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, 2005
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 Incorporation or (I.R.S. Employer Identification No.)
Organization)
600 Kuebler Road
Easton, Pennsylvania 18040
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-3205
-----------------------------------
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 if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
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. |_|
Indicate by check mark whether the Registrant is a Large Accelerated Filer, an
Accelerated Filer, or a Non-Accelerated Filer. See definition of "Accelerated
Filer and Large Accelerated Filer" in Rule 12-b of the Exchange Act. (Check
one:)
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
1
The aggregate market value of common stock held by non-affiliates of the
Registrant (based on the closing price on the American Stock Exchange) on June
30, 2005, the last day of the Registrant's second fiscal quarter, was
approximately $26.1 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, 2005 that it is the
beneficial owner of 10% or more of the outstanding common stock of Registrant.
The number of shares of the Registrant's Common Stock, $1.00 par value,
outstanding as of March 22, 2006 was 3,551,519.
DOCUMENTS INCORPORATED BY REFERENCE: None
2
[PARAGON LOGO]
TABLE OF CONTENTS
PART I..........................................................................................4
Item 1. Business......................................................................4
Item 1A. Risk Factors.................................................................10
Item 1B. Unresolved Staff Comments....................................................14
Item 2. Properties...................................................................15
Item 3. Legal Proceedings............................................................15
Item 4. Submission of Matters to a Vote of Security Holders..........................15
PART II........................................................................................16
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities...............................................................16
Item 6. Selected Financial Data......................................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................29
Item 8. Financial Statements and Supplementary Data..................................30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................................55
Item 9A. Controls and Procedures......................................................55
Item 9B. Other Information............................................................55
PART III.......................................................................................56
Item 10. Directors and Executive Officers of the Registrant...........................56
Item 11. Executive Compensation.......................................................59
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...............................63
Item 13. Certain Relationships and Related Transactions...............................65
Item 14. Principal Accountant Fees and Services.......................................65
PART IV........................................................................................67
Item 15. Exhibits and Financial Statement Schedules...................................67
Signatures...................................................................71
Exhibit Index................................................................73
3
PART I
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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'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.
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. SI Systems is brought to market as two
individual brands, SI Systems' Order Fulfillment Systems (hereafter referred to
as "SI Systems OFS") and SI Systems' Production & Assembly Systems (hereafter
referred to as "SI Systems PAS"). Each brand has its own focused sales force,
utilizing the products and services currently available or under development
within the Company.
The SI Systems OFS sales force focuses on providing order fulfillment
systems to order processing and distribution operations, which may incorporate
the Company's proprietary DISPEN-SI-MATIC(R) and automated order fulfillment
solutions and specialized software from the SINTHESIS(TM) Software Suite.
SINTHESIS(TM) is comprised of eight proprietary software groups, with 26
extendible software modules that continually assess real-time needs and deploy
solutions to accurately facilitate and optimize planning, warehousing,
inventory, routing, and order fulfillment within the distribution process. The
SI Systems PAS sales force focuses on providing automated material handling
systems to manufacturing and assembly operations and the U.S. government, which
may incorporate the Company's proprietary LO-TOW(R) and CARTRAC(R) horizontal
transportation technologies.
The Company's automated material handling systems are marketed, designed,
sold, installed, and serviced by its own staff or subcontractors as labor saving
devices to improve productivity, quality, and reduce costs. The Company's
integrated material handling solutions involve both standard and specially
designed components and include integration of non-proprietary automated
handling technologies so as to provide turnkey solutions for its customers'
unique material handling needs. The Company's engineering staff develops and
designs computer controlled programs required for the efficient operation of the
systems and for optimizing manufacturing, assembly, and fulfillment operations.
On May 20, 2005, the Company and Ermanco entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") with TGW Transportgerate GmbH, an
Austrian corporation ("Buyer Parent"), and Malibu Acquisition, Inc., a Michigan
corporation and wholly owned subsidiary of Buyer Parent ("Buyer"), pursuant to
which Paragon agreed to sell to Buyer substantially all of the assets and
liabilities of Ermanco, Paragon's conveyor and sortation subsidiary located in
Spring Lake, Michigan. On August 5, 2005, the Company completed the sale of
substantially all of the assets and liabilities of Ermanco. See Discontinued
Operations - Sale of Ermanco in Note 2 of the Notes to Consolidated Financial
Statements for further information regarding the sale of substantially all of
the assets and liabilities of Ermanco.
4
Following the sale of Ermanco, the Company intends to continue to review
opportunities with the goal of maximizing resources, increasing stockholder
value, and considering strategies and transactions intended to provide
liquidity. At this time, the Company believes that an increase in stockholder
value will be best obtained through a redeployment of assets from Ermanco to the
Company's remaining business, through increases in the Company's internal
technology base, strengthening the Company's sales and marketing capabilities,
growth of the Company's continuing operations and other higher growth markets,
in particular, by the enhancement of the Company's products with advanced
proprietary software capabilities through research and development efforts
and/or possible acquisitions, mergers, and joint ventures. Although the Company
enters into preliminary discussions and non-disclosure agreements from time to
time, the Company does not have any material definitive agreements in place.
There is no assurance that the Company will be able to consummate any such
acquisition at all or an acquisition on terms that the Company would consider
reasonable.
-----------------------------------
The Company's systems vary in configuration and capacity. Historically,
system prices across the Company's product lines have ranged from $100,000 to
several million dollars per system. Systems and aftermarket sales during the
years ended December 31, 2005, 2004, and 2003 are as follows (in thousands):
For the year ended December 31, 2005:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 13,614 81.6%
Aftermarket sales............................. 3,062 18.4%
------------------- ------------------
Total sales................................... $ 16,676 100.0%
=================== ==================
For the year ended December 31, 2004:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 8,375 71.6%
Aftermarket sales............................. 3,327 28.4%
------------------- ------------------
Total sales................................... $ 11,702 100.0%
=================== ==================
For the year ended December 31, 2003:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 9,134 75.6%
Aftermarket sales............................. 2,949 24.4%
------------------- ------------------
Total sales................................... $ 12,083 100.0%
=================== ==================
The Company's products are sold worldwide through its own sales personnel.
Domestic and international sales during the years ended December 31, 2005, 2004,
and 2003 are as follows (in thousands):
For the year ended December 31, 2005:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 15,966 95.7%
International sales........................... 710 4.3%
------------------- ------------------
Total sales................................... $ 16,676 100.0%
=================== ==================
5
For the year ended December 31, 2004:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 9,941 85.0%
International sales........................... 1,761 15.0%
------------------- ------------------
Total sales................................... $ 11,702 100.0%
=================== ==================
For the year ended December 31, 2003:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 10,780 89.2%
International sales........................... 1,303 10.8%
------------------- ------------------
Total sales................................... $ 12,083 100.0%
=================== ==================
All of the Company's sales originate in the United States, and there are no
long-lived assets existing outside the United States.
The Company 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, 2005, 2004, and 2003 represented 3.2%, 3.0%, and 11.4% of total
sales, respectively. In the year ended December 31, 2005, five customers
accounted for revenues of $2,492,000, $1,990,000, $1,867,000, $1,812,000, and
$1,723,000, respectively. In the year ended December 31, 2004, two customers
accounted for revenues of $1,600,000 and $1,184,000, respectively. In the year
ended December 31, 2003, two customers accounted for revenues of $1,543,000 and
$1,382,000, respectively. No other customer accounted for over 10% of sales.
The Company's backlog of orders at December 31, 2005 and December 31, 2004
were $6,918,000 and $5,514,000, respectively.
The Company's business is largely dependent upon a limited number of large
contracts with a limited number of customers. This dependence can cause
unexpected fluctuations in sales volume. Various external factors affect the
customers' decision-making process on expanding or upgrading their current
production or distribution sites. The customers' timing and placement of new
orders is often affected by factors such as the current economy, current
interest rates, and future expectations. The Company believes that its business
is not subject to seasonality, although the rate of new orders can vary
substantially from month to month. Since the Company recognizes sales on a
percentage of completion basis for its systems contracts, fluctuations in the
Company's sales and earnings occur with increases or decreases in major
installations. The Company expects to fill, within its 2006 calendar year, all
of the December 31, 2005 backlog of orders indicated above.
Products
--------
SI Systems' Branded Products
----------------------------
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
6
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 34.1%, 22.7%, and
37.7% for the years ended December 31, 2005, 2004, and 2003, respectively.
Order Fulfillment Systems
-------------------------
DISPEN-SI-MATIC(R), SINTHESIS(TM), and Automated Order Fulfillment
------------------------------------------------------------------
Solutions
---------
DISPEN-SI-MATIC(R) 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(R) 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(R) 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(R), 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(R), SINTHESIS(TM), and automated order
fulfillment system requires approximately six to nine months to engineer,
manufacture, and install.
DISPEN-SI-MATIC(R), SINTHESIS(TM), and the related order fulfillment
systems sales, as a percent of total sales, were 46.9%, 46.8%, and 30.8% for the
years ended December 31, 2005, 2004, and 2003, respectively.
-----------------------------------
7
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 OFS and SI Systems PAS brands. Each brand has its own
focused sales force, utilizing the products and services currently available or
under development within the Company.
Sales of the Company's SI Systems branded products are made through its own
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.
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.
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(R) 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(R) 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.
Raw Materials
-------------
The Company has not been adversely affected by energy or raw materials
shortages. The principal raw material purchased by the Company is steel, which
the Company purchases from various suppliers. Steel prices have escalated in
recent years; 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.
8
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.
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.
The Company holds six patents, of which five have been issued in the United
States, with lives that expire from September 2006 through September 2022; in
addition, the Company has one pending patent application. Significant design
features of the LO-TOW(R), CARTRAC(R), DISPEN-SI-MATIC(R), 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, vehicle and
carrier design, track design and assembly, and order fulfillment system designs.
CARTRAC(R), ROBOLITE(R), ROBODRIVE(R), ROBORAIL(R), SWITCH-CART(R),
LO-TOW(R), DISPEN-SI-MATIC(R), DISTRIBUTION SYSTEM OPTIMIZER(R), ACCUPIC(R), and
Paragon Technologies(R) are registered trademarks of the Company. SINTHESIS(TM)
and SI Planograph(TM) are trademarks of the Company.
The Company does not believe that the loss of any one or group of related
patents, trademarks, or licenses would have a material averse effect on the
overall business of the Company.
Product Development
-------------------
Total product development costs, including patent expense, were $62,000,
$176,000, and $259,000 for the years ended December 31, 2005, 2004, and 2003,
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.
Development programs in the years ended December 31, 2005 and December 31,
2004 were primarily aimed at improvements to the Company's Order Fulfillment
systems technologies. Order Fulfillment development efforts, that were
essentially completed during the year ended December 31, 2004 and incorporated
into the Company's Order Fulfillment product offerings, were centered on the
development of an innovative computer control system, along with
DISPEN-SI-MATIC(R) software and hardware enhancements aimed at promoting
workplace efficiencies for the Company's customers. Order Fulfillment
development efforts during the year ended December 31, 2005 were primarily
additional modifications and enhancements to the Company fiscal 2004 development
initiatives.
Development programs in the year ended December 31, 2003 included
SINTHESIS(TM) computer software for warehousing and distribution center
operations and hardware enhancements related to Order Fulfillment systems
technologies.
Employees
---------
As of December 31, 2005, the Company employed four executive officers and
45 office employees, including salespersons, draftspersons, and engineers. The
Company also operates as a project manager in connection with the installation,
integration, and service of its products generally utilizing subcontractors. 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.
9
Available Information
---------------------
Our internet website is www.ptgamex.com and you may find our SEC filings on
---------------
the "For Stockholders" page of that website. We provide access to all of our
filings with the United States Securities and Exchange Commission, or SEC, free
of charge, as soon as reasonably practicable after filing with the SEC on such
site. Our internet website and the information contained on that website, or
accessible from our website, is not intended to be incorporated into this Annual
Report on Form 10-K.
Item 1A. Risk Factors
-------- ------------
THE FOLLOWING CAUTIONARY STATEMENTS ARE MADE TO PERMIT PARAGON TECHNOLOGIES,
INC. TO TAKE ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Investing in the Company's Common Stock will provide an investor with an
equity ownership interest in the Company. Stockholders will be subject to risks
inherent in the Company's business. The performance of Paragon's shares will
reflect the performance of the Company's business relative to, among other
things, general economic and industry conditions, market conditions, and
competition. The value of the investment in the Company may increase or decline
and could result in a loss. An investor should carefully consider the following
factors as well as other information contained in this Form 10-K before deciding
to invest in shares of the Company's Common Stock.
This Form 10-K also contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in the forward-looking statements as a result of many factors,
including the risk factors described below and the other factors described
elsewhere in this Form 10-K.
The Company wishes to inform its investors of the following important
factors that in some cases have affected, and in the future could affect, the
Company's results of operations and that could cause such future results of
operations to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Disclosure of these factors is
intended to permit the Company to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Many of these factors
have been discussed in prior SEC filings by the Company. Though the Company has
attempted to list comprehensively these important cautionary factors, the
Company wishes to caution investors that other factors may in the future prove
to be important in affecting the Company's results of operations.
-----------------------------------
Sales of the Company's products depend on the capital spending decisions of its
customers.
Automated, integrated material handling systems using the Company's
products can range in price from $100,000 to several million dollars.
Accordingly, purchases of the Company's products represent a substantial capital
investment by its customers, and the Company's success depends directly on their
capital expenditure budgets. The Company's future operations may be subject to
substantial fluctuations as a consequence of domestic and foreign economic
conditions, industry patterns, and other factors affecting capital spending.
The current domestic and international economic conditions in the Company's
major markets for SI Systems' branded products, such as the electronics,
telecommunications, semiconductor, appliance, pharmaceutical, food processing,
and automotive components industries, have resulted in cutbacks in capital
spending which has caused a direct, material adverse impact on the Company's
product sales in recent years. 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. 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. Various external factors affect the customers'
decision-making process on expanding or upgrading their current production or
distribution sites.
10
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 cannot estimate when or if a sustained revival in the
markets for its products will occur. If the Company is unable to maintain an
increased level of sales of its products, the Company's sales will continue to
be adversely affected.
The Company is largely dependent upon a limited number of large contracts,
including contracts with a federal government agency.
The Company is largely dependent upon a limited number of large contracts
from large domestic corporations and a federal government agency. This
dependence can cause unexpected fluctuations in sales volume and operating
results from period to period. In the year ended December 31, 2005, five
customers accounted for revenues of $2,492,000, $1,990,000, $1,867,000,
$1,812,000, and $1,723,000, respectively. In the year ended December 31, 2004,
two customers accounted for revenues of $1,600,000 and $1,184,000, respectively.
In the year ended December 31, 2003, two customers accounted for revenues of
$1,543,000 and $1,382,000, respectively. No other customer accounted for over
10% of sales.
The Company received $540,000 or 3.2% of its total sales from sales to
government agencies in the fiscal year ended December 31, 2005. Accordingly, our
sales have been impacted as a result of government spending cuts, general
budgetary constraints, and the complex and competitive government procurement
processes. If the Company is unable to attain an increased level of
government-related sales, the Company's sales will continue to be adversely
affected.
The Company's contracts with government agencies are subject to adjustment
pursuant to federal regulations.
From time to time, the Company receives contracts from federal agencies.
Each of the Company's contracts with federal agencies include various federal
regulations that impose certain requirements on the Company, including the
ability of the government agency or general contractor to alter the price,
quantity, or delivery schedule of the Company's products. In addition, the
government agency retains the right to terminate the contract at any time at its
convenience. Upon alteration or termination of these contracts, the Company
would normally be entitled to an equitable adjustment to the contract price so
that the Company may receive the purchase price for items it has delivered and
reimbursement for allowable costs it has incurred. From time to time, a portion
of the Company's backlog is from government-related contracts. The Company's
total backlog of orders at December 31, 2005 was $6,918,000, of which $0 was
associated with U.S. government projects. Accordingly, because contracts with
federal agencies can be terminated, the Company cannot assure you that backlog
associated with government contracts will result in sales. The Company has not
previously experienced material adjustments or terminations of government
contracts.
The Company must accurately estimate its costs prior to entering into contracts
on a fixed-price basis.
The Company frequently enters into contracts with its customers on a
fixed-price basis. In order to realize a profit on these contracts, the Company
must accurately estimate the costs the Company will incur in completing the
contract. 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. 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.
At times, uncertainty exists with respect to the resources required to
accomplish the contractual scope of work dealing with the final integration of
state-of-the-art automated material handling systems. As a result of past
experience with cost overruns, the Company established enhanced business
controls, estimating, and procurement
11
disciplines to attempt to reduce future cost overruns. Since the Company
established these controls in 2000, it has not experienced additional
significant cost overruns on new contracts; however, additional cost overruns in
the future could result in reduced revenues and earnings.
The Company faces significant competition, which could result in the Company's
loss of customers.
The markets in which the Company competes are highly competitive. The
Company competes with a number of different manufacturers, both domestically and
abroad, with respect to each of its products and services. Some of the Company's
competitors have greater financial and other resources than the Company has. The
Company's ability to compete depends on factors both within and outside its
control, including:
o product availability, performance, and price;
o product brand recognition;
o distribution and customer support;
o the timing and success of its newly developed products; and
o the timing and success of newly developed products by its
competitors.
These factors could possibly limit the Company's ability to compete
successfully.
The Company may lose market share if it is not able to develop new products or
enhance its existing products.
The Company's ability to remain competitive and its future success depends
greatly upon the technological quality of its products and processes relative to
those of its competitors. The Company may need to develop new and enhanced
products and to introduce these new products at competitive prices and on a
timely and cost-effective basis. The Company may not be successful in selecting,
developing, and manufacturing new products or in enhancing its existing products
on a timely basis or at all. The Company's new or enhanced products may not
achieve market acceptance. If the Company cannot successfully develop and
manufacture new products, timely enhance its existing technologies, or meet
customers' technical specifications for any new products, the Company's products
could lose market share, its sales and profits could decline, and it could
experience operating losses. New technology or product introductions by the
Company's competitors could also cause a decline in sales or loss of market
share for the Company's existing products or force the Company to significantly
reduce the prices of its existing products.
From time to time, the Company has experienced and will likely continue to
experience delays in the introduction of new products. The Company has also
experienced and may continue to experience technical and manufacturing
difficulties with introductions of new products and enhancements. Any failure by
the Company to develop, manufacture, and sell new products in quantities
sufficient to offset a decline in sales from existing products or to manage
product and related inventory transitions successfully could harm the Company's
business. The Company's success in developing, introducing, selling, and
supporting new and enhanced products depends upon a variety of factors,
including timely and efficient completion of hardware and software design and
development, timely and efficient implementation of manufacturing processes, and
effective sales, marketing, and customer service.
The Company depends on key personnel and may not be able to retain these
employees or recruit additional qualified personnel, which would harm the
Company's business.
The Company is highly dependent upon the continuing contributions of its
key management, sales, and product development personnel. The loss of the
services of any of its senior managerial, technical, or sales personnel could
have a material adverse effect on the Company's business, financial condition,
and results of operations. None of the Company's executive officers have
employment agreements with the Company. The Company does not maintain key man
life insurance on the lives of any of its key
12
personnel. The Company's future success also heavily depends on its continuing
ability to attract, retain, and motivate highly qualified managerial, technical,
and sales personnel. The Company's inability to recruit and train adequate
numbers of qualified personnel on a timely basis could adversely affect its
ability to design, manufacture, market, and support its products.
The Company may face costly intellectual property infringement claims.
On a few occasions, the Company has received communications from third
parties asserting that it is infringing certain patents and other intellectual
property rights of others, or seeking indemnification against the alleged
infringement. As claims arise, the Company evaluates their merits. Any claims of
infringement brought by third parties could result in protracted and costly
litigation, in the Company paying damages for infringement, and in the need for
the Company to obtain a license relating to one or more of its products or
current or future technologies. Such a license may not be available on
commercially reasonable terms or at all. Litigation, which could result in
substantial cost to the Company and diversion of its resources, may be necessary
to enforce its patents or other intellectual property rights, or to defend the
Company against claimed infringement of the rights of others. Any intellectual
property litigation and the failure to obtain necessary licenses or other rights
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
As occurred in 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.
The Company's failure to protect its intellectual property and proprietary
technology may significantly impair the Company's competitive advantage.
Third parties may infringe or misappropriate the Company's patents,
copyrights, trademarks, and similar proprietary rights. The Company cannot be
certain that the steps the Company has taken to prevent the misappropriation of
the Company's intellectual property are adequate, particularly in foreign
countries where the laws may not protect the Company's proprietary rights as
fully as in the United States. The Company relies on a combination of patent,
copyright, and trade secret protection and nondisclosure agreements to protect
its proprietary rights. However, the Company cannot be certain that patent and
copyright law and trade secret protection will be adequate to deter
misappropriation of its technology, that any patents issued to the Company will
not be challenged, invalidated, or circumvented, that the rights granted
thereunder will provide competitive advantages to the Company, or that the
claims under any patent application will be allowed. The Company may be subject
to or may initiate interference proceedings in the United States Patent and
Trademark Office, which can demand significant financial and management
resources. The process of seeking patent protection can be time-consuming and
expensive, and there can be no assurance that patents will issue from currently
pending or future applications or that the Company's existing patents or any new
patents that may be issued will be sufficient in scope or strength to provide
meaningful protection or any commercial advantage to the Company.
13
The Company may in the future initiate claims or litigation against third
parties for infringement of the Company's proprietary rights in order to
determine the scope and validity of the Company's proprietary rights or the
proprietary rights of the Company's competitors. These claims could result in
costly litigation and the diversion of the Company's technical and management
personnel.
New software products or enhancements may contain defects that could result in
expensive and time-consuming design modifications or large warranty charges,
damage customer relationships, and result in loss of market share.
New software products or enhancements may contain errors or performance
problems when first introduced, when new versions or enhancements are released,
or even after such products or enhancements have been used in the marketplace
for a period of time. Despite the Company's testing, product defects may be
discovered only after a product has been installed and used by customers. Errors
and performance problems may be discovered in future shipments of the Company's
products. These errors could result in expensive and time-consuming design
modifications or large warranty charges, damage customer relationships, and
result in loss of market share. To date, there have been no known defects in the
Company's software products that materially affected the Company's operations.
The Company may be subject to product liability claims, which can be expensive,
difficult to defend, and may result in large judgments or settlements against
the Company.
On a few occasions, the Company has received communications from third
parties asserting that the Company's products have caused bodily injury to
others. Product liability claims can be expensive, difficult to defend, and may
result in large judgments or settlements against the Company. In addition, third
party collaborators and licensees may not protect the Company from product
liability claims. Although the Company maintains product liability insurance in
the amount of approximately $26 million, claims could exceed the coverage
obtained. A successful product liability claim in excess of the Company's
insurance coverage could harm the Company's financial condition and results of
operations. In addition, any successful claim may prevent the Company from
obtaining adequate product liability insurance in the future on commercially
desirable terms. Even if a claim is not successful, defending such a claim may
be time-consuming.
The Company's presence in international markets exposes it to risk.
The Company has a presence in international markets and has experienced a
fluctuation in international sales volume in recent years. Maintenance and
continued growth of this segment of the Company's business may be affected by
changes in trade, monetary and fiscal policies, laws and regulations of the
United States and other trading nations and by foreign currency exchange rate
fluctuations.
Availability of product components could harm the Company's profitability.
The Company obtains raw materials and certain manufactured components
from third party suppliers. Although the Company deems that it maintains an
adequate level of raw material inventory, even brief unanticipated delays in
delivery by suppliers, including those due to capacity constraints, labor
disputes, impaired financial condition of suppliers, weather emergencies, or
other natural disasters, may adversely affect the Company's ability to satisfy
its customers on a timely basis and thereby affect the Company's financial
performance.
Item 1B. Unresolved Staff Comments
-------- -------------------------
Not applicable.
14
Item 2. Properties
------- ----------
The Company's principal office is located in a 173,000 square foot
concrete, brick, and steel facility in Easton, Pennsylvania. In connection with
the February 2003 sale of the Company's Easton, Pennsylvania facility, the
Company entered into a leaseback arrangement for 25,000 square feet of office
space for five years. The leasing agreement requires fixed monthly rentals of
$18,234 (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 believes that its Easton, Pennsylvania 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
facility 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.
Item 3. Legal Proceedings
------- -----------------
The Company is involved in various 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, 2005.
15
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, 2005 and 2004 are as follows:
For the Year Ended For the Year Ended
December 31, 2005 December 31, 2004
---------------------------- ---------------------------
High Low High Low
------------ ------------- ------------ ------------
First Quarter..................... 10.13 7.71 11.35 9.46
Second Quarter.................... 12.89 8.67 10.40 9.50
Third Quarter..................... 13.79 10.19 9.90 9.00
Fourth Quarter ................... 11.00 8.85 10.03 8.76
The Company did not pay cash dividends during the years ended December 31,
2005, 2004, and 2003, 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, 2005, as shown by the records of the Company's transfer agent was
284. This figure does not include individual participants in security position
listings.
The closing market price of the Company's common stock on March 22, 2006
was $10.11.
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, 2005:
-----------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------
10/01/05 - 10/31/05 209,600 $ 9.80 209,600 $ 2,053,126 $ 2,453,759
11/01/05 - 11/30/05 173,400 $ 9.79 173,400 $ 1,697,165 $ 756,595
12/01/05 - 12/31/05 36,400 $ 9.21 36,400 $ 335,109 $ 1,593,486
--------------------------------------------------------------------------------
419,400 $ 9.74 419,400 $ 4,085,400
==================================================================
-----------------------------------------------------------------------------------------------------------
On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. On August 3, 2005,
the Company's Board of Directors amended its existing stock repurchase program
by increasing the amount it has authorized management to repurchase from up to
$1,000,000 of the Company's common stock to up to $5,000,000. On August 19,
2005, the Company announced the repurchase of an aggregate of 359,200 shares (or
8.3%)
16
Item 5. Market For The Registrant's Common Stock And Related Security
------- -------------------------------------------------------------
Holder Matters (Continued)
--------------
Issuer Purchases of Equity Securities (Continued)
-------------------------------------
of its common stock in a private sale transaction for an aggregate of
approximately $3,502,000 (or $9.75 per share) from Leon C. Kirschner, the
Company's former Chief Operating Officer, and Steven Shulman, a former director
of the Company. In these transactions, the Company, with authorization from its
Board of Directors, repurchased 190,091 shares from Mr. Kirschner for
approximately $1,853,000 and 169,109 shares from Mr. Shulman for approximately
$1,649,000, which represented their holdings of the Company's common stock, and
retired the shares. The closing market price of the Company's common stock on
August 18, 2005 was $12.60 per share.
Mr. Kirschner, who also served as the Chief Executive Officer of the
Company's former wholly owned subsidiary, Ermanco Incorporated, resigned as an
officer and employee of the Company on August 5, 2005, the day on which the
Company completed its sale of substantially all of the assets and liabilities of
Ermanco Incorporated. Mr. Shulman resigned as a director of the Company on
August 8, 2005. Mr. Shulman became a director of the Company as a result of the
Company's purchase of Ermanco on September 30, 1999.
On August 31, 2005, the Company's Board of Directors amended its existing
stock repurchase program by increasing the amount it has authorized management
to repurchase from up to $5,000,000 of the Company's common stock to up to
$8,828,000.
On November 15, 2005, the Company announced the repurchase of 100,000
shares (or 2.67%) of its common stock in a private sale transaction for $975,000
(or $9.75 per share) from L. Jack Bradt, a member of the Company's Board of
Directors. The Company's non-interested Audit Committee members and the Board of
Directors approved the repurchase of Mr. Bradt's shares. The closing market
price of the Company's common stock on November 14, 2005 was $10.09 per share.
On December 5, 2005, the Company's Board of Directors amended its existing
stock repurchase program by increasing the amount it has authorized management
to repurchase from up to $8,828,000 of the Company's common stock to up to
$10,000,000. During the three months ended December 31, 2005, the Company
repurchased 419,400 shares of common stock at a weighted average cost, including
brokerage commissions, of $9.74 per share. During the year ended December 31,
2005, the Company repurchased 824,100 shares of common stock at a weighted
average cost, including brokerage commissions, of $9.81 per share. Cash
expenditures for the stock repurchases during the three and twelve months ended
December 31, 2005 were $4,085,400 and $8,080,882, respectively. Through December
31, 2005, the Company had repurchased 858,800 shares of common stock at a
weighted average cost, including brokerage commissions, of $9.79 per share. Cash
expenditures for the stock repurchases since the inception of the program were
$8,406,514. As of December 31, 2005, $1,593,486 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. All shares of common stock
that were repurchased by the Company since the inception of the program were
subsequently retired.
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, 2005. The selected consolidated financial data presented below
should be read in conjunction with
17
Item 6. Selected Financial Data (Continued)
------- -----------------------
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
----------------------------------------------------- ------------
12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
------------- ------------ ------------ ------------- ------------
Net sales................... $ 16,676 11,702 12,083 14,906 19,008
Income (loss) from
continuing operations
before income taxes....... $ 301 (271) 6,034 1,376 (2,114)
Income tax expense
(benefit)................. 93 (106) 2,349 420 (956)
------------- ------------ ------------ ------------- ------------
Income (loss) from
continuing operations..... 208 (165) 3,685 956 (1,158)
Income (loss) from
discontinued operations,
net of income taxes....... 990 1,638 100 (293) 1,096
------------- ------------ ------------ ------------- ------------
Net income (loss)........... $ 1,198 1,473 3,785 663 (62)
============= ============ ============ ============= ============
Basic earnings (loss) per
share:
Income (loss) from
continuing operations..... $ .05 (.04) .87 .23 (.27)
Income (loss) from
discontinued
operations................ .24 .38 .02 (.07) .26
------------- ------------ ------------ ------------- ------------
Net income (loss)........... $ .29 .34 .89 .16 (.01)
============= ============ ============ ============= ============
Diluted earnings (loss) per
share:
Income (loss) from
continuing operations..... $ .05 (.04) .85 .22 (.27)
Income (loss) from
discontinued
operations................ .24 .38 .02 (.07) .26
------------- ------------ ------------ ------------- ------------
Net income (loss)........... $ .29 .34 .87 .15 (.01)
============= ============ ============ ============= ============
Total assets (1)............ $ 22,596 33,424 33,803 36,703 41,621
Long-term liabilities....... $ 193 2,761 2,159 9,402 11,352
Cash dividends per
share..................... $ - - - - -
See Discontinued Operations - Sale of Ermanco in Note 2 of the Notes to
Consolidated Financial Statements for further information regarding the sale of
substantially all of the assets and liabilities of Ermanco in the third quarter
of 2005.
(1) During the year ended December 31, 2005, the Company repurchased 824,100
shares of common stock at a weighted average cost, including brokerage
commissions, of $9.81 per share. Cash expenditures for the stock
repurchases during the year ended December 31, 2005 were $8,080,882. See
Stock Repurchase Program in Note 14 of the Notes to Consolidated Financial
Statements regarding the repurchase of shares of the Company's common
stock.
18
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, 2005. 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 risks and uncertainties identified in connection with those
forward-looking statements, including those factors as more fully discussed in
Item 1A, Risk Factors.
-----------------------------------
Business Overview
-----------------
Paragon Technologies, Inc. provides a variety of material handling
solutions, including systems, technologies, products, and services for material
flow applications. Founded in 1958, the Company's 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.
On August 5, 2005, the Company completed the sale of substantially all of
the assets and liabilities of Ermanco, and received cash consideration of
$23,055,000 (subject to a working capital adjustment and an accounts receivable
adjustment). Transaction costs associated with the sale of the assets and
liabilities of Ermanco were approximately $1,038,000. During the fourth quarter
of 2005, the Company paid $448,000 to the Buyer in connection with the working
capital adjustment and $61,000 in connection with the accounts receivable
adjustment. Therefore, the Company received cash consideration of $21,508,000,
net of transaction costs and the working capital and the accounts receivable
adjustments in connection with the sale of the assets and liabilities of
Ermanco, thereby resulting in a pre-tax loss of approximately $964,000. See Note
2 of the Notes to Consolidated Financial Statements for further information
regarding the sale of substantially all of the assets and liabilities of
Ermanco. The discussion that follows reflects the operations of the Company
following the sale of substantially all of the assets and liabilities of
Ermanco.
-----------------------------------
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 and
falls, the Company may see a corresponding change in the rate of new orders, and
therefore, a corresponding change 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
19
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Key Performance Metrics Relevant to the Company (Continued)
-----------------------------------------------
Capacity Utilization (Continued)
--------------------
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, 2005, 2004, 2003, 2002, 2001, and
2000:
(Dollars in Thousands) 2005 2004 2003 2002 2001 2000
---------- ----------- ---------- ----------- ---------- -----------
Backlog of orders --
Beginning................. $ 5,514 4,052 4,834 7,666 16,353 15,403
Add: orders............... 18,080 13,164 11,301 12,074 10,321 30,599
Less: sales............... 16,676 11,702 12,083 14,906 19,008 29,649
---------- ----------- ---------- ----------- ---------- -----------
Backlog of orders --
Ending.................... $ 6,918 5,514 4,052 4,834 7,666 16,353
========== =========== ========== =========== ========== ===========
Capacity Utilization (1)..... 80.0% 78.6% 75.7% 75.1% 76.3% 81.8%
Current Ratio
-------------
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, 2005, 2004, 2003, 2002, 2001, and 2000:
(Dollars in Thousands) 2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
Current assets............... $ 22,134 14,249 14,720 15,444 19,200 22,850
---------- ---------- ---------- ---------- ---------- ----------
Current liabilities.......... $ 5,337 7,355 9,583 9,416 13,357 15,193
Current ratio................ 4.15 1.94 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, 2005, 2004, 2003, 2002, 2001, and 2000 and also includes the number
of shares outstanding at each fiscal year end:
(Dollars in Thousands) 2005 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 (1)................. $ 17,066 23,308 22,061 17,885 16,912 16,980
============== ============== ============== ============== ============== ==============
Debt to equity ratio......... - - - .49 .72 .84
Number of shares out-
standing at year-end....... 3,539,019 4,265,310 4,277,595 4,256,098 4,221,635 4,194,869
20
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Key Performance Metrics Relevant to the Company (Continued)
-----------------------------------------------
Debt to Equity Ratio (Continued)
--------------------
(1) During the year ended December 31, 2005, the Company repurchased 824,100
shares of common stock at a weighted average cost, including brokerage
commissions, of $9.81 per share. Cash expenditures for the stock
repurchases during the year ended December 31, 2005 were $8,080,882. See
Stock Repurchase Program in Note 14 of the Notes to Consolidated Financial
Statements regarding the repurchase of shares of the Company's common
stock.
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
systems sales, warranty, and inventories 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.
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, 2005, 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, typically two percent
of the cost of the system being sold, and a detailed review of products still in
the warranty period. Historically, the level
21
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Accrued Product Warranty (Continued)
------------------------
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, 2005 is
$189,000.
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 new cost basis is removed from the
accounts.
-----------------------------------
Results of Operations - Year Ended December 31, 2005 Compared to the Year
-------------------------------------------------------------------------
Ended December 31, 2004
-----------------------
Earnings Summary
----------------
The Company had net income of $1,198,000 (or $0.29 basic earnings per
share) for the year ended December 31, 2005, compared to net income of
$1,473,000 (or $0.34 basic earnings per share) for the year ended December 31,
2004. Income from discontinued operations, net of income taxes, was $990,000 (or
$0.24 basic earnings per share) for the year ended December 31, 2005, compared
to income from discontinued operations, net of income taxes, of $1,638,000 (or
$0.38 basic earnings per share) for the year ended December 31, 2004. Income
from continuing operations was $208,000 (or $0.05 basic earnings per share) for
the year ended December 31, 2005, compared to a loss from continuing operations
of $165,000 (or $0.04 basic loss per share) for the year ended December 31,
2004. The increase in income from continuing operations was primarily due to:
o an increase during 2005 in total revenues and gross profit of
$4,974,000 and $649,000, respectively, as described below; and
o an increase of $248,000 in interest income attributable to the higher
level of funds available for investment as a result of the cash
proceeds from the sale of substantially all of the assets and
liabilities of Ermanco.
Partially offsetting the above increase in income from continuing
operations for the year ended December 31, 2005 was as increase in selling,
general and administrative expenses of $486,000 as mentioned below.
Net Sales and Gross Profit on Sales
-----------------------------------
2005 2004
----------------- ------------------
Net sales.............................................. $ 16,676,000 11,702,000
Cost of sales.......................................... 12,140,000 7,815,000
----------------- ------------------
Gross profit on sales.................................. $ 4,536,000 3,887,000
================= ==================
Gross profit as a percentage of sales.................. 27.2% 33.2%
================= ==================
The increase in sales was associated with a larger backlog of orders
entering fiscal 2005 when compared to the backlog of orders entering fiscal
2004. Contributing to the increase in sales was progress made on contracts
received prior to the start of the year
22
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2005 Compared to the Year
-------------------------------------------------------------------------
Ended December 31, 2004 (Continued)
-----------------------
Net Sales and Gross Profit on Sales (Continued)
-----------------------------------
and during 2005 in accordance with contract completion requirements associated
with customers in the vehicle assembly, health and beauty aids, and
entertainment marketplace as a result of a demand for the Company's products in
these industry sectors.
Gross profit, as a percentage of sales, for the year ended December 31,
2005, when compared to the year ended December 31, 2004, was unfavorably
impacted by approximately 8.2% due to competitive pricing pressures and product
mix, along with the impact of the favorable performance on the Company's
contracts that were completed or nearing completion in the year ended December
31, 2004 as compared to the year ended December 31, 2005. Partially offsetting
the aforementioned unfavorable variance was a 2.2% reduction in overhead costs
as a percentage of sales due to the higher sales volume to cover fixed overhead
costs in the year ended December 31, 2005.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $4,646,000 were higher by
$486,000 for the year ended December 31, 2005 than for the year ended December
31, 2004. The increase was attributable to the addition of resources aimed at
expanding the customer base and an increase in salaries and fringe benefits
totaling $305,000, an increase of $64,000 in commission expenses related to the
Company's enhanced revenue performance, and an increase of $204,000 in
professional fees and consulting expenses. Partially offsetting the
aforementioned unfavorable variance was a decrease of $84,000 in marketing
expenses primarily associated with product promotion.
Product Development Costs
-------------------------
Product development costs, including patent expense, of $62,000 were lower
by $114,000 for the year ended December 31, 2005 than for the year ended
December 31, 2004. Development programs in the years ended December 31, 2005 and
December 31, 2004 were primarily aimed at improvements to the Company's Order
Fulfillment systems technologies. Order Fulfillment development efforts, that
were essentially completed during the year ended December 31, 2004 and
incorporated into the Company's Order Fulfillment product offerings, were
centered on the development of an innovative computer control system, along with
DISPEN-SI-MATIC(R) software and hardware enhancements aimed at promoting
workplace efficiencies for the Company's customers. Order Fulfillment
development efforts during the year ended December 31, 2005 were primarily
additional modifications and enhancements to the Company's fiscal 2004
development initiatives.
Interest Income
---------------
Interest income of $324,000 was higher by $248,000 for the year ended
December 31, 2005 than for the year ended December 31, 2004. The increase in
interest income was attributable to the higher level of funds available for
investment as a result of the cash proceeds from the sale of substantially all
of the assets and liabilities of Ermanco.
Other Income, Net
-----------------
The favorable variance of $44,000 in other income, net for the year ended
December 31, 2005 as compared to the year ended December 31, 2004 was primarily
attributable to an increase in royalty income from a license agreement related
to material handling equipment sales.
23
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2005 Compared to the Year
-------------------------------------------------------------------------
Ended December 31, 2004 (Continued)
-----------------------
Income Tax Expense (Benefit)
----------------------------
The Company recognized income tax expense of $93,000 during the year ended
December 31, 2005 compared to an income tax benefit of $106,000 during the year
ended December 31, 2004. Income tax expense (benefit) was generally recorded at
statutory federal and state tax rates.
Results of Operations - Year Ended December 31, 2004 Compared to the Year
-------------------------------------------------------------------------
Ended December 31, 2003
-----------------------
Earnings Summary
----------------
The Company had net income of $1,473,000 (or $0.34 basic earnings per
share) for the year ended December 31, 2004, compared to net income of
$3,785,000 (or $0.89 basic earnings per share) for the year ended December 31,
2003. Income from discontinued operations, net of income taxes, was $1,638,000
(or $0.38 basic earnings per share) for the year ended December 31, 2004,
compared to income from discontinued operations, net of income taxes, of
$100,000 (or $0.02 basic earnings per share) for the year ended December 31,
2003. The loss from continuing operations was $165,000 (or $0.04 basic loss per
share) for the year ended December 31, 2004, compared to income from continuing
operations of $3,685,000 (or $0.87 basic earnings per share) for the year ended
December 31, 2003. The decrease in income from continuing operations 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 income from continuing
operations for the year ended December 31, 2004 was 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.............................................. $ 11,702,000 12,083,000
Cost of sales.......................................... 7,815,000 8,385,000
----------------- ------------------
Gross profit on sales.................................. $ 3,887,000 3,698,000
================= ==================
Gross profit as a percentage of sales.................. 33.2% 30.6%
================= ==================
24
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 (Continued)
-----------------------
Net Sales and Gross Profit on Sales (Continued)
-----------------------------------
The decrease in sales of approximately 3% was associated with a smaller
backlog of orders entering fiscal 2004 when compared to the backlog of orders
entering fiscal 2003, along 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 4.2% due to product mix, and unfavorably impacted by
approximately 1.6% due primarily to costs related to enhancing the Company's
operations.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $4,160,000 were higher by
$221,000 for the year ended December 31, 2004 than for the year ended December
31, 2003. The increase of $221,000 was attributable to the addition of resources
aimed at expanding the customer base and an increase in salaries and fringe
benefits totaling $256,000, and an increase in consulting and marketing expenses
primarily associated with product promotion and marketing research totaling
$294,000. Partially offsetting the aforementioned unfavorable variance were
severance charges of $48,000 in 2004 versus $387,000 in 2003.
Product Development Costs
-------------------------
Product development costs, including patent expense, of $176,000 were lower
by $83,000 for the year ended December 31, 2004 than for the year ended December
31, 2003. Development programs in the year ended December 31, 2004 were
primarily aimed at improvements to the Company's Order Fulfillment systems
technologies. Order Fulfillment development efforts, that were essentially
completed during the year ended December 31, 2004 and incorporated into the
Company's Order Fulfillment product offerings, were centered on the development
of an innovative computer control system, along with DISPEN-SI-MATIC(R) software
and hardware enhancements aimed at promoting workplace efficiencies for the
Company's customers. Development programs in the year ended December 31, 2003
included SINTHESIS(TM) computer software for optimizing warehousing and
distribution center operations and hardware enhancements related to Order
Fulfillment systems technologies.
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 Venture
---------------------------------
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.
25
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 (Continued)
-----------------------
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.
Other Income, Net
-----------------
In September 2003, the Company sold its entire ownership interest in
SI/BAKER, INC. The unfavorable variance of $253,000 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 an income tax benefit of $106,000 during the year
ended December 31, 2004, compared to income tax expense of $2,349,000 during the
year ended December 31, 2003. Income tax expense was generally recorded at
statutory federal and state tax rates.
-----------------------------------
Liquidity and Capital Resources
-------------------------------
The Company's cash and cash equivalents and short-term investments at
December 31, 2005 were $17,397,000, representing 77.0% of total assets, up from
$3,602,000, or 10.8% of total assets, at December 31, 2004. The increase was
primarily due to cash proceeds of $21,508,000 from the sale of Ermanco, net of
transaction costs and the working capital and accounts receivable adjustments,
and proceeds of $623,000 from the sale of common stock in connection with the
Company's stock option plan, partially offset by the repurchase and retirement
of common stock of $8,081,000.
Cash provided by operating activities totaling $149,000 during the year
ended December 31, 2005 was primarily due to the following factors:
o an increase in customers' deposits and billings in excess of costs and
estimated earnings in the amount of $802,000 in accordance with
contractual requirements associated with customers in the vehicle
assembly and entertainment marketplace;
o an increase in net cash provided by operating activities of
discontinued operations of $601,000.
Partially offset by the following factors:
o an increase in trade receivables in the amount of $393,000 in
accordance with contractual requirements associated with customers in
the vehicle assembly, entertainment, and health and beauty aids
marketplace;
26
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Liquidity and Capital Resources (Continued)
-------------------------------
o an increase in costs and estimated earnings in excess of billings in
the amount of $524,000 in accordance with contractual requirements
associated with customers in the health and beauty aids marketplace;
o a decrease in accrued product warranty in the amount of $301,000
primarily associated with the reversal of unused, expired accrued
product warranties for contracts that were no longer in the warranty
period.
The Company's cash and cash equivalents and short-term investments at
December 31, 2004 decreased to $3,602,000 at December 31, 2004 from $5,591,000
at December 31, 2003. The decrease resulted primarily from cash used by
operating activities totaling $1,473,000 and the repurchase and retirement of
common stock of $325,000.
Cash used by operating activities totaling $1,473,000 during the year ended
December 31, 2004 was primarily due to the following factors:
o an increase in accounts receivable in the amount of $1,432,000 in
accordance with contractual requirements associated with customers in
the health and beauty aids and retail marketplace;
o a decrease in income taxes payable in the amount of $417,000 primarily
associated with the payment of income taxes based on the Company's
fiscal 2003 profitability;
o a decrease in accrued product warranty in the amount of $224,000
primarily associated with the reversal of unused, expired accrued
product warranties for contracts that were no longer in the warranty
period.
Partially offset by the following factors:
o an increase in customers' deposits and billings in excess of costs and
estimated earnings in the amount of $249,000 in accordance with
contractual requirements associated with customers in the health and
beauty aids and entertainment marketplace;
o a decrease in costs and estimated earnings in excess of billings in
the amount of $358,000 in accordance with contractual requirements
associated with customers in the vehicle assembly and health and
beauty aids marketplace and the U.S. government.
In 2003, the Company repaid all of its outstanding term debt and
subordinated debt.
On August 5, 2005, the Company completed the sale of substantially all of
the assets and liabilities of Ermanco, and received cash consideration of
$23,055,000 (subject to a working capital adjustment and an accounts receivable
adjustment). Transaction costs associated with the sale of the assets and
liabilities of Ermanco were approximately $1,038,000. During the fourth quarter
of 2005, the Company paid approximately $448,000 to the Buyer in connection with
the working capital adjustment and $61,000 in connection with the accounts
receivable adjustment. Therefore, the Company received cash consideration of
$21,508,000, net of transactions costs and the working capital and accounts
receivable adjustments in connection with the sale of the assets and liabilities
of Ermanco, thereby resulting in a pre-tax loss on the sale of approximately
$964,000.
The Company's line of credit facility may not exceed $5,000,000 and is to
be used primarily for working capital purposes. Effective August 5, 2005, the
Company issued a $2,000,000 letter of credit in connection with the sale of
substantially all of the assets and liabilities of Ermanco, thereby reducing the
amount of available line of credit to $2,800,000. The line of credit facility
contains various non-financial covenants and is secured by all accounts
receivables and inventory. As of December 31, 2005, the Company did not have any
borrowings under the line of credit facility, and the line of credit facility
expires effective June 30, 2006. The Company expects to renew the line of credit
facility under similar terms and conditions during 2006.
27
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Liquidity and Capital Resources (Continued)
-------------------------------
The Company anticipates that its financial resources, consisting of cash
generated from operations, its line of credit, and the sale of Ermanco 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. The Company has
retained the investment banking firm, Boenning & Scattergood, Inc., to advise
the Company in evaluating strategic options. The Company is continuing to
evaluate and actively explore a range of possible options, including
transactions intended to provide liquidity and maximize stockholder value, and
consider the acquisition of complementary assets and/or businesses. The Company
may not be able to effect any of these strategic options on favorable terms or
at all.
-----------------------------------
Contractual Obligations
-----------------------
The Company leases 25,000 square feet in Easton, Pennsylvania for use as
its principal office. The leasing agreement requires fixed monthly rentals of
$18,234 (with annual increases of 3%). The terms of the lease also require the
payment of a proportionate share of the facility's operating expenses. The
leasing agreement is secured with a $200,000 letter of credit. The lease expires
on February 21, 2008.
Future contractual obligations and commercial commitments at December 31,
2005 as noted above are as follows:
Payments Due by Period
------------------------------------------------------------------------------
Total 2006 2007 2008 2009 2010
------------------------------------------------------------------------------
Contractual obligations:
Operating leases.......... $ 489,000 224,000 231,000 34,000 - -
------------------------------------------------------------------------------
Total.................... $ 489,000 224,000 231,000 34,000 - -
==============================================================================
Amount of Commitment Expiration Per Period
------------------------------------------------------------
Total Amounts
Committed 2006 2007 2008 2009 2010
------------------------------------------------------------------------------
Other
commercial
commitments:
Letters of credit...... $ 2,200,000 2,200,000 - - - -
Off-Balance Sheet Arrangements
------------------------------
As of December 31, 2005, 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.
-----------------------------------
28
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Recently Issued Accounting Pronouncements
-----------------------------------------
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 2006. The adoption of FAS 123R is not expected to
have a material impact on the Company's financial statements.
In May 2005, the Financial Accounting Standard Board issued SFAS No. 154,
"Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20
and FASB Statement No. 3" ("FAS 154"). FAS 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. This statement also requires
that retrospective application of a change in accounting principle be limited to
the direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change. FAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived non-financial assets be
accounted for as a change in accounting estimate affected by a change in
accounting principle. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this statement was issued. The
Company is required to adopt the provisions of this statement, as applicable,
beginning in 2006.
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.
29
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, 2005 and 2004.
Consolidated Statements of Operations for the years ended December 31,
2005, 2004, and 2003.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2005, 2004, and 2003.
Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003.
Notes to Consolidated Financial Statements.
o All schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes.
30
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Paragon Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Paragon
Technologies, Inc. and subsidiary as of December 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2005.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Philadelphia, PA
March 22, 2006
31
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2005 and 2004
(In Thousands, Except Share Data)
December 31, December 31,
2005 2004
------------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents.......................... $ 687 1,702
Short-term investments............................. 16,710 1,900
------------------- ------------------
Total cash and cash equivalents and
short-term investments......................... 17,397 3,602
------------------- ------------------
Receivables:
Trade............................................ 2,029 1,636
Notes and other receivables...................... 1,066 691
------------------- ------------------
Total receivables.............................. 3,095 2,327
------------------- ------------------
Costs and estimated earnings in excess of billings. 616 92
Inventories:
Raw materials.................................... 108 110
Work-in-process.................................. 26 47
Finished goods................................... 210 195
------------------- ------------------
Total inventories.............................. 344 352
------------------- ------------------
Current assets of business held for sale........... - 7,017
Deferred income tax benefits....................... 353 627
Prepaid expenses and other current assets.......... 329 232
------------------- ------------------
Total current assets............................. 22,134 14,249
------------------- ------------------
Property, plant and equipment, at cost:
Machinery and equipment............................ 1,160 1,191
Less: accumulated depreciation.................... 911 1,002
------------------- ------------------
Net property, plant and equipment................ 249 189
------------------- ------------------
Non-current assets of business held
for sale........................................... - 18,704
Deferred income tax benefits.......................... 203 272
Other assets.......................................... 10 10
------------------- ------------------
Total assets..................................... $ 22,596 33,424
=================== ==================
See accompanying notes to consolidated financial statements.
32
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2005 and 2004
(In Thousands, Except Share Data)
December 31, December 31,
2005 2004
------------------- ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable.................................. $ 1,391 1,446
Customers' deposits and billings in excess of
costs and estimated earnings.................... 2,044 1,242
Accrued salaries, wages, and commissions.......... 102 100
Income taxes payable.............................. 650 505
Accrued product warranty.......................... 189 490
Deferred gain on sale-leaseback................... 165 165
Current liabilities of business held for sale..... - 2,453
Accrued other liabilities......................... 796 954
----------------- -----------------
Total current liabilities..................... 5,337 7,355
----------------- -----------------
Long-term liabilities:
Deferred gain on sale-leaseback................... 193 358
Long-term liabilities of business held for sale... - 2,403
----------------- -----------------
Total long-term liabilities................... 193 2,761
----------------- -----------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and outstanding
3,539,019 shares as of December 31, 2005
and 4,265,310 shares as of December 31,
2004............................................ 3,539 4,265
Additional paid-in capital........................ 7,004 7,996
Retained earnings................................. 6,523 11,047
----------------- -----------------
Total stockholders' equity.................... 17,066 23,308
----------------- -----------------
Total liabilities and stockholders' equity.... $ 22,596 33,424
================= =================
See accompanying notes to consolidated financial statements.
33
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended December 31, 2005, 2004, and 2003
(In Thousands, Except Share and Per Share Data)
December 31, December 31, December 31,
2005 2004 2003
---------------- ---------------- ----------------
Net sales................................. $ 16,676 11,702 12,083
Cost of sales............................. 12,140 7,815 8,385
---------------- ---------------- ----------------
Gross profit on sales.................. 4,536 3,887 3,698
---------------- ---------------- ----------------
Selling, general and administrative
expenses............................... 4,646 4,160 3,939
Product development costs................. 62 176 259
Restructuring charges (credits)........... - - (264)
Interest expense.......................... 1 4 676
Interest income........................... (324) (76) (76)
Equity in income of joint venture......... - - (256)
Gain on sale of SI/BAKER
joint venture.......................... - - (4,901)
Gain on disposition of
property, plant and equipment.......... - - (1,354)
Other income, net......................... (150) (106) (359)
---------------- ---------------- ----------------
4,235 4,158 (2,336)
---------------- ---------------- ----------------
Income (loss) from continuing
operations before income taxes......... 301 (271) 6,034
Income tax expense (benefit).............. 93 (106) 2,349
---------------- ---------------- ----------------
Income (loss) from continuing
operations........................... 208 (165) 3,685
Income from discontinued
operations, net of income taxes...... 990 1,638 100
---------------- ---------------- ----------------
Net income................................ $ 1,198 1,473 3,785
================ ================ ================
Basic earnings (loss) per share:
Income (loss) from continuing
operations........................... $ .05 (.04) .87
Income from discontinued
operations........................... .24 .38 .02
---------------- ---------------- ----------------
Net income................................ $ .29 .34 .89
================ ================ ================
Diluted earnings (loss) per share:
Income (loss) from continuing
operations........................... $ .05 (.04) .85
Income from discontinued
operations........................... .24 .38 .02
---------------- ---------------- ----------------
Net income................................ $ .29 .34 .87
================ ================ ================
Weighted average shares
outstanding............................ 4,073,252 4,278,065 4,269,274
Dilutive effect of stock options.......... 45,342 72,232 95,438
---------------- ---------------- ----------------
Weighted average shares
outstanding assuming dilution.......... 4,118,594 4,350,297 4,364,712
================ ================ ================
See accompanying notes to consolidated financial statements.
34
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2005, 2004, and 2003
(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, 2002............. 4,256,098 $ 4,256 7,369 6,504 (244) 17,885
Net income............................... - - - 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 income............................... - - - 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
Net income............................... - - - 1,198 - 1,198 1,198
-------------
Comprehensive income..................... - - - - - - 1,198
=============
Stock options exercised.................. 97,809 98 602 (77) - 623
Acquisition and retirement of
common stock.......................... (824,100) (824) (1,612) (5,645) - (8,081)
Other incentive plan activity............ - - 18 - - 18
--------- ------- ---------- -------- ------------- -------------
Balance at December 31, 2005............. 3,539,019 $ 3,539 7,004 6,523 - 17,066
========= ======= ========== ======== ============= =============
See accompanying notes to consolidated financial statements.
35
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005, 2004, and 2003
(In Thousands)
December 31, December 31, December 31,
2005 2004 2003
-------------------- ------------------ ------------------
Cash flows from operating activities:
Net income....................................... $ 1,198 1,473 3,785
Less: income from discontinued
operations.............................. 990 1,638 100
-------------------- ------------------ ------------------
Income(loss)from continuing operations............. 208 (165) 3,685
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation of plant and
equipment................................ 90 104 139
Amortization of intangibles................ - - 57
Gain on disposition of
property, plant and equipment............ - - (1,354)
Gain on sale of SI/BAKER joint
venture.................................. - - (4,901)
Amortization of deferred gain on
sale-leaseback........................... (165) (165) (138)
Equity in income of joint venture.......... - - (256)
Cash dividends received from
joint venture............................ - - 1,000
Issuance of common shares
as interest payment on
subordinated notes....................... - - 90
Other non-cash items
affecting earnings....................... 18 29 36
Noncash interest charges
associated with settlement of
interest rate swap contract.............. - - 292
Change in operating assets and
liabilities:
Receivables........................... (768) (1,432) 1,666
Costs and estimated earnings
in excess of billings............... (524) 358 (387)
Inventories........................... 8 (128) 204
Deferred tax expenses................. 343 310 (69)
Prepaid expenses and other
current assets...................... (97) (20) (3)
Other noncurrent assets............... - - 1
Accounts payable...................... (55) 77 (14)
Customers' deposits and
billings in excess of costs
and estimated earnings.............. 802 249 (831)
Accrued salaries, wages,
and commissions..................... 2 8 (205)
36
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2005, 2004, and 2003
(In Thousands)
December 31, December 31, December 31,
2005 2004 2003
-------------------- ------------------ ------------------
Income taxes payable.................. 145 (417) 837
Accrued product warranty.............. (301) (224) (8)
Accrued other liabilities............. (158) (129) (555)
Deferred compensation................. - (42) 17
Net cash provided by
operating activities of
discontinued operations............. 601 114 1,026
-------------------- ------------------- ------------------
Net cash provided (used) by
operating activities.......................... 149 (1,473) 329
-------------------- ------------------- ------------------
Cash flows from investing activities:
Proceeds from the sale of Ermanco,
net of transaction costs and
post closing adjustments...................... 21,508 - -
Proceeds from sales of short-term
investments ................................. 10,875 - -
Purchases of short-term investments.............. (25,685) (1,900) -
Proceeds from the disposition of
property, plant and equipment................. - - 2,738
Proceeds from the divestment of
joint venture, net of advisory fees........... - - 5,482
Additions to property, plant and
equipment..................................... (150) (63) (76)
Net cash used by investing activities
of discontinued operations.................... (254) (198) (161)
-------------------- ------------------- ------------------
Net cash provided (used) by investing
activities.................................... 6,294 (2,161) 7,983
-------------------- ------------------- ------------------
Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan.......... 623 70 12
Repurchase and retirement of
common stock.................................. (8,081) (325) -
Decrease in restricted cash...................... - - 864
Repayment of long-term debt...................... - - (8,700)
Settlement of interest rate swap
contract...................................... - - (283)
-------------------- ------------------- ------------------
Net cash used by financing activities............ (7,458) (255) (8,107)
-------------------- ------------------- ------------------
Increase (decrease) in cash
and cash equivalents.......................... (1,015) (3,889) 205
Cash and cash equivalents,
beginning of period........................... 1,702 5,591 5,386
-------------------- ------------------- ------------------
Cash and cash equivalents, end of period......... $ 687 1,702 5,591
==================== =================== ==================
See accompanying notes to consolidated financial statements.
37
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 Company's automated material
handling systems are marketed, designed, sold, installed, and serviced by its
own staff or subcontractors as labor-saving devices to improve productivity,
quality, and reduce costs. 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. The Company's 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 Company's engineering staff develops and designs
computer control programs required for the efficient operation of the systems
and for optimizing manufacturing, assembly, and fulfillment operations.
In the year ended December 31, 2005, five customers accounted for revenues
of $2,492,000, $1,990,000, $1,867,000, $1,812,000, and $1,723,000, respectively.
In the year ended December 31, 2004, two customers accounted for revenues of
$1,600,000 and $1,184,000, respectively. In the year ended December 31, 2003,
two customers accounted for revenues of $1,543,000 and $1,382,000, respectively.
No other customers 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. As of December 31, 2005, three customers owed the Company
$792,000, $448,000, and $298,000, respectively, in trade receivables. No other
customer owed the Company in excess of 10% of 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.
Use of Estimates
----------------
The preparation of the financial statements, in conformity with U.S.
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
judgments made in assessing the appropriateness of the estimates and assumptions
utilized by management in the preparation of the financial statements are based
on historical and empirical data and other factors germane to the nature of the
risk being analyzed. Materially different results may occur if different
assumptions or conditions were to prevail. Estimates and assumptions are mainly
utilized to establish the appropriateness of the inventory reserve, warranty
reserve, and revenue recognition.
38
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
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.
Short-Term Investments
----------------------
The Company's short-term investments are comprised of debt securities, all
classified as trading, that are carried at cost, which approximates fair value
of the investments at period end. These debt securities include state and
municipal bonds. The short-term investments are on deposit with a major
financial institution and are supported by letters of credit.
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. The allowance for doubtful accounts
was $0 at December 31, 2005 and 2004.
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 generally 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.
Investment in Joint Venture
---------------------------
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.
39
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
Intangibles
-----------
Deferred Debt Issuance Costs
----------------------------
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.
A roll-forward of restructuring activities is as follows (in thousands):
Beginning Charge/ Cash Reversal/ Ending
Balance (Credit) Spending Reclassification Balance
------------ ------------- ------------ ------------------- ------------
2005............. $ 63 - - - 63
2004............. $ 68 - (5) - 63
2003............. $ 216 (264) (54) 170 68
40
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
Restructuring (Continued)
-------------
The $63,000 restructuring accrual at December 31, 2005 primarily relates to
professional fees for the 2001 restructuring that are still expected to be paid
and are 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 amount reclassified out of the restructuring accrual and included in
accrued pension and retirement savings plan liabilities for the year ended
December 31, 2003 was $170,000.
Accrued Product Warranty
------------------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements and
the type of system sold, with a typical warranty period of one year. The Company
provides an accrual for estimated future warranty costs and potential product
liability claims based upon a percentage of cost of sales, typically two percent
of the cost of the system being sold, and a detailed review of products still in
the warranty period.
A roll-forward of warranty activities is as follows (in thousands):
Additions
(Reductions)
Charged to
Beginning Costs and Ending
Balance Expenses Deductions Balance
------------ ----------------- ------------------ --------------
2005.................... $ 490 (242) (59) 189
2004.................... $ 714 (70) (154) 490
2003.................... $ 722 24 (32) 714
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.
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 income (in thousands) and basic and diluted
earnings per share for the years ended December 31, 2005, 2004, and 2003 would
have been as follows:
41
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
Stock-Based Compensation (Continued)
------------------------
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2005 2004 2003
----------------- ----------------- ----------------
Net income, as reported................... $ 1,198 1,473 3,785
Deduct: total stock-based employee
compensation determined under
fair value method, net of related
tax effects............................ (27) (91) (80)
----------------- ----------------- ----------------
Pro forma net income...................... $ 1,171 1,382 3,705
================= ================= ================
Earnings per share:
Basic -- as reported.................... $ .29 .34 .89
================= ================= ================
Basic -- pro forma...................... $ .29 .32 .87
================= ================= ================
Diluted -- as reported.................. $ .29 .34 .87
================= ================= ================
Diluted -- pro forma.................... $ .28 .32 .85
================= ================= ================
The above pro forma net income 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, 2005, 2004, and 2003.
Earnings Per Share
------------------
Basic and diluted earnings per share for the years ended December 31, 2005,
2004, and 2003 are based on the weighted average number of shares outstanding.
In addition, diluted earnings per share reflect the effect of dilutive
securities which include 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.
Recently Issued Accounting Pronouncements
-----------------------------------------
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 2006. The adoption of FAS 123R is not expected to
have a material impact on the Company's financial statements.
42
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------
In May 2005, the Financial Accounting Standard Board issued SFAS No. 154,
"Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20
and FASB Statement No. 3" ("FAS 154"). FAS 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. This statement also requires
that retrospective application of a change in accounting principle be limited to
the direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change. FAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived non-financial assets be
accounted for as a change in accounting estimate affected by a change in
accounting principle. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this statement was issued. The
Company is required to adopt the provisions of this statement, as applicable,
beginning in 2006.
(2) Discontinued Operations -- Sale of Ermanco
--- ------------------------------------------
On May 20, 2005, the Company and Ermanco entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") with TGW Transportgerate GmbH, an
Austrian corporation ("Buyer Parent"), and Malibu Acquisition, Inc., a Michigan
corporation and wholly owned subsidiary of Buyer Parent ("Buyer"), pursuant to
which Paragon agreed to sell to Buyer substantially all of the assets and
liabilities of Ermanco, Paragon's conveyor and sortation subsidiary located in
Spring Lake, Michigan. The terms of the Asset Purchase Agreement provided that
Buyer pay cash in the amount of $23 million (subject to a working capital
adjustment and an accounts receivable adjustment) and assume certain liabilities
of Ermanco, as more fully described in the Asset Purchase Agreement, a copy of
which was filed with the Securities and Exchange Commission on July 1, 2005. At
a Special Meeting of Stockholders held on August 3, 2005, the Company received
approval from its stockholders to sell substantially all of the assets and
liabilities of Ermanco.
On August 5, 2005, the Company completed the sale of substantially all of
the assets and liabilities of Ermanco, and received cash consideration of
$23,055,000 (subject to a working capital adjustment and an accounts receivable
adjustment). Transaction costs associated with the sale of the assets and
liabilities of Ermanco were approximately $1,038,000. During the fourth quarter
of 2005, the Company paid approximately $448,000 to the Buyer in connection with
the working capital adjustment and $61,000 in connection with the accounts
receivable adjustment. Therefore, the Company received cash consideration of
$21,508,000, net of transactions costs and the working capital and the accounts
receivable adjustments in connection with the sale of the assets and liabilities
of Ermanco, thereby resulting in a pre-tax loss on the sale of approximately
$964,000.
43
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(2) Discontinued Operations -- Sale of Ermanco (Continued)
--- ------------------------------------------
Ermanco and Paragon indemnified the Buyer and Buyer Parent for, among other
things, a breach of any representation, warranty, covenant, or agreement set
forth under the terms of the Asset Purchase Agreement. Paragon and Ermanco will
have no liability to Buyer or Buyer Parent with respect to claims for breaches
of representations and/or warranties until the aggregate amount of loss relating
to such breaches exceeds $230,000, and then only for such amount that exceeds
$230,000. The overall aggregate indemnification liability of Paragon and Ermanco
shall not exceed $5,750,000. At the closing of the asset sale, Paragon delivered
to the Buyer an irrevocable letter of credit in the amount of $2 million as
security for its indemnification obligations. The letter of credit shall remain
in place for a period of one year following the closing of the asset sale or
longer in the event of any pending dispute thereunder; provided, however, that
if a dispute remains pending longer than the one year period following the
closing of the asset sale, the amount of the letter of credit shall be reduced
to an amount not less than an amount sufficient to resolve such dispute. If
applicable, the reduced letter of credit shall remain in place following the one
year anniversary of the closing of the asset sale until any pending dispute has
been resolved.
Ermanco and Paragon agreed that for a period of 3 years following the
closing of the transaction, each will not solicit any employee, customer, or
supplier of Buyer to leave Buyer's employment or alter its business dealings
with the Buyer.
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
results of operations for Ermanco's business activities are reported as a
discontinued operation and accordingly, the accompanying consolidated financial
statements have been reclassified to report separately the assets, liabilities,
and operating results of this discontinued operation.
The following are the condensed results of operations for Ermanco (in
thousands):
December 31, December 31, December 31,
2005 2004 2003
------------------ ------------------ ------------------
Net sales........................... $ 28,132 30,553 25,212
================== ================== ==================
Income from operations
before income taxes.............. $ 2,523 2,487 175
Income tax expense.................. 916 849 75
------------------ ------------------ ------------------
Income from operations
after income taxes............... 1,607 1,638 100
Loss on sale before
income taxes..................... (964) - -
Income tax benefit.................. (347) - -
------------------ ------------------ ------------------
Loss on sale after income
tax benefit...................... (617) - -
------------------ ------------------ ------------------
Income from discontinued
operations....................... $ 990 1,638 100
================== ================== ==================
44
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(2) Discontinued Operations -- Sale of Ermanco (Continued)
--- ------------------------------------------
The following is condensed balance sheet data pertaining to Ermanco as of
December 31, 2004 (in thousands):
As of
December 31, 2004
-------------------------
Current assets of business held for sale:
Receivables........................................... $ 4,120
Inventories........................................... 1,264
Other current assets.................................. 1,633
-------------------------
Total current assets of business
held for sale..................................... $ 7,017
=========================
Non-current assets of business held for sale:
Net property, plant and equipment..................... $ 1,047
Goodwill.............................................. 17,657
-------------------------
Total non-current assets of business
held for sale..................................... $ 18,704
=========================
Current liabilities of business held for sale:
Accounts payable...................................... $ 1,554
Other current liabilities............................. 899
-------------------------
Total current liabilities of business held
for sale.......................................... $ 2,453
=========================
Long-term liabilities of business held for sale:
Deferred income taxes payable......................... $ 2,403
=========================
(3) Uncompleted Contracts
--- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows (in
thousands):
December 31, 2005 December 31, 2004
---------------------- -----------------------
Costs and estimated earnings on
uncompleted contracts.......................... $ 11,592 6,884
Less: billings to date........................... (13,020) (8,034)
---------------------- -----------------------
$ (1,428) (1,150)
====================== =======================
Included in accompanying balance sheets under
the following captions:
Costs and estimated earnings
in excess of billings...................... $ 616 92
Customers' deposits and billings in
excess of costs and estimated
earnings................................... (2,044) (1,242)
---------------------- -----------------------
$ (1,428) (1,150)
====================== =======================
45
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(4) Line of Credit
--- --------------
The Company has a line of credit facility which may not exceed $5,000,000
and is to be used primarily for working capital purposes. Interest on the line
of credit facility is at the LIBOR Market Index Rate plus 1.4%. Effective August
5, 2005, the Company issued a $2,000,000 letter of credit in connection with the
sale of substantially all of the assets and liabilities of Ermanco, thereby
reducing the amount of available line of credit to $2,800,000. As of December
31, 2005, the Company did not have any borrowings under the line of credit
facility, and the line of credit facility expires effective June 30, 2006. The
Company expects to renew the line of credit facility under similar terms and
conditions during 2006.
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, 2005.
(5) Long-Term Debt
--- --------------
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.
46
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(6) 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, 2005, 2004, and 2003:
2005 2004 2003
------------------------- ------------------------- ------------------------
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....... 209,783 $ 7.11 339,122 $ 7.40 525,516 $ 7.78
Granted....................... - - - - - -
Exercised..................... (105,648) 6.83 (67,789) 7.40 (39,706) 6.67
Lapsed........................ (65,600) 7.11 (61,550) 8.40 (146,688) 8.95
------------- --------- ------------- --------- ------------- ---------
Balance as of December 31..... 38,535 $ 7.86 209,783 $ 7.11 339,122 $ 7.40
============= ========== ============= ========= ============= =========
47
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(6) Stock Options (Continued)
--- -------------
The following table summarizes information about stock options outstanding
as of December 31, 2005:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Number of Remaining Number of
Exercise Stock Options Life Exercise Stock Options
Price Outstanding (Years) Price Exercisable
------------- ----------------- -------------- ----------- ----------------
$7.50 18,535 .61 7.50 18,535
8.12 10,000 1.47 8.12 7,500
8.27 10,000 1.27 8.27 7,500
------------- ----------------- -------------- ----------- ----------------
$7.86 38,535 1.12 7.81 33,535
============= ================= ============== =========== ================
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, 2005, 38,535
options are outstanding under the plan, and all options have a term of five
years.
(7) Employee Benefit Plans
--- ----------------------
The Company previously maintained a defined benefit plan for employees
covered by its collective bargaining agreement. Retirement benefits were based
on the employee's years of service multiplied by the appropriate monthly benefit
amount. Employee compensation did not impact pension benefits. During the plan's
existence, the Company's policy was to fund the plan in compliance with
applicable laws and regulations. See Restructuring in Note 1 of the Notes to
Consolidated Financial Statements for a discussion of the $170,000 pension
credit recorded in 2003.
The Company has a defined contribution Retirement Savings Plan for its
employees. Employees age 21 and above, with at least one year of service, are
eligible to participate in the Plan. Under the 401(k) feature of the Plan, the
Company contributes 2% of base pay to each eligible employee's account and, in
addition, matches 50% of the first 4% of pay which the employee contributes to
the Plan. The Plan also contains provisions for profit sharing contributions in
the form of cash as determined annually by the Company's Board of Directors.
Total expense for the Retirement Savings Plan was $129,000, $132,000, and
$112,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
48
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(8) Income Taxes
The provision for income tax expense (benefit) associated with continuing
operations consists of the following (in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2005 2004 2003
------------------ ------------------ ------------------
Federal - current.................. $ (251) (418) 1,970
- deferred................. 338 330 (267)
------------------ ------------------ ------------------
87 (88) 1,703
------------------ ------------------ ------------------
State - current.................. 1 2 390
- deferred................. 5 (20) 256
------------------ ------------------ ------------------
6 (18) 646
------------------ ------------------ ------------------
Foreign - current.................. - - -
------------------ ------------------ ------------------
$ 93 (106) 2,349
================== ================== ==================
The income tax expense (benefit) was allocated as follows (in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2005 2004 2003
------------------ ------------------ ------------------
Continuing operations............... $ 93 (106) 2,349
Discontinued operations............. 569 849 75
------------------ ------------------ ------------------
$ 662 743 2,424
================== ================== ==================
The reconciliation between the U.S. federal statutory rate and the
Company's effective income tax rate associated with continuing operations is (in
thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2005 2004 2003
------------------ ------------------ ------------------
Computed tax expense (benefit)
at statutory rate of 34%......... $ 102 (92) 2,051
Increase (reduction) in taxes
resulting from:
State income taxes, net of
federal benefit.............. 4 (12) 426
Equity in income of joint
venture and dividend
received deduction from
joint venture distribution... - - (272)
Tax-exempt interest............ (86) (2) -
Miscellaneous items............ 73 - 144
------------------ ----------------- ------------------
$ 93 (106) 2,349
================== ================= ==================
49
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(8) Income Taxes (Continued)
--- ------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities associated with continuing
operations at December 31, 2005 and 2004 are presented below (in thousands):
December 31, December 31,
2005 2004
----------------- -----------------
Deferred tax assets:
Net operating and built-in loss carryforward
(federal loss of $86 expires through 2007)........... $ 190 245
Inventories............................................ 148 143
Accrued restructuring costs............................ 24 24
Accrued warranty costs................................. 73 189
Accruals for other expenses, not yet deductible
for tax purposes..................................... 265 413
----------------- -----------------
Total gross deferred tax assets.................... 700 1,014
----------------- -----------------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation.......................... (29) (37)
Prepaid expenses....................................... (115) (78)
----------------- -----------------
Total gross deferred tax liabilities............... (144) (115)
----------------- -----------------
Net deferred tax assets............................ $ 556 899
================= =================
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, 2005.
(9) Contingencies
--- -------------
The Company is involved in various 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.
(10) Commitments and Related Party Transactions
---- ------------------------------------------
The Company's principal office is located in a 173,000 square foot,
concrete, brick, and steel facility in Easton, Pennsylvania. In connection with
the February 2003 sale of the Company's Easton, Pennsylvania facility, the
Company entered into a leaseback arrangement for 25,000 square feet of office
space for five years. The leasing agreement requires fixed monthly rentals of
$18,234 (with annual increases of 3%). The terms of the lease also require the
payment of a proportionate share of the facility's operating expenses. The
leasing agreement is secured with a $200,000 letter of credit. The lease expires
on February 21, 2008. In accordance with SFAS 13 and SFAS 28, the leaseback
50
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(10) Commitments and Related Party Transactions (Continued)
---- ------------------------------------------------------
does not meet the criteria for classification as a capital lease; hence, it is
classified as an operating lease. The sale-leaseback resulted in a total gain of
$2,189,000, of which $1,363,000 was recorded as a gain in 2003. The
seller-lessee (Company) retained more than a minor part (25,000 square feet) but
less than substantially all of the use of the property (173,000 square feet)
through the leaseback and realized a profit on the sale in excess of the present
value of the minimum lease payments over the lease term. The present value of
the stream of lease payments utilizing the Company's incremental borrowing rate
of 10.0% was $826,000. The $826,000 of deferred profit is amortized in equal
amounts as a reduction in rent expense over the five-year term of the lease.
During the years ended December 31, 2005, 2004, and 2003, $165,000, $165,000,
and $138,000, respectively, of the deferred gain was recognized.
Total rental expense in the years ended December 31, 2005, 2004, and 2003
approximated $231,000, $222,000, and $187,000, respectively.
Future minimum rental commitments at December 31, 2005 are as follows (in
thousands):
Operating Leases
--------------------
2006............................................ $ 224
2007............................................ 231
2009............................................ 34
2009............................................ -
2010............................................ -
--------------------
Total ......................................... $ 489
====================
On September 20, 2005, the Board of Directors of the Company, upon the
recommendation of the Board's Nominating Committee, unanimously voted to elect
Mr. Joel L. Hoffner as a Director of the Company to fill the vacancy created by
the resignation of Mr. Steven Shulman on August 8, 2005. Mr. Hoffner had been a
consultant to SI Handling Systems, Inc. and Paragon Technologies for various
marketing and business evaluation assignments during the last ten years. From
September 1, 2005 through December 31, 2005, Mr. Hoffner provided consulting
services related to the Company's corporate development pursuant to the terms of
a consulting agreement by and between the Company and The QTX Group dated
September 1, 2005. In consideration for their services, The QTX Group received
$7,500 per month and reimbursement for all reasonable and necessary
out-of-pocket expenses directly incurred by Mr. Hoffner during the term of his
engagement with the Company. The parties terminated the consulting agreement
with The QTX Group on January 1, 2006, the time Mr. Hoffner's appointment as
President and Chief Executive Officer of the Company became effective.
Consulting expenses associated with The QTX Group in the years ended December
31, 2005, 2004, and 2003 approximated $44,000, $10,000, and $0, respectively.
On November 15, 2005, the Company announced the repurchase of 100,000
shares (or 2.67%) of its common stock in a private sale transaction for $975,000
(or $9.75 per share) from L. Jack Bradt, a member of the Company's Board of
Directors. The Company's non-interested Audit Committee members and the Board of
Directors approved the repurchase of Mr. Bradt's shares. The closing market
price of the Company's common stock on November 14, 2005 was $10.09 per share.
See Note 12 of Notes to Consolidated Financial Statements for transactions
related to the Company's former SI/BAKER joint venture.
51
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(11) Cash Flow Information
---- ---------------------
Supplemental disclosures of cash flow information for the years ended
December 31, 2005, 2004, and 2003 are as follows (in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2005 2004 2003
---------------- ----------------- ----------------
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest.......................... $ 1 4 456
================ ================= ================
Income taxes...................... $ 2,718 512 720
================ ================= ================
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)
================ ================= ================
(12) 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:
2003
------------------
Statements of Operations Data
(in thousands):
Systems and services sold under various subcontracts............... $ 62
Reimbursement for administrative and other
services provided................................................ 9
Royalty income..................................................... 226
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):
2003
------------------
Net sales............................................................... $ 11,279
==================
Net earnings............................................................ $ 513
==================
52
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, 2005 Quarter Quarter Quarter Quarter
----------------------------------------------- ------------- -------------- ------------- -------------
Net sales................................. $ 3,866 3,729 4,101 4,980
Gross profit on sales..................... $ 1,092 890 1,127 1,427
Income (loss) from continuing
operations................................ $ 64 (110) 61 193
Income (loss) from discontinued
operations, net of income taxes........... 130 819 80 (39)
------------- -------------- ------------- -------------
Net income................................ $ 194 709 141 154
============= ============== ============= =============
Basic earnings (loss) per share:
Income (loss) from continuing
operations................................ $ .02 (.03) .01 .05
Income (loss) from discontinued
operations................................ .03 .20 .02 (.01)
------------- -------------- ------------- - -------------
Net income................................ $ .05 .17 .03 .04
============= ============== ============= =============
Diluted earnings (loss) per share:
Income (loss) from continuing
operations................................ $ .02 (.03) .01 .05
Income (loss) from discontinued
operations................................ .03 .20 .02 (.01)
------------- -------------- ------------- -------------
Net income................................ $ .05 .17 .03 .04
============= ============== ============= =============
For the Year Ended First Second Third Fourth
December 31, 2004 Quarter Quarter Quarter Quarter
----------------------------------------------- ------------- -------------- ------------- -------------
Net sales................................. $ 2,913 2,496 3,111 3,182
Gross profit on sales..................... $ 900 842 1,097 1,048
Income (loss) from continuing
operations................................ $ (17) (98) 44 (94)
Income from discontinued
operations, net of income taxes........... 358 227 421 632
------------- -------------- ------------- -------------
Net income................................ $ 341 129 465 538
============= ============== ============= =============
Basic earnings (loss) per share:
Income (loss) from continuing
operations................................ $ - (.02) .01 (.02)
Income from discontinued
operations................................ .08 .05 .10 .15
------------- -------------- ------------- -------------
Net income................................ $ .08 .03 .11 .13
============= ============== ============= =============
Diluted earnings (loss) per share:
Income (loss) from continuing
operations................................ $ - (.02) .01 (.02)
Income from discontinued
operations................................ .08 .05 .10 .14
------------- -------------- ------------- -------------
Net income................................ $ .08 .03 .11 .12
============= ============== ============= =============
53
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(13) Quarterly Financial Information (Unaudited) (Continued)
---- -------------------------------------------------------
See Discontinued Operations - Sale of Ermanco in Note 2 of the Notes to
Consolidated Financial Statements for further information regarding the sale of
substantially all of the assets and liabilities of Ermanco in the third quarter
of 2005.
(14) Stock Repurchase Program
---- ------------------------
On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. On August 3, 2005,
the Company's Board of Directors amended its existing stock repurchase program
by increasing the amount it has authorized management to repurchase from up to
$1,000,000 of the Company's common stock to up to $5,000,000. On August 19,
2005, the Company announced the repurchase of an aggregate of 359,200 shares (or
8.3%) of its common stock in a private sale transaction for an aggregate of
approximately $3,502,000 (or $9.75 per share) from Leon C. Kirschner, the
Company's former Chief Operating Officer, and Steven Shulman, a former director
of the Company. In these transactions, the Company, with authorization from its
Board of Directors, repurchased 190,091 shares from Mr. Kirschner for
approximately $1,853,000 and 169,109 shares from Mr. Shulman for approximately
$1,649,000, which represented their holdings of the Company's common stock, and
retired the shares. The closing market price of the Company's common stock on
August 18, 2005 was $12.60 per share.
Mr. Kirschner, who also served as the Chief Executive Officer of the
Company's former wholly owned subsidiary, Ermanco Incorporated, resigned as an
officer and employee of the Company on August 5, 2005, the day on which the
Company completed its sale of substantially all of the assets and liabilities of
Ermanco Incorporated. Mr. Shulman resigned as a director of the Company on
August 8, 2005. Mr. Shulman became a director of the Company as a result of the
Company's purchase of Ermanco on September 30, 1999.
On August 31, 2005, the Company's Board of Directors amended its existing
stock repurchase program by increasing the amount it has authorized management
to repurchase from up to $5,000,000 of the Company's common stock to up to
$8,828,000.
On November 15, 2005, the Company announced the repurchase of 100,000 shares
(or 2.67%) of its common stock in a private sale transaction for $975,000 (or
$9.75 per share) from L. Jack Bradt, a member of the Company's Board of
Directors. The Company's non-interested Audit Committee members and the Board of
Directors approved the repurchase of Mr. Bradt's shares. The closing market
price of the Company's common stock on November 14, 2005 was $10.09 per share.
On December 5, 2005, the Company's Board of Directors amended its existing
stock repurchase program by increasing the amount it has authorized management
to repurchase from up to $8,828,000 of the Company's common stock to up to
$10,000,000. During the year ended December 31, 2005, the Company repurchased
824,100 shares of common stock at a weighted average cost, including brokerage
commissions, of $9.81 per share. Cash expenditures for the stock repurchases
during the year ended December 31, 2005 were $8,080,882. Through December 31,
2005, the Company repurchased 858,800 shares of common stock at a weighted
average cost, including brokerage commissions, of $9.79 per share. Cash
expenditures for the stock repurchases since the inception of the program were
$8,406,514. As of December 31, 2005, $1,593,486 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
54
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(14) Stock Repurchase Program (Continued)
---- ------------------------
expiration date with regard to the stock repurchase program. All shares of
common stock that were repurchased by the Company since the inception of the
program were subsequently retired.
Item 9. Changes in and Disagreements with Accountants on Accounting and
------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
-------- -----------------------
(a) Evaluation of Disclosure Controls and Procedures
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, 2005. 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 accumulated and communicated to the Company's
management, including the Company's CEO and CFO, to allow timely decisions
regarding required disclosure, and is recorded, processed, summarized, and
reported as specified in Securities and Exchange Commission rules and forms.
(b) Changes in Internal Control Over Financial Reporting
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 that has materially
affected, or that is reasonably likely to materially affect the Company's
internal control over financial reporting.
Item 9B. Other Information
-------- -----------------
Not applicable.
55
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 Age
and Principal Occupation for Past Five Years Since
------------------------------------------------------------------------------------------- ------
L. Jack Bradt.................................................................. 1958 77
L. Jack Bradt was the founder in 1958, and for 30 years until his retirement in
1987, 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.
Joel L. Hoffner............................................................... 2005 61
Joel L. Hoffner became President and CEO of the Company on January 1, 2006,
and a director of the Company on September 20, 2005. Mr. Hoffner
previously served as Vice President of Product Management (June 1992 -
June 1995), Vice President of Engineering (May 1987 - January 1988), and
Director of Engineering (July 1985 - May 1987) at SI Handling Systems,
Inc., renamed Paragon Technologies, Inc. shortly after the Company
acquired Ermanco Incorporated. In 1993, Mr. Hoffner also served as CEO
and founder of SI/BAKER, INC., a joint venture between the Company and
Automated Prescription Systems, Inc. that provided order fulfillment
systems to the mail order pharmacy market.
In 1995, Mr. Hoffner became the President of E&E Corporation, and through Decem
31, 2005 he was the Managing Director of The QTX Group. Both companies
provided consultative due diligence and enterprise evaluation services to
investment banking institutions worldwide, to process and manufacturing
industries, and to warehousing and distribution operations. Mr. Hoffner
had been a consultant to SI Handling Systems, Inc. and Paragon
Technologies for various marketing and business evaluation assignments
during the last ten years. ber
Theodore W. Myers............................................................. 2002 62
Theodore W. Myers is the Chairman of the Board of the Company since June
2002. 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.
56
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------
Name, Other Positions or Offices With The Company Director
and Principal Occupation for Past Five Years Since Age
------------------------------------------------------------------------------------------- ------
Anthony W. Schweiger.......................................................... 2001 64
Anthony W. Schweiger is President and CEO of The Tomorrow Group, LLC, a
governance and management consultancy. He is also Managing 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 Compensation and Investment Committees. Between 2004 and 2005, Mr.
Schweiger was a director and Audit Chair and Governance Chair of United
Financial Mortgage Corp. In his capacity as a consultant, Mr. Schweiger
advises various service and technology businesses on governance, operational,
and strategic issues.
Leonard S. Yurkovic........................................................... 2002 68
Leonard S. Yurkovic returned to the Company as President and CEO in October
2003 and retired from the Company as President and CEO on December 31, 2005.
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
---- --- ------
Joel L. Hoffner 61 President and Chief Executive Officer, Director
William J. Casey 62 Executive Vice President
John F. Lehr 45 Vice President
Ronald J. Semanick 44 Vice President - Finance, Chief Financial Officer,
Treasurer, and Secretary
Information regarding Mr. Hoffner is provided above.
Mr. Casey whose career with the Company spans 38 years, rejoined the
Company on December 29, 2003 as Vice President of SI Systems Production &
Assembly after a two and a half year absence. Mr. Casey was appointed Executive
Vice President of the Company and President of SI Systems Production & Assembly
on October 14, 2005. From July 2001 to December 2003 Mr. Casey held an executive
position with The Casey Group, an information technology firm specializing in
providing Enterprise Services in IT management, integration, and outsourcing.
Previously (1965-2001), Mr. Casey held a variety of senior management positions
at Paragon Technologies including Executive Vice President, Vice President Sales
and Marketing, and Director of Sales. Mr. Casey is a well known leader in the
material handling industry. A member of the Conveyor Equipment Manufacturers
Association (CEMA) for over 24 years, acting as Board President in 2002-2003,
Mr. Casey has served on its Board of Directors since 1997 and
57
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------
chaired numerous committees. Mr. Casey received a Bachelor's Degree in Business
and Commerce from Rider University.
Mr. Lehr joined the Company as the Director of Sales and Marketing of SI
Systems Order Fulfillment on April 18, 2005. Mr. Lehr was appointed Vice
President of the Company and Managing Director of Order Fulfillment on October
14, 2005. With over 22 years of experience in the material handling systems
integration industry, Mr. Lehr has specific expertise in the design, sale and
implementation of highly automated distribution centers. Mr. Lehr has managed
facilities projects in North America, South America, and Europe across a wide
range of wholesale and retail distribution markets. Over the past 5 years, Mr.
Lehr has focused on the development of industry specific analytical processes
and tools that assist clients in the resolution of complex distribution
problems. These processes have contributed to the success of over $100 million
dollars of automated systems projects. From 2003 to 2005 Mr. Lehr was President
of Genesys Systems. Mr. Lehr served as Managing Partner of Novare-Solutions from
2000 to 2003 and from 1999 to 2000 he held various positions at W&H Systems, a
systems integrator, ranging from Project Manager to Vice President. Mr. Lehr
received a Bachelor's Degree in Industrial Design from the University of
Bridgeport.
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, and
is a member of the Pennsylvania and American Institutes of Certified Public
Accountants.
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
and to furnish the Company with copies of these reports. Based on our records
and other information, we believe that in 2005 all of our directors and
executive officers met all applicable Section 16(a) filing requirements with the
exception of one late report for Mr. Schweiger. Mr. Schweiger inadvertently did
not report the sale of 10,700 shares on September 30, 2005 until a Form 5 filing
made on December 14, 2005.
-----------------------------------
Audit Committee
---------------
The Audit Committee consists of three directors, Messrs. Bradt, Myers, and
Schweiger, all of whom are considered "independent" within the meaning of the
rules of the Securities and Exchange Commission and the American Stock Exchange.
The Board of Directors has further determined that all of the Audit Committee
members are "financially literate," and that based on Mr. Schweiger's education,
his previous experience as a chief financial officer and chief executive
officer, his participation on other audit committees, and his professional
experience, Mr. Schweiger is an "audit committee financial expert" within the
meaning of the rules of the Securities and Exchange Commission and, therefore,
Mr. Schweiger qualifies as a financially sophisticated audit committee member
within the meaning of the rules of the American Stock Exchange. No member of the
Audit Committee simultaneously serves on the audit committees of more than three
public companies.
58
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 ------------- All Other
Year Salary Bonus Compensation Stock Options Compensation
Name and Position Ended ($)(1) ($) ($)(2) (#)(3) ($)(4)
--------------------- -------- ---------- --------- ------------ ------------- ------------
Leonard S. Yurkovic 12/31/05 $ 217,423 $ - $ 9,600 - $ 32,661
President and 12/31/04 212,160 - 9,600 - 28,838
Chief Executive 12/31/03 48,960 - 2,215 - 7,894
Officer (5)
William J. Casey 12/31/05 138,789 - 9,600 - 5,552
Executive Vice 12/31/04 123,023 - 9,600 - 5,161
President (6) 12/31/03 - - - - -
John F. Lehr 12/31/05 104,423 - 7,569 - 26,000
Vice 12/31/04 - - - - -
President (7) 12/31/03 - - - - -
Ronald J. Semanick 12/31/05 123,743 - 9,600 - 4,950
Vice President - 12/31/04 119,755 - 9,600 - 4,967
Finance, Chief 12/31/03 112,236 - 9,969 - 4,843
Financial Officer,
and Treasurer
Leon C. Kirschner 12/31/05 165,964 - 6,400 - 1,983
Chief Operating 12/31/04 272,328 - 9,600 - 2,050
Officer and 12/31/03 260,545 - 9,600 - 2,000
President of
Ermanco
Incorporated (8)
59
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. 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 $16,905, $20,515, and $6,262 for 2005, 2004, and 2003, respectively, for
Mr. Yurkovic while away from his Maryland residence and working at the
Company's headquarters in Easton, Pennsylvania. This column also includes
the payment of unused vacation of $10,086 paid to Mr. Yurkovic upon his
retirement, and the payment of commissions of $26,000 to Mr. Lehr.
(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. Mr. Yurkovic retired from his
position as President and CEO of the Company on December 31, 2005.
(6) Mr. Casey rejoined the Company on December 29, 2003 and became Executive
Vice President of the Company on October 14, 2005. His fiscal year 2005
compensation represents compensation for the entire fiscal year 2005.
(7) Mr. Lehr joined the Company on April 18, 2005 and became a Vice President
of the Company on October 14, 2005. His fiscal year 2005 compensation
represents compensation from April 2005 through December 2005.
(8) Mr. Kirschner, who also served as the Chief Executive Officer of the
Company's former wholly owned subsidiary, Ermanco Incorporated, resigned as
an officer and employee of the Company on August 5, 2005, the day on which
the Company completed its sale of substantially all of the assets and
liabilities of Ermanco Incorporated. His fiscal year 2005 compensation
represents compensation from January 1, 2005 through August 5, 2005.
60
Item 11. Executive Compensation (Continued)
-------- ----------------------
Stock Options Granted to Named Executive Officers During the Year Ended
December 31, 2005.
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, 2005.
Stock Options Exercised During the Year Ended December 31, 2005 and Held by
Named Executive Officers as of December 31, 2005.
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, 2005.
Aggregated Option Exercises in the Year Ended December 31, 2005
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, 2005 December 31, 2005
On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
------------------- ----------- ---------- ----------------- -------------------
Leonard S. Yurkovic - $ - 7,500/2,500 $ 13,725/4,575
William J. Casey - - - / - - / -
John F. Lehr - - - / - - / -
Ronald J. Semanick 14,548 (1) 84,331 2,535/0 6,211/0
Leon C. Kirschner 25,000 (2) 122,375 - / - - / -
(1) On August 16, 2005, Mr. Semanick acquired 14,548 shares of common stock by
exercising 14,548 options to obtain the shares.
(2) On September 1, 2005, Mr. Kirschner acquired 25,000 shares of common stock
by exercising 25,000 options to obtain the shares.
-----------------------------------
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.
61
Item 11. Executive Compensation (Continued)
-------- ----------------------
COMPENSATION OF DIRECTORS (Continued)
Effective February 20, 2006, the Board of Directors made the following
changes to Board of Directors' compensation relating to Meeting fees:
non-employee directors serving on Committees of the Board of Directors receive
meeting fees of $1,500 for Audit Committee Meetings and $1,000 for all other
Committee Meetings of the Board of Directors. The Chairman of the Board and
other non-employee directors receive a fee of $1,500 for each Board Meeting
attended. There is no longer a differentiation in fees for Board Meetings or
Committee Meetings held by telephone conference.
The Company permits its directors, at their election, to defer receipt of
payment of directors' fees. During the year ended December 31, 2005, no
directors' fees were 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, 2005, distributions under the Directors' Deferred
Compensation Plan totaled $47,829.
Under the Company's 1997 Equity Compensation Plan, directors are eligible
to receive grants of stock options at the discretion of the Company's Board of
Directors. No grant of stock options were made to any directors in 2005.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently comprised of Mr. Schweiger,
Chairman, and Messrs. Bradt and Myers. Mr. Bradt was formerly the CEO of the
Company until 1987. 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.
62
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
and Related Stockholder Matters
-------------------------------
The following table sets forth certain information as of March 22, 2006
(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 five percent
(5%) of the outstanding common stock, (ii) by each director or nominee for
election as a director 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.
Number of Right to Acquire
Shares Under Options
Beneficially Exercisable Percentage
Beneficial Owner (1) Owned Within 60 Days of Class (2)
-------------------- ------------- ------------------- --------------
Emerald Advisers, Inc. (3).............. 919,065 - 25.9%
1703 Oregon Pike
Suite 101
Lancaster, PA 17601
L. Jack Bradt (4)....................... 222,324 - 6.3%
580 Riverwoods Way
Bethlehem, PA 18018
Joel L. Hoffner (5)..................... 5,000 - *
Theodore W. Myers (6)................... 26,200 10,000 1.0%
Anthony W. Schweiger ................... 19,300 10,000 *
Leonard S. Yurkovic..................... 19,000 7,500 *
William J. Casey (5).................... 2,500 - *
John F. Lehr (5)........................ 2,500 - *
Ronald J. Semanick (5).................. 17,048 2,535 *
All current directors and
executive officers as a group
(8 persons) (4) (5) (6).............. 313,872 30,035 9.6%
-----------------------------------------
*Less than 1%.
(1) Unless otherwise indicated, the address for each stockholder listed on the
table is c/o Paragon Technologies, Inc., 600 Kuebler Road, Easton,
Pennsylvania 18040.
(2) The percentage for each individual, entity or group is based on the
aggregate number of shares outstanding as of March 22, 2006 (3,551,519) 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 22, 2006.
(3) This information is presented in reliance on information disclosed in a
Schedule 13G/A filed with the Securities and Exchange Commission on January
31, 2006.
(4) Includes 51,262 shares held by members of Mr. Bradt's immediate family. Mr.
Bradt disclaims beneficial ownership of such shares.
63
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
and Related Stockholder Matter (Continued)
------------------------------
(5) Includes restricted shares awarded on March 8, 2006 under the Company's
1997 Equity Compensation Plan to Messrs. Hoffner (5,000 shares), Casey
(2,500 shares), Lehr (2,500 shares), and Semanick (2,500 shares). The
restricted stock grants vest on March 8, 2010, the four-year anniversary
date of the grants.
(6) Includes 2,800 shares held by members of Mr. Myers' immediate family. Mr.
Myers disclaims beneficial ownership of such shares.
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 Weighted- available for future
securities to be average issuance under
issued upon 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
plans approved by
security holders.......... 51,035 $ 8.39 709,947
Equity compensation
plans not approved by
security holders.......... - - 2,239
-------------------- -------------------- -----------------------
Total........................ 51,035 $ 8.39 712,186
==================== ==================== =======================
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.
64
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
On September 20, 2005, the Board of Directors of the Company, upon the
recommendation of the Board's Nominating Committee, unanimously voted to elect
Mr. Joel L. Hoffner as a Director of the Company to fill the vacancy created by
the resignation of Mr. Steven Shulman on August 8, 2005. Mr. Hoffner had been a
consultant to SI Handling Systems, Inc. and Paragon Technologies for various
marketing and business evaluation assignments during the last ten years. From
September 1, 2005 through December 31, 2005, Mr. Hoffner provided consulting
services related to the Company's corporate development pursuant to the terms of
a consulting agreement by and between the Company and The QTX Group dated
September 1, 2005. In consideration for their services, The QTX Group received
$7,500 per month and reimbursement for all reasonable and necessary
out-of-pocket expenses directly incurred by Mr. Hoffner during the term of his
engagement with the Company. The parties terminated the consulting agreement
with The QTX Group on January 1, 2006, the time Mr. Hoffner's appointment as
President and Chief Executive Officer of the Company became effective.
Consulting expenses associated with The QTX Group in the years ended December
31, 2005, 2004, and 2003 approximated $44,000, $10,000, and $0, respectively.
On November 15, 2005, the Company announced the repurchase of 100,000
shares (or 2.67%) of its common stock in a private sale transaction for $975,000
(or $9.75 per share) from L. Jack Bradt, a member of the Company's Board of
Directors. The Company's non-interested Audit Committee members and the Board of
Directors approved the repurchase of Mr. Bradt's shares. The closing market
price of the Company's common stock on November 14, 2005 was $10.09 per share.
Item 14. Principal Accountant Fees and Services
-------- --------------------------------------
Selection of the independent registered public accountants is made solely
by the Audit Committee. KPMG LLP ("KPMG") served as the Company's independent
registered public accountants for 2005 and 2004. Fees for all services provided
by KPMG for the fiscal years ended December 31, 2005 and 2004 were as follows:
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 $142,400 for 2005 and $145,000 for 2004.
Audit-Related Fees
------------------
KPMG's fees for audit-related services were $23,000 for 2005 and $10,000
for 2004. The services rendered in 2005 were in connection with due diligence
related to the sale of substantially all of the assets and liabilities of
Ermanco. The services rendered in 2004 were in connection with an audit of the
Company's 401(k) Retirement Savings Plan.
Tax Fees
--------
KPMG's fees for tax services were $92,910 for 2005 and $63,100 for 2004.
The services rendered in 2005 were in connection with tax compliance and tax
consultation services totaling $52,460 related to the Company's annual federal
and state tax returns and due diligence totaling $40,450 related to the sale of
substantially all of the assets and liabilities of Ermanco. The services
rendered in 2004 were in connection with tax compliance and tax consultation
services.
All Other Fees
--------------
No other fees were charged by KPMG to the Company in 2005 and 2004 other
than those referenced above.
65
Item 14. Principal Accountant Fees and Services (Continued)
-------- --------------------------------------
Fee Approval Policy
-------------------
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 the Company 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.
Specific services being provided by the Company's independent auditors are
regularly reviewed in accordance with the pre-approval policy. All services
rendered by KPMG are permissible under applicable laws and regulations, and the
Audit Committee pre-approved all audit, audit-related, and non-audit services
performed by KPMG during 2005.
66
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, 2005 and 2004
Consolidated Statements of Operations for the years ended December
31, 2005, 2004, and 2003
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2005, 2004, and 2003
Consolidated Statements of Cash Flows for the years ended December
31, 2005, 2004, and 2003
Notes to Consolidated Financial Statements
2. Index to Financial Statement Schedule
All 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).
3.3 Certificate of Amendment to the Articles of Incorporation of
Ermanco Incorporated as filed with the Michigan Secretary of
State on August 5, 2005 (incorporated by reference to Exhibit
3.1 to Form 8-K, filed on August 9, 2005).
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).
67
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
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).
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).
68
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
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).
10.31 Asset Purchase Agreement by and among TGW Transportgerate
GmbH, Malibu Acquisition, Inc., Ermanco Incorporated, and
Paragon Technologies, Inc. dated May 20, 2005 (incorporated by
reference to Exhibit 10.1 to Form 8-K, filed on May 23, 2005).
10.32 Loan Agreement (Line of Credit) entered into June 20, 2005 by
and between Paragon Technologies, Inc., Ermanco Incorporated,
and Wachovia Bank, National Association (incorporated by
reference to Exhibit 10.31 to Form 10-Q, filed on August 12,
2005).
10.33 Promissory Note related to the Line of Credit entered into
June 20, 2005 by and between Paragon Technologies, Inc.,
Ermanco Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.32 to Form 10-Q,
filed on August 12, 2005).
69
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.34 Consulting Agreement dated September 1, 2005 by and between
Paragon Technologies, Inc. and The QTX Group (incorporated by
reference to Exhibit 10.1 to Form 8-K, filed on September 21,
2005).
10.35 Termination Agreement dated January 1, 2006 by and between
Paragon Technologies, Inc. and The QTX Group (filed
herewith).
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 Joel L. Hoffner,
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 Joel L. Hoffner, 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).
* Management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 15(c) of this report.
(b) Exhibits 10.35, 14, 21, 23.1, 31.1, 31.2, 32.1, and 32.2 are filed with
this report.
(c) Not applicable.
70
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, 2006 By /s/ Theodore W. Myers
------------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 30, 2006 By /s/ Joel L. Hoffner
------------------------------------------
Joel L. Hoffner
President and Chief Executive Officer
71
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, 2006 /s/ Theodore W. Myers
------------------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 30, 2006 /s/ Joel L. Hoffner
-------------------------------------------------
Joel L. Hoffner
President & Chief Executive Officer, Director
Dated: March 30, 2006 /s/ Ronald J. Semanick
-------------------------------------------------
Ronald J. Semanick
Vice President-Finance, Chief Financial
Officer, Treasurer, and Secretary
(Principal Accounting and Financial Officer)
Dated: March 30, 2006 /s/ L. Jack Bradt
------------------------------------------------
L. Jack Bradt
Director
Dated: March 30, 2006 /s/ Anthony W. Schweiger
------------------------------------------------
Anthony W. Schweiger
Director
Dated: March 30, 2006 /s/ Leonard S. Yurkovic
------------------------------------------------
Leonard S. Yurkovic
Director
72
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).
3.3 Certificate of Amendment to the Articles of Incorporation of Ermanco
Incorporated as filed with the Michigan Secretary of State on August 5,
2005 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed on
August 9, 2005).
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).
73
EXHIBIT INDEX (Continued)
-------------
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).
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).
74
EXHIBIT INDEX (Continued)
-------------
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).
10.31 Asset Purchase Agreement by and among TGW Transportgerate GmbH, Malibu
Acquisition, Inc., Ermanco Incorporated, and Paragon Technologies, Inc.
dated May 20, 2005 (incorporated by reference to Exhibit 10.1 to Form
8-K, filed on May 23, 2005).
10.32 Loan Agreement (Line of Credit) entered into June 20, 2005 by and
between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia
Bank, National Association (incorporated by reference to Exhibit 10.31
to Form 10-Q, filed on August 12, 2005).
10.33 Promissory Note related to the Line of Credit entered into June 20,
2005 by and between Paragon Technologies, Inc., Ermanco Incorporated,
and Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.32 to Form 10-Q, filed on August 12, 2005).
10.34 Consulting Agreement dated September 1, 2005 by and between Paragon
Technologies, Inc. and The QTX Group (incorporated by reference to
Exhibit 10.1 to Form 8-K, filed on September 21, 2005).
10.35 Termination Agreement dated January 1, 2006 by and between Paragon
Technologies, Inc. and The QTX Group (filed herewith).
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 Joel L. Hoffner, 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 Joel L. Hoffner, 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).
*Management contract or compensatory plan or arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this report.
75