-Q, filed on May 14, 2003).
10.17 Amendment II to Agreement of Sale between Triple Net
Investments XIII, L.P. and Paragon Technologies, Inc. dated
January 13, 2003 (incorporated by reference to Exhibit 10.29
to Form 10-Q, filed on May 14, 2003).
10.18 Amendment III to Agreement of Sale between Triple Net
Investments, XIII, L.P. and Paragon Technologies, Inc. dated
January 17, 2003 (incorporated by reference to Exhibit 10.30
to Form 10-Q, filed on May 14, 2003).
10.19 Lease Agreement between Triple Net Investments XIII, L.P.
and Paragon Technologies, Inc. dated February 21, 2003
(incorporated by reference to Exhibit 10.31 to Form 10-Q,
filed on May 14, 2003).
10.20 Eighth Amendment to Line of Credit Note and Loan Agreement
(Line of Credit) dated June 5, 2003 (incorporated by
reference to Exhibit 10.32 to Form 10-Q, filed on August
14, 2003).
10.21 Loan Agreement (Term Loan A and Term Loan B) entered into June
5, 2003 by and between Paragon Technologies, Inc., Ermanco
Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.33 to Form 10-Q,
filed on August 14, 2003).
64
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.22 Promissory Note related to Term Loan A entered into June 5,
2003 by and between Paragon Technologies, Inc., Ermanco
Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.34 to Form 10-Q,
filed on August 14, 2003).
10.23 Promissory Note related to Term Loan B entered into June 5,
2003 by and between Paragon Technologies, Inc., Ermanco
Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.35 to Form 10-Q,
filed on August 14, 2003).
10.24 Security Agreement related to Term Loan A dated June 5, 2003
by and between Paragon Technologies, Inc. and Wachovia Bank,
National Association (incorporated by reference to Exhibit
10.36 to Form 10-Q, filed on August 14, 2003).
10.25 First Amendment to Term Loan A and B Agreement dated August 4,
2003 by and between Paragon Technologies, Inc. and Wachovia
Bank, National Association (incorporated by reference to
Exhibit 10.37 to Form 10-Q, filed on November 13, 2003).
10.26 Ninth Amendment to Line of Credit Note and Loan Agreement
dated August 4, 2003 by and between Paragon Technologies, Inc.
and Wachovia Bank, National Association (incorporated by
reference to Exhibit 10.38 to Form 10-Q, filed on November 13,
2003).
10.27 Amendment to Lease Agreement by and between Spring Lake
Properties Holdings, L.C. and Ermanco Incorporated dated April
1, 2004 (incorporated by reference to Exhibit 10.27 to Form
10-Q, filed on August 12, 2004).
10.28 Lease Agreement related to the Line of Credit entered into
August 6, 2004 by and between Paragon Technologies, Inc.,
Ermanco Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.28 to Form 10-Q,
filed on November 12, 2004).
10.29 Promissory Note related to the Line of Credit entered into
August 6, 2004 by and between Paragon Technologies, Inc.,
Ermanco Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.29 to Form 10-Q,
filed on November 12, 2004).
10.30 Security Agreement related to the Line of Credit dated August
6, 2004 by and between Paragon Technologies, Inc., Ermanco
Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.30 to Form 10-Q,
filed on November 12, 2004).
14 Code of Business Conduct and Ethics (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Independent Registered Public Accounting Firm
(filed herewith).
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 signed by Leonard S. Yurkovic,
President and CEO (filed herewith).
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 signed by Ronald J. Semanick,
Chief Financial Officer and Vice President - Finance and
Treasurer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 signed by Leonard S. Yurkovic, President and CEO
(filed herewith).
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
signed by Ronald J. Semanick, Chief Financial Officer and Vice
President - Finance and Treasurer (filed herewith).
66
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
99.1 Cautionary Statement (filed herewith).
* Management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 15(c) of this report.
(b) Exhibits 14, 21, 23.1, 31.1, 31.2, 32.1, 32.2, and 99.1 are filed with
this report.
(c) Not applicable.
66
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARAGON TECHNOLOGIES, INC.
Dated: March 30, 2005 By /s/ Theodore W. Myers
-------------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 30, 2005 By /s/ Leonard S. Yurkovic
-------------------------------------------
Leonard S. Yurkovic
President and Chief Executive Officer
67
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. This Annual Report
may be signed in multiple identical counterparts, all of which taken together,
shall constitute a single document.
Dated: March 30, 2005 /s/ Theodore W. Myers
------------------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 30, 2005 /s/ Leonard S. Yurkovic
------------------------------------------------
Leonard S. Yurkovic
President & Chief Executive Officer, Director
Dated: March 30, 2005 /s/ Ronald J. Semanick
------------------------------------------------
Ronald J. Semanick
Vice President-Finance, Chief Financial
Officer, Treasurer, and Secretary
(Principal Accounting and Financial Officer)
Dated: March 30, 2005 /s/ Leon C. Kirschner
------------------------------------------------
Leon C. Kirschner
Chief Operating Officer,
President of Ermanco Incorporated
Dated: March 30, 2005 /s/ L. Jack Bradt
------------------------------------------------
L. Jack Bradt
Director
Dated: March 30, 2005 /s/ Anthony W. Schweiger
------------------------------------------------
Anthony W. Schweiger
Director
Dated: March 30, 2005 /s/ Steven Shulman
------------------------------------------------
Steven Shulman
Director
68
EXHIBIT INDEX
2.1 Stock Purchase Agreement dated as of August 6, 1999 among SI Handling
Systems, Inc., Ermanco Incorporated, and the stockholders of Ermanco
Incorporated (incorporated by reference to Exhibit 2.1 to Form 10-Q for
the quarterly period ended August 29, 1999).
2.2 Stock Purchase Agreement by and among McKesson Automation Systems,
Inc., Paragon Technologies, Inc., and SI/BAKER, INC. dated
September 19, 2003 (incorporated by reference to Exhibit 2.2 on
Form 8-K, filed on October 1, 2003).
3.1 Articles of Incorporation of Paragon Technologies, Inc., a Delaware
corporation (incorporated by reference to Exhibit 3.1 on
Form 8-K, filed on December 11, 2001).
3.2 Bylaws of Paragon Technologies, Inc., a Delaware corporation
(incorporated by reference to Exhibit 3.2 on Form 8-K, filed on
December 11, 2001).
10.1 Executive Officer Incentive Plan* (incorporated by reference to
Exhibit 10.5 to Annual Report on Form 10-K for the fiscal
year ended February 26, 1995).
10.2 Directors' Deferred Compensation Plan* (incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on
Form S-8 [No. 333-10181]).
10.3 1997 Equity Compensation Plan* (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form
S-8 [No. 333-36397]).
10.4 Executive Employment Agreement with William R. Johnson dated
March 29, 1999* (incorporated by reference to Exhibit 10.10 to
Form 10-Q for the quarterly period ended May 30, 1999).
10.5 Employment Agreement with Leon C. Kirschner* (incorporated by
reference to Exhibit 10.11 to Form 8-K filed on October 15,
1999).
10.6 Line of Credit Loan Agreement entered into September 30, 1999 by and
between SI Handling Systems, Inc., Ermanco Incorporated, and First
Union National Bank (incorporated by reference to Exhibit 10.12 to Form
8-K filed on October 15, 1999).
10.7 Promissory Note related to the Line of Credit Loan Agreement entered
into September 30, 1999 by and between SI Handling Systems, Inc.,
Ermanco Incorporated, and First Union National Bank (incorporated by
reference to Exhibit 10.13 to Form 8-K filed on October 15, 1999).
10.8 First Amendment to Term Note and Loan Agreement dated March 30, 2000
(incorporated by reference to Exhibit 10.17 to Form 10-Q, filed
on May 15, 2000).
10.9 Registration Rights Agreement (incorporated by reference to Exhibit
10.1 to Form S-3, filed on July 5, 2000).
10.10 Amended and Restated Executive Employment Agreement with William R.
Johnson dated October 1, 2001* (incorporated by reference to
Exhibit 10.22 to Amendment No. 1 to Annual Report on Form 10-K for
the year ended December 31, 2001).
10.11 Amended and Restated Executive Employment Agreement with Leon C.
Kirschner dated August 28, 2002* (incorporated by reference
to Exhibit 10.23 to Form 10-Q, filed on November 14, 2002).
10.12 Sixth Amendment to Line of Credit Note and Loan Agreement dated
August 9, 2002 (incorporated by reference to Exhibit 10.24
to Form 10-Q, filed on November 14, 2002).
10.13 Sixth Amendment to Promissory Note and Loan Agreement (Term Loan)
dated November 13, 2002 (incorporated by reference to
Exhibit 10.25 to Annual Report on Form 10-K for the year ended
December 31, 2002).
10.14 Seventh Amendment to Line of Credit Note and Loan Agreement
(Line of Credit) dated November 13, 2002 (incorporated by
reference to Exhibit 10.26 to Annual Report on Form 10-K for the
year ended December 31, 2002).
10.15 Agreement of Sale between J. G. Petrucci Company, Inc. or its
Assigns and Paragon Technologies, Inc. dated November 8, 2002
(incorporated by reference to Exhibit 10.27 to Form 10-Q, filed on
May 14, 2003).
10.16 Amendment I to Agreement of Sale between J. G. Petrucci Company, Inc.
and Paragon Technologies, Inc. dated January 2, 2003
(incorporated by reference to Exhibit 10.28 to Form 10-Q, filed on
May 14, 2003).
69
EXHIBIT INDEX (Continued)
10.17 Amendment II to Agreement of Sale between Triple Net Investments XIII,
L.P. and Paragon Technologies, Inc. dated January 13,
2003 (incorporated by reference to Exhibit 10.29 to Form 10-Q, filed
on May 14, 2003).
10.18 Amendment III to Agreement of Sale between Triple Net Investments,
XIII, L.P. and Paragon Technologies, Inc. dated January
17, 2003 (incorporated by reference to Exhibit 10.30 to Form 10-Q,
filed on May 14, 2003).
10.19 Lease Agreement between Triple Net Investments XIII, L.P.
and Paragon Technologies, Inc. dated February 21, 2003
(incorporated by reference to Exhibit 10.31 to Form 10-Q, filed on
May 14, 2003).
10.20 Eighth Amendment to Line of Credit Note and Loan Agreement (Line
of Credit) dated June 5, 2003 (incorporated by reference to
Exhibit 10.32 to Form 10-Q, filed on August 14, 2003).
10.21 Loan Agreement (Term Loan A and Term Loan B) entered into June 5, 2003
by and between Paragon Technologies, Inc., Ermanco Incorporated, and
Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.33 to Form 10-Q, filed on August 14, 2003).
10.22 Promissory Note related to Term Loan A entered into June 5, 2003 by and
between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia
Bank, National Association (incorporated by reference to Exhibit 10.34
to Form 10-Q, filed on August 14, 2003).
10.23 Promissory Note related to Term Loan B entered into June 5, 2003 by and
between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia
Bank, National Association (incorporated by reference to Exhibit 10.35
to Form 10-Q, filed on August 14, 2003).
10.24 Security Agreement related to Term Loan A dated June 5, 2003 by and
between Paragon Technologies, Inc. and Wachovia Bank, National
Association (incorporated by reference to Exhibit 10.36 to Form 10-Q,
filed on August 14, 2003).
10.25 First Amendment to Term Loan A and B Agreement dated August 4, 2003 by
and between Paragon Technologies, Inc. and Wachovia Bank, National
Association (incorporated by reference to Exhibit 10.37 to Form 10-Q,
filed on November 13, 2003).
10.26 Ninth Amendment to Line of Credit Note and Loan Agreement dated August
4, 2003 by and between Paragon Technologies, Inc. and Wachovia Bank,
National Association (incorporated by reference to Exhibit 10.38 to
Form 10-Q, filed on November 13, 2003).
10.27 Amendment to Lease Agreement by and between Spring Lake Properties
Holdings, L.C. and Ermanco Incorporated dated April 1, 2004
(incorporated by reference to Exhibit 10.27 to Form 10-Q, filed on
August 12, 2004).
10.28 Lease Agreement related to the Line of Credit entered into August 6,
2004 by and between Paragon Technologies, Inc., Ermanco Incorporated,
and Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.28 to Form 10-Q, filed on November 12, 2004).
10.29 Promissory Note related to the Line of Credit entered into August 6,
2004 by and between Paragon Technologies, Inc., Ermanco Incorporated,
and Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.29 to Form 10-Q, filed on November 12, 2004).
10.30 Security Agreement related to the Line of Credit dated August 6, 2004
by and between Paragon Technologies, Inc., Ermanco Incorporated, and
Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.30 to Form 10-Q, filed on November 12, 2004).
14 Code of Business Conduct and Ethics (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Independent Registered Public Accounting Firm (filed
herewith).
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 signed by Leonard S. Yurkovic, President
and CEO (filed herewith).
70
EXHIBIT INDEX (Continued)
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 signed by Ronald J. Semanick, Chief Financial Officer and Vice
President - Finance and Treasurer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
signed by Leonard S. Yurkovic, President and CEO (filed herewith).
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
signed by Ronald J. Semanick, Chief Financial Officer and Vice
President - Finance and Treasurer (filed herewith).
99.1 Cautionary Statement (filed herewith).
*Management contract or compensatory plan or arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this report.
71