UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
Commission file number: 1-15729
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 (ss. 229.405) is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer, "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|
Smaller Reporting Company |_|
1
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
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
29, 2007, the last day of the Registrant's second fiscal quarter, was
approximately $14.1 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 29, 2007 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 20, 2008 was 2,740,392.
DOCUMENTS INCORPORATED BY REFERENCE: None
2
[PARAGON TECHNOLOGIES, INC. LOGO]
TABLE OF CONTENTS
PART I..........................................................................................4
Item 1. Business......................................................................4
Item 1A. Risk Factors.................................................................12
Item 1B. Unresolved Staff Comments....................................................18
Item 2. Properties...................................................................18
Item 3. Legal Proceedings............................................................18
Item 4. Submission of Matters to a Vote of Security Holders..........................18
PART II........................................................................................19
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities...............................................................19
Item 6. Selected Financial Data......................................................22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................35
Item 8. Financial Statements and Supplementary Data..................................36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................................63
Item 9A. Controls and Procedures......................................................63
Item 9B. Other Information............................................................64
PART III.......................................................................................65
Item 10. Directors and Executive Officers of the Registrant...........................65
Item 11. Executive Compensation.......................................................69
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...............................84
Item 13. Certain Relationships and Related Transactions
and Director Independence...............................................86
Item 14. Principal Accounting Fees and Services.......................................86
PART IV........................................................................................88
Item 15. Exhibits and Financial Statement Schedules...................................88
Signatures...................................................................93
Exhibit Index................................................................95
3
PART I
------
Item 1. Business
------- --------
Company Overview
----------------
Paragon Technologies, Inc. ("the Company"), based out of Easton,
Pennsylvania, provides a variety of material handling solutions, including
systems, technologies, products, and services for material flow applications.
The Company's capabilities include horizontal transportation, rapid dispensing,
order fulfillment, computer software, sortation, integrating conveyors and
conveyor systems, and aftermarket services. The Company is a Delaware
corporation, originally incorporated in 1958.
The Company (also referred to as "SI Systems") is a specialized systems
integrator supplying SI Systems' branded automated material handling systems to
manufacturing, assembly, order fulfillment, and distribution operations
customers located primarily in North America, including the U.S. government. SI
Systems is brought to market as two individual brands, SI Systems' Order
Fulfillment Systems (hereafter referred to as "SI Systems OFS") and SI Systems'
Production & Assembly Systems (hereafter referred to as "SI Systems PAS"). Each
brand has its own focused sales force, utilizing the products and services
currently available or under development within the Company.
The SI Systems OFS sales force focuses on providing order fulfillment
systems to order processing and distribution operations, which may incorporate
the Company's proprietary DISPEN-SI-MATIC(R) and automated order fulfillment
solutions and specialized software from the SINTHESIS(R) Software Suite.
SINTHESIS(R) is comprised of eight proprietary software groups, with 26
extendible software modules that continually assess real-time needs and deploy
solutions to accurately facilitate and optimize planning, warehousing,
inventory, routing, and order fulfillment within the distribution process. The
SI Systems PAS sales force focuses on providing automated material handling
systems to manufacturing and assembly operations and the U.S. government, which
may incorporate the Company's proprietary LO-TOW(R) and CARTRAC(R) horizontal
transportation technologies.
The Company's automated material handling systems are marketed, designed,
sold, installed, and serviced by its own staff or subcontractors as labor saving
devices to improve productivity, quality, and reduce costs. The Company's
integrated material handling solutions involve both standard and specially
designed components and include integration of non-proprietary automated
handling technologies to provide turnkey solutions for its customers' unique
material handling needs. The Company's engineering staff develops and designs
computer control programs required for the efficient operation of the systems
and for optimizing manufacturing, assembly, and fulfillment operations.
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 has continued to review
opportunities with the goal of maximizing resources, increasing stockholder
value, and considering strategies and transactions intended to improve
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,
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.
--------------------------------
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, 2007, 2006, and 2005 are as follows (in thousands):
For the year ended December 31, 2007:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 17,737 82.7%
Aftermarket sales............................. 3,711 17.3%
------------------- ------------------
Total sales................................... $ 21,448 100.0%
=================== ==================
For the year ended December 31, 2006:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 14,576 81.9%
Aftermarket sales............................. 3,212 18.1%
------------------- ------------------
Total sales................................... $ 17,788 100.0%
=================== ==================
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%
=================== ==================
The Company's products are sold worldwide through its own sales personnel.
Domestic and international sales during the years ended December 31, 2007, 2006,
and 2005 are as follows (in thousands):
For the year ended December 31, 2007:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 14,935 69.6%
International sales........................... 6,513 30.4%
------------------- ------------------
Total sales................................... $ 21,448 100.0%
=================== ==================
5
For the year ended December 31, 2006:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 16,866 94.8%
International sales........................... 922 5.2%
------------------- ------------------
Total sales................................... $ 17,788 100.0%
=================== ==================
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%
=================== ==================
Sales from external customers for each of the Company's products during the
years ended December 31, 2007, 2006, and 2005 are as follows (in thousands):
December 31, 2007 December 31, 2006 December 31, 2005
--------------------------- --------------------------- ---------------------------
% of Total % of Total % of Total
Sales Sales Sales Sales Sales Sales
------------ ------------ ------------ ------------ ------------ ------------
LO-TOW(R) sales............... $ 6,367 29.7% $ 6,458 36.3% $ 5,691 34.1%
CARTRAC(R) sales............... 119 .5% 1,975 11.1% 34 .2%
DISPEN-SI-MATIC(R),
SINTHESIS(R), and
related order fulfillment
sales....................... 11,216 52.3% 6,092 34.2% 7,813 46.9%
Other sales.................... 35 .2% 51 .3% 76 .4%
Aftermarket sales.............. 3,711 17.3% 3,212 18.1% 3,062 18.4%
------------ ------------ ------------ ------------ ------------ ------------
Total sales................. $ 21,448 100.0% $ 17,788 100.0% $ 16,676 100.0%
============ ============ ============ ============ ============ ============
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, 2007, 2006, and 2005 were $317,000, $732,000, and $540,000,
respectively.
In the year ended December 31, 2007, two customers accounted for over 10%
of sales, and they are listed as follows: Vistakon, a division of Johnson &
Johnson Vision Care - $7,625,000 or 35.6% and General Motors - $3,008,000 or
14.0%. In the year ended December 31, 2006, one customer accounted for over 10%
of sales and is listed as follows: Caterpillar - $2,098,000 or 11.8% of total
sales. In the year ended December 31, 2005, five customers accounted for over
10% of sales, and they are listed as follows: BMG Direct Marketing - $2,492,000
or 14.9%, SI/BAKER - $1,990,000 or 11.9%, Vistakon, a division of Johnson &
Johnson Vision Care - $1,867,000 or 11.2%, E-Z-GO Division of Textron -
$1,812,000 or 10.9%, and Honda of America Mfg. - $1,723,000 or 10.3%. No other
customer accounted for over 10% of sales.
The Company's backlog of orders at December 31, 2007 and December 31, 2006
were $7,934,000 and $5,932,000, respectively.
6
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 2008 calendar year, all
of the December 31, 2007 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
------
systems are utilized in the automation of manufacturing, assembly, unit load
handling in distribution environments, and large newspaper roll delivery
systems. Industries served include the automotive, recreational and utility
vehicle, distribution centers, radiation chambers, engine assembly, truck
assembly, construction vehicles, newspaper facilities, farm machinery, and the
U.S. government, primarily the United States Postal Service and the Defense
Logistics Agency. This simple, yet reliable component design allows for a
variety of configurations well suited for numerous applications. It provides
reliable and efficient transportation for unit loads of all types in progressive
assembly or distribution applications. Because SI Systems' LO-TOW(R) tow chain
used with the system operates at a minimal depth, systems can be installed in
existing one-story and multi-story buildings as well as newly constructed
facilities. Controls sophistication varies depending upon the application. More
complex systems include programmable logic controllers ("PLCs"), personal
computers for data collection and operator interface, radio frequency
identification and communication, bar code identification, and customer host
computer communication interface. The Company believes that SI Systems is the
largest supplier of in-floor towline systems in the United States. A typical
LO-TOW(R) system requires approximately six months to engineer, manufacture, and
install.
LO-TOW(R) sales were $6,367,000, $6,458,000, and $5,691,000 for the years
ended December 31, 2007, 2006, and 2005, respectively.
CARTRAC(R). CARTRAC(R) spinning tube conveyor systems are used in the
-------
automation of production, and assembly operations throughout various industries.
Some of the industries served are automotive, aerospace, appliance, defense,
electronics, machine tools, radiation chambers, castings, transportation, and
foundries. As part of a fully computerized manufacturing system, CARTRAC(R)
offers zero pressure accumulation, high speeds, and smooth
acceleration/deceleration capabilities for both light and heavy load
capabilities that are well suited for the manufacturing environment where high
volume product rate and short cycle time are critical. Some of the more
sophisticated systems require a high degree of accuracy and positioning
repeatability. For these applications, CARTRAC(R) carriers are positioned in
workstations holding very tight tolerances.
CARTRAC(R) sales were $119,000, $1,975,000, and $34,000 for the years ended
December 31, 2007, 2006, and 2005, respectively.
7
Order Fulfillment Systems
-------------------------
DISPEN-SI-MATIC(R), SINTHESIS(R), and Automated Order Fulfillment Solutions
---------------------------------------------------------------------------
DISPEN-SI-MATIC(R) and SINTHESIS(R) 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(R) 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(R) 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(R) 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(R), and automated order fulfillment
system requires approximately six to nine months to engineer, manufacture, and
install.
DISPEN-SI-MATIC(R), SINTHESIS(R), and the related order fulfillment systems
sales, were $11,216,000, $6,092,000, and $7,813,000 for the years ended December
31, 2007, 2006, and 2005, respectively.
--------------------------------
Aftermarket Spare Parts, Equipment and Support Service
------------------------------------------------------
The Company provides spare and replacement parts and equipment for all of
its products, along with support contract services for its order fulfillment
systems. Aftermarket sales were $3,711,000, $3,212,000, and $3,062,000 for the
years ended December 31, 2007, 2006, and 2005, respectively.
--------------------------------
8
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 three principal competitors supplying equipment similar to the
LO-TOW(R) system: FMC Technologies, Jervis B. Webb Company, and Southern
Systems, Inc. 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 CARTRAC(R) system competes with various alternative materials handling
technologies, including automated guided vehicle systems, electrified monorail
and pallet skid systems, power and free conveyor systems, and belt and roller
conveyor systems, that may be obtained through a variety of suppliers. However,
the Company believes that the CARTRAC(R) system's advantages, such as controlled
acceleration and deceleration, high speed, individual carrier control, and right
angle turning, are significant distinctive features providing competitive
advantages in applications requiring these features.
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, KNAPP Logistik Automation GmbH and SSI Schafer Peem GmbH, 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.
9
Proprietary SINTHESIS(R) 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(R) 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.
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 seven patents, all of which have been issued in the
United States, with lives that expire from June 2008 through October 2023.
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),
ETV(R), SI(R), SINTHESIS(R), DC XCELLERATOR(R), and Paragon Technologies(R) are
registered trademarks of the Company. SI Planograph(TM) is a trademark 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 adverse effect on the
overall business of the Company.
Product Development
-------------------
Total product development costs, including patent expense, were $166,000,
$283,000, and $62,000 for the years ended December 31, 2007, 2006, and 2005,
respectively. The Company 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.
10
Development programs in the year ended December 31, 2007 were primarily
aimed at improvements to the Company's Order Fulfillment systems technologies.
Order Fulfillment development efforts during the year ended December 31, 2007
included voice-directed replenishment and DISPEN-SI-MATIC(R) software
enhancements aimed at promoting workplace efficiencies for the Company's
customers.
Development programs in the year ended December 31, 2006 were primarily
aimed at improvements to the Company's Order Fulfillment and Production &
Assembly systems technologies. Development efforts during the year ended
December 31, 2006 included DISPEN-SI-MATIC(R) hardware and software enhancements
aimed at promoting workplace efficiencies for the Company's customers,
voice-directed replenishment, and LO-TOW(R) product enhancements.
Development programs in the year ended December 31, 2005 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.
Employees
---------
As of December 31, 2007, the Company employed four executive officers and
53 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, a retirement savings
plan, and paid vacation and sick leave benefits, and considers its relations
with employees to be satisfactory.
Available Information
---------------------
The Company files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission (the "SEC").
You may read and copy any document the Company files with the SEC at the SEC's
public reference room at 100 F Street, NE, Washington, DC 20549. Please call the
SEC at 1-800-SEC-0330 for information on the public reference room. The SEC
maintains an internet site that contains annual, quarterly and current reports,
proxy and information statements and other information that issuers (including
Paragon Technologies, Inc.) file electronically with the SEC. The Company's
electronic SEC filings are available to the public at the SEC's internet site,
www.sec.gov. In addition, the Company's internet website is www.ptgamex.com, and
you may find the Company's SEC filings on the "For Stockholders" page of that
website. The Company provides access to all of its filings with the SEC, free of
charge, as soon as reasonably practicable after filing with the SEC on such
site. The Company's internet website and the information contained on that
website, or accessible from its website, is not intended to be incorporated into
this Annual Report on Form 10-K.
--------------------------------
11
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.
12
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 federal government agencies.
The Company is largely dependent upon a limited number of large contracts
from large domestic corporations and federal government agencies. This
dependence can cause unexpected fluctuations in sales volume and operating
results from period to period. In the year ended December 31, 2007, two
customers accounted for over 10% of sales, and they are listed as follows:
Vistakon, a division of Johnson & Johnson Vision Care - $7,625,000 or 35.6% and
General Motors - $3,008,000 or 14.0%. In the year ended December 31, 2006, one
customer accounted for over 10% of sales and is listed as follows: Caterpillar -
$2,098,000 or 11.8% of total sales. In the year ended December 31, 2005, five
customers accounted for over 10% of sales, and they are listed as follows: BMG
Direct Marketing - $2,492,000 or 14.9%, SI/BAKER - $1,990,000 or 11.9%,
Vistakon, a division of Johnson & Johnson Vision Care - $1,867,000 or 11.2%,
E-Z-GO Division of Textron - $1,812,000 or 10.9%, and Honda of America Mfg. -
$1,723,000 or 10.3%. No other customer accounted for over 10% of sales.
The Company received $317,000 or 1.5% of its total sales from sales to
government agencies in the fiscal year ended December 31, 2007. 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, 2007 was $7,934,000, of which $19,000
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.
13
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 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. 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 depend
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:
o timely and efficient completion of hardware and software design and
development;
o timely and efficient implementation of manufacturing processes; and
o effective sales, marketing, and customer service.
14
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 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.
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.
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.
15
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 and expensive.
The Company may seek to make acquisitions or joint ventures that prove
unsuccessful or strain or divert resources.
The Company continues to evaluate potential acquisitions and joint
ventures. However, the Company may not be able to complete any acquisitions or
joint ventures at all. Acquisitions and joint ventures present risks that could
materially and adversely affect the Company's business and financial
performance, including:
o the diversion of management's attention from everyday business
activities;
o the contingent and latent risks associated with the past operations of,
and other unanticipated problems arising in, the acquired business; and
o the need to expand management, administration, and operational systems.
If the Company makes such acquisitions, it cannot predict whether:
o it will be able to successfully integrate the operations and personnel
of any new businesses into its business;
o it will realize any anticipated benefits of completed acquisitions; or
o there will be substantial unanticipated costs associated with
acquisitions, including potential costs associated with environmental
liabilities undiscovered at the time of acquisition.
If the Company makes such joint ventures, it cannot predict whether:
o it will realize any anticipated benefits of successful joint ventures;
and
o there will be substantial unanticipated costs associated with such
joint ventures or investments.
16
In addition, future acquisitions by the Company may result in:
o potentially dilutive issuances of the Company's equity securities;
o the incurrence of additional debt;
o restructuring charges; and
o the recognition of significant charges for depreciation and
amortization related to certain intangible assets.
In the future, the Company may make investments in or acquire companies or
commence operations in businesses and industries that are outside of those areas
that the Company has operated historically. The Company cannot assure that it
will be successful in managing any new business. If these investments,
acquisitions, or arrangements are not successful, the Company's earnings could
be materially adversely affected by increased expenses and decreased revenues.
The Company may incur significant increased costs in order to assess its
internal controls over financial reporting, and its internal controls over
financial reporting may be found to be deficient.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to assess
its internal controls over financial reporting and will require independent
registered public accountants to attest to the effectiveness of internal
controls. Current regulations of the Securities and Exchange Commission, or SEC,
require the Company to include this assessment in its Annual Report on Form
10-K.
The Company may incur significant increased costs in implementing and
responding to the new requirements. In particular, the rules governing the
standards that must be met for management to assess its internal controls over
financial reporting under Section 404 are complex and require significant
documentation, testing, and possible remediation. The process of reviewing,
documenting, and testing internal controls over financial reporting may cause a
significant strain on the Company's management, information systems, and
resources. The Company may have to invest in additional accounting and software
systems. The Company may also be required to hire additional personnel and to
use outside legal, accounting, and advisory services. In addition, the Company
may incur additional fees from its independent registered public accountants
when they are required to perform the additional services necessary for them to
provide their attestation. If the Company is unable to favorably assess the
effectiveness of its internal control over financial reporting when it is
required to, the Company may be required to change its internal control over
financial reporting to remediate deficiencies. In addition, investors may lose
confidence in the reliability of the Company's financial statements, causing the
Company's stock price to decline.
The Company's presence in international markets exposes it to risk.
The Company has a limited 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.
17
The Company may be impacted by the overall state of the economy.
The Company remains subject to the risks associated with prolonged declines
in national or local economies. Conditions such as inflation, recession,
unemployment, changes in interest rates and other factors beyond the Company's
control may adversely affect the Company's asset quality and, therefore, its
earnings. In particular, changes in interest rates could adversely affect the
Company's net interest income and have a number of other adverse effects on the
Company's operations. Adverse changes in the economy may have a negative effect
on the Company's operations, which could have an adverse impact on the Company's
earnings. Consequently, any prolonged decline in the economy in the Company's
market area could have a material adverse effect on the Company's financial
condition and results of operations. Although the Company could attempt to
mitigate or cover its exposure from such risks, there can be no assurance that
the Company will be able to mitigate or cover all of the costs resulting from
such risks.
Item 1B. Unresolved Staff Comments
-------- -------------------------
Not applicable.
Item 2. Properties
------- ----------
The Company's principal office is located 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 approximately
25,000 square feet of office space for five years. The leasing agreement
requires fixed monthly rental payments of $19,345. 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. On
November 14, 2007, the Company amended the lease agreement to extend the term of
the lease for a period of five years commencing immediately upon the February
21, 2008 expiration date of the original term of the lease. The amended lease
agreement requires fixed monthly rental payments of $18,000 for five years
through the February 20, 2013 expiration date of the lease. The amended lease
agreement incorporates the terms and conditions of the original lease agreement.
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
------- -----------------
From time to time, the Company is involved in various claims and legal
actions arising in the ordinary course of business. Although the amount of any
liability that could arise with respect to currently pending actions cannot be
accurately predicted, in the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's 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, 2007.
--------------------------------
18
PART II
-------
Item 5. Market for the Registrant's Common Equity, Related Stockholder
------- --------------------------------------------------------------
Matters and Issuer Purchases of Equity Securities
-------------------------------------------------
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, 2007 and 2006 are as follows:
For the Year Ended For the Year Ended
December 31, 2007 December 31, 2006
---------------------------- ----------------------------
High Low High Low
------------ ------------ ------------ ------------
First Quarter................... 6.43 5.47 10.65 9.25
Second Quarter.................. 6.79 5.50 11.50 8.25
Third Quarter................... 7.94 5.94 8.95 6.00
Fourth Quarter.................. 8.84 6.35 6.98 5.19
The Company did not pay cash dividends during the years ended December 31,
2007, 2006, and 2005, 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, 2007, as shown by the records of the Company's transfer agent was
265. This figure does not include individual participants in security position
listings.
The closing market price of the Company's common stock on March 20, 2008
was $5.39.
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, 2007:
-----------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------
10/01/07 - 10/31/07 - $ - - $ - $ 883,857
11/01/07 - 11/30/07 - $ - - $ - $ 883,857
12/01/07 - 12/31/07 - $ - - $ - $ 883,857
----------------------------------------------------------------------------------
- $ - - $ -
==================================================================
-----------------------------------------------------------------------------------------------------------
On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. The Company's Board
of Directors amended its existing stock repurchase program on several occasions
during 2005 and 2006 by increasing the amount it has authorized management to
repurchase from up to $1,000,000 of the Company's common stock to up to
$14,000,000.
19
Item 5. Market for the Registrant's Common Equity, Related Stockholder
------- --------------------------------------------------------------
Matters and Issuer Purchases of Equity Securities (Continued)
-------------------------------------------------
Issuer Purchases of Equity Securities (Continued)
-------------------------------------
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.
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 at the time of the transaction. 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 January 7, 2007, the Company's Board of Directors amended its existing
stock repurchase program by increasing the amount it has authorized management
to repurchase from up to $14,000,000 of the Company's common stock to up to
$15,000,000.
There were no repurchases of the Company's common stock during the three
months ended December 31, 2007. During the year ended December 31, 2007, the
Company repurchased 99,699 shares of common stock at a weighted average cost,
including brokerage commissions, of $5.68 per share. Cash expenditures for the
stock repurchases during the year ended December 31, 2007 were $566,732. From
the inception of the Company's stock repurchase program on August 12, 2004
through December 31, 2007, the Company repurchased 1,637,718 shares of common
stock at a weighted average cost, including brokerage commissions, of $8.62 per
share. Cash expenditures for the stock repurchases since the inception of the
program were $14,116,143. As of December 31, 2007, $883,857 remained available
for repurchases under the stock repurchase program.
Subsequent to December 31, 2007, the Company's Board of Directors amended
its existing stock repurchase program by increasing the amount it has authorized
management to repurchase from up to $15,000,000 of the Company's common stock to
up to $17,000,000.
Based on market conditions and other factors, additional repurchases may be
made from time to time, in compliance with SEC regulations, in the open market
or through privately negotiated transactions at the discretion of the Company.
There is no expiration date with regards to the stock repurchase program. The
purchase price for the shares of the Company's common stock repurchased was
reflected as a reduction to stockholders' equity. The Company allocates the
purchase price of the repurchased shares as a reduction to common stock for the
par value of the shares repurchased, with the excess of the purchase price over
par value being allocated between additional paid-in capital and retained
earnings. All shares of common stock that were repurchased by the Company since
the inception of the program were subsequently retired.
20
Item 5. Market for the Registrant's Common Equity, Related Stockholder
------- --------------------------------------------------------------
Matters and Issuer Purchases of Equity Securities (Continued)
-------------------------------------------------------------
Stock Performance Chart
-----------------------
The following graph illustrates the cumulative total stockholder return on
the Company's common stock during the years ended December 31, 2007, December
31, 2006, December 31, 2005, December 31, 2004, and December 31, 2003 with
comparison to the cumulative total return on the Amex Composite Index, and a
Peer Group of Construction and Related Machinery Companies. This comparison
assumes $100 was invested on December 31, 2002 in the Company's common stock and
in each of the foregoing indexes and assumes reinvestment of dividends.
[STOCK PERFORMANCE CHART OMITTED]
12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
-------- -------- -------- -------- -------- --------
Paragon Technologies, Inc. 100 115 117 117 66 82
(1) Peer Group 100 139 180 299 287 364
Amex Composite Index 100 143 175 215 257 299
-----------------------------------
(1) The self-constructed Peer Group of Construction and Related Machinery
Companies includes: A.S.V., Inc., Bolt Technology Corporation, Columbus
McKinnon Corporation, Industrial Rubber Products, Inc., Lufkin Industries,
Inc., Quipp, Inc., and Tesco Corporation. The total returns of each member
of the Peer Group were determined in accordance with Securities and
Exchange Commission regulations; i.e., weighted according to each such
issuer's stock market capitalization.
--------------------------------
Please refer to the Company's disclosure regarding Executive Compensation
information included in Item 11 of this Annual Report on Form 10-K.
21
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, 2007. The selected consolidated financial data presented below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and 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
------------------------------------------------------------------
12/31/07 12/31/06 12/31/05 12/31/04 12/31/03
------------- ------------ ------------ ------------- ------------
Net sales................... $ 21,448 17,788 16,676 11,702 12,083
Income (loss) from
continuing operations
before income taxes....... $ (92) 449 301 (271) 6,034
Income tax expense
(benefit)................. (433) (19) 93 (106) 2,349
------------- ------------ ------------ ------------- ------------
Income (loss) from
continuing operations..... 341 468 208 (165) 3,685
Income from
discontinued operations,
net of income taxes....... - - 990 1,638 100
------------- ------------ ------------ ------------- ------------
Net income.................. $ 341 468 1,198 1,473 3,785
============= ============ ============ ============= ============
Basic earnings (loss)
per share:
Income (loss) from
continuing operations... $ .12 .14 .05 (.04) .87
Income from
discontinued
operations.............. - - .24 .38 .02
------------- ------------ ------------ ------------- ------------
Net income.................. $ .12 .14 .29 .34 .89
============= ============ ============ ============= ============
Diluted earnings (loss)
per share:
Income (loss) from
continuing operations... $ .12 .14 .05 (.04) .85
Income from
discontinued
operations.............. - - .24 .38 .02
------------- ------------ ------------ ------------- ------------
Net income.................. $ .12 .14 .29 .34 .87
============= ============ ============ ============= ============
Total assets (1)............ $ 18,316 16,752 22,596 33,424 33,803
Long-term liabilities....... $ 261 28 193 2,761 2,159
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.
22
Item 6. Selected Financial Data (Continued)
------- -----------------------
(1) During the year ended December 31, 2007, the Company repurchased 99,699
shares of common stock at a weighted average cost, including brokerage
commissions, of $5.68 per share. Cash expenditures for the stock
repurchases during the year ended December 31, 2007 were $566,732. During
the year ended December 31, 2006, the Company repurchased 679,219 shares of
common stock at a weighted average cost, including brokerage commissions,
of $7.57 per share. Cash expenditures for the stock repurchases during the
year ended December 31, 2006 were $5,142,898. 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. During the year ended December 31, 2004,
the Company repurchased 34,700 shares of common stock at a weighted average
cost, including brokerage commissions, of $9.38 per share. Cash
expenditures for the stock repurchases during the year ended December 31,
2004 were $325,631. See Stock Repurchase Program in Note 12 of the Notes to
Consolidated Financial Statements regarding the repurchase of shares of the
Company's common stock.
--------------------------------
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, 2007. 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.
--------------------------------
23
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
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 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, 2007, 2006, 2005, 2004, 2003, and 2002:
(Dollars in Thousands) 2007 2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ---------- ----------
Backlog of orders --
Beginning................. $ 5,932 6,918 5,514 4,052 4,834 7,666
Add: orders............... 23,450 16,802 18,080 13,164 11,301 12,074
Less: sales............... 21,448 17,788 16,676 11,702 12,083 14,906
---------- ---------- ---------- ---------- ---------- ----------
Backlog of orders --
Ending.................... $7,934 5,932 6,918 5,514 4,052 4,834
========== ========== ========== ========== ========== ==========
Capacity Utilization(1)...... 81.6% 81.7% 80.2% 78.1% 76.1% 74.8%
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, 2007, 2006, 2005, 2004, 2003, and 2002:
(Dollars in Thousands) 2007 2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ---------- -----------
Current assets............... $ 17,842 16,370 22,134 14,249 14,720 15,444
---------- ----------- ---------- ----------- ---------- -----------
Current liabilities.......... $ 5,802 4,296 5,337 7,355 9,583 9,416
Current ratio................ 3.08 3.81 4.15 1.94 1.54 1.64
Debt to Equity Ratio
--------------------
With an emphasis on generating cash flows to eliminate the Company's senior
and subordinated debt, the Company eliminated its financial leverage in 2003 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, 2007,
2006, 2005, 2004, 2003, and 2002 and also includes the number of shares
outstanding at each fiscal year end:
24
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)
--------------------
(Dollars in Thousands) 2007 2006 2005 2004 2003 2002
-------------- -------------- -------------- -------------- -------------- --------------
Current installments of
long-term debt............. $ - - - - - 1,437
Long-term debt............... - - - - - 7,263
-------------- -------------- -------------- -------------- -------------- --------------
Total debt................... - - - - - 8,700
-------------- -------------- -------------- -------------- -------------- --------------
Total stockholders'
equity (1)................. $ 12,253 12,428 17,066 23,308 22,061 17,885
============== ============== ============== ============== ============== ==============
Debt to equity ratio......... - - - - - .49
Number of shares out-
standing at year end....... 2,769,192 2,873,891 3,539,019 4,265,310 4,277,595 4,256,098
(1) During the year ended December 31, 2007, the Company repurchased 99,699
shares of common stock at a weighted average cost, including brokerage
commissions, of $5.68 per share. Cash expenditures for the stock
repurchases during the year ended December 31, 2007 were $566,732. During
the year ended December 31, 2006, the Company repurchased 679,219 shares of
common stock at a weighted average cost, including brokerage commissions,
of $7.57 per share. Cash expenditures for the stock repurchases during the
year ended December 31, 2006 were $5,142,898. 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. During the year ended December 31, 2004,
the Company repurchased 34,700 shares of common stock at a weighted average
cost, including brokerage commissions, of $9.38 per share. Cash
expenditures for the stock repurchases during the year ended December 31,
2004 were $325,631. See Stock Repurchase Program in Note 12 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 the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires
the Company 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
the Company's financial statements. Actual results may, under different
assumptions and conditions, differ significantly from the Company's estimates.
The Company believes that its accounting policies related to revenue
recognition on systems sales, warranty, and inventories are its "critical
accounting policies." These policies have been reviewed with the Audit Committee
of the Board of Directors and are discussed in greater detail below.
25
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Critical Accounting Policies and Estimates (Continued)
------------------------------------------
Revenue Recognition on Systems Sales
------------------------------------
Revenues on systems contracts, accounted for in accordance with SOP 81-1 of
the American Institute of Certified Public Accountants, are recorded on the
basis of the Company's estimates of the percentage of completion of individual
contracts. Gross margin is recognized on the basis of the ratio of aggregate
costs incurred to date to the most recent estimate of total costs. As contracts
may extend over one or more years, revisions in cost and profit estimates during
the course of the work are reflected in the accounting periods in which the
facts requiring revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued. As of
December 31, 2007, 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 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 warranty
reserve as of December 31, 2007 and 2006 was $234,000 and $192,000,
respectively.
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.
--------------------------------
26
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2007 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2006
-----------------
Earnings Summary
----------------
The Company had a net income of $341,000 (or $0.12 basic earnings per
share) for the year ended December 31, 2007, compared to net income of $468,000
(or $0.14 basic earnings per share) for the year ended December 31, 2006. The
decrease in net income was primarily due to:
o a decrease during 2007 in gross profit of $76,000 as described below;
o an increase in selling, general and administrative expenses of $363,000
as described below;
o a decrease of $79,000 in interest income attributable to the lower level
of funds available for investment as the Company liquidated a portion of
its short-term investments to fund the Company's stock repurchase
activities; and
o a decrease of $140,000 in other income, net attributable to a decrease
in royalty income from a license agreement related to material handling
equipment sales as described below.
Partially offsetting the above decrease in net income was:
o a decrease in product development costs of $117,000 as described below;
and
o an income tax benefit of $433,000, primarily due to the reversal of
accruals for the expiration of tax return statutes and the effect of
tax-exempt interest on certain investments on the annualized effective
rate.
Net Sales and Gross Profit on Sales
-----------------------------------
2007 2006
----------------- ------------------
Net sales.............................................. $ 21,448,000 17,788,000
Cost of sales.......................................... 16,228,000 12,492,000
----------------- ------------------
Gross profit on sales.................................. $ 5,220,000 5,296,000
================= ==================
Gross profit as a percentage of sales.................. 24.3% 29.8%
================= ==================
The increase in sales was associated with a larger amount of orders
received during 2007 when compared to the amount of orders received during 2006.
Contributing to the increase in sales was progress made on contracts received
during 2007 in accordance with contract completion requirements.
Gross profit, as a percentage of sales, for the year ended December 31,
2007, when compared to the year ended December 31, 2006, was unfavorably
impacted by 4.1% due to product mix, and by 1.4% due to the reduced absorption
of overhead costs.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $5,615,000 were higher by
$363,000 for the year ended December 31, 2007 than for year ended December 31,
2006. The increase was attributable to the addition of resources aimed at
expanding the customer base and costs associated with sales efforts in response
to quoting and sales activities totaling $136,000, and an increase of $355,000
in commission expenses related to the Company's enhanced revenue performance.
Partially offsetting the aforementioned unfavorable variance was a decrease of
$168,000 in marketing expenses primarily associated with product promotion and
trade shows.
27
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2007 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2006 (Continued)
-----------------
Product Development Costs
-------------------------
Product development costs, including patent expense, of $166,000 were lower
by $117,000 for the year ended December 31, 2007 than for the year ended
December 31, 2006. Development programs in the year ended December 31, 2007 were
primarily aimed at improvements to the Company's Order Fulfillment systems
technologies. Order Fulfillment development efforts during the year ended
December 31, 2007 included voice-directed replenishment and DISPEN-SI-MATIC(R)
software enhancements aimed at promoting workplace efficiencies for the
Company's customers.
Development programs in the year ended December 31, 2006 were primarily
aimed at improvements to the Company's Order Fulfillment and Production &
Assembly systems technologies. Development efforts during the year ended
December 31, 2006 included DISPEN-SI-MATIC(R) hardware and software enhancements
aimed at promoting workplace efficiencies for the Company's customers,
voice-directed replenishment, and LO-TOW(R) product enhancements.
Interest Income
---------------
Interest income of $448,000 was lower by $79,000 for the year ended
December 31, 2007 than for the year ended December 31, 2006. The decrease in
interest income was attributable to the lower level of funds available for
investment throughout the year, as the Company liquidated a portion of its
short-term investments to fund the Company's stock repurchase activities.
Other Income, Net
-----------------
The unfavorable variance of $140,000 in other income, net for the year
ended December 31, 2007 as compared to the year ended December 31, 2006 was
primarily attributable to a decrease in royalty income from a license agreement
related to material handling equipment sales. Effective February 1, 2007, the
license agreement became royalty-free. Therefore, the Company no longer receives
royalty income from the license agreement.
Income Tax Expense (Benefit)
---------------------------
The Company recognized an income tax benefit of $433,000 during the year
ended December 31, 2007 compared to an income tax benefit of $19,000 during the
year ended December 31, 2006. The income tax benefit for the year ended December
31, 2007 was higher than statutory federal and state tax rates primarily due to
the reversal of accruals for the expiration of tax return statutes and
tax-exempt interest on certain investments. The income tax benefit for the year
ended December 31, 2006 was primarily due to the reversal of accruals for the
expiration of tax return statutes and tax-exempt interest on certain
investments.
Results of Operations - Year Ended December 31, 2006 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2005
-----------------
Earnings Summary
----------------
The Company had net income of $468,000 (or $0.14 basic earnings per share)
for the year ended December 31, 2006, compared to net income of $1,198,000 (or
$0.29 basic earnings per share) for the year ended December 31, 2005. There was
no income from discontinued operations, net of income taxes, for the year ended
December 31, 2006, compared to income from discontinued operations, net of
income taxes of
28
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2006 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2005 (Continued)
-----------------
Earnings Summary (Continued)
----------------
$990,000 (or $0.24 basic earnings per share) for the year ended December 31,
2005. Income from continuing operations was $468,000 (or $0.14 basic earnings
per share) for the year ended December 31, 2006, compared to income from
continuing operations of $208,000 (or $0.05 basic earnings per share) for the
year ended December 31, 2005. The increase in income from continuing operations
was primarily due to:
o an increase during 2006 in total revenues and gross profit of $1,112,000
and $760,000, respectively, as described below; and
o an increase of $203,000 in interest income attributable to the higher
level of funds available for investment as a result of the cash proceeds
from the August 5, 2005 sale of substantially all of the assets and
liabilities of Ermanco and the increased level of interest rates earned
on funds available for investment.
Partially offsetting the above increase in income from continuing
operations for the year ended December 31, 2006 was as increase in selling,
general and administrative expenses of $606,000 and an increase in product
development costs of $221,000 as mentioned below.
Net Sales and Gross Profit on Sales
-----------------------------------
2006 2005
----------------- ------------------
Net sales.............................................. $ 17,788,000 16,676,000
Cost of sales.......................................... 12,492,000 12,140,000
----------------- ------------------
Gross profit on sales.................................. $ 5,296,000 4,536,000
================= ==================
Gross profit as a percentage of sales.................. 29.8% 27.2%
================= ==================
The increase in sales was associated with a larger backlog of orders
entering fiscal 2006 when compared to the backlog of orders entering fiscal
2005. Contributing to the increase in sales was progress made on contracts
received prior to the start of the year and during 2006 in accordance with
contract completion requirements associated with certain customers.
Gross profit, as a percentage of sales, for the year ended December 31,
2006, when compared to the year ended December 31, 2005, was favorably impacted
by approximately 1.3% due to product mix and the impact of the favorable
performance on the Company's contracts that were completed or nearing completion
in the year ended December 31, 2006 as compared to the year ended December 31,
2005. Also contributing to the aforementioned favorable variance was a 1.3%
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, 2006.
29
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2006 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2005 (Continued)
-----------------
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $5,252,000 were higher by
$606,000 for the year ended December 31, 2006 than for the year ended December
31, 2005. The increase was attributable to the addition of resources aimed at
expanding the customer base and an increase in salaries and fringe benefits
totaling $227,000, an increase of $34,000 in commission expenses related to the
Company's enhanced revenue performance, and an increase of $285,000 in marketing
expenses primarily associated with product promotion and participation in trade
shows.
Product Development Costs
-------------------------
Product development costs, including patent expense, of $283,000 were
higher by $221,000 for the year ended December 31, 2006 than for the year ended
December 31, 2005. Development programs in the year ended December 31, 2006 were
primarily aimed at improvements to the Company's Order Fulfillment and
Production & Assembly systems technologies. Development efforts during the year
ended December 31, 2006 included DISPEN-SI-MATIC(R) hardware and software
enhancements aimed at promoting workplace efficiencies for the Company's
customers, voice-directed replenishment, and LO-TOW(R) product enhancements.
Development programs in the year ended December 31, 2005 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 $527,000 was higher by $203,000 for the year ended
December 31, 2006 than for the year ended December 31, 2005. 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 August 5, 2005 sale of
substantially all of the assets and liabilities of Ermanco and the increased
level of interest rates earned on funds available for investment.
Income Tax Expense (Benefit)
---------------------------
The Company recognized an income tax benefit of $19,000 during the year
ended December 31, 2006 compared to income tax expense of $93,000 during the
year ended December 31, 2005. The income tax benefit for the year ended December
31, 2006 was primarily due to the reversal of accruals for the expiration of tax
return statutes and tax-exempt interest on certain investments. Income tax
expense for the year ended December 31, 2005 was lower than statutory federal
and state tax rates primarily due to tax-exempt interest on certain investments.
--------------------------------
30
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Liquidity and Capital Resources
-------------------------------
The Company's cash and cash equivalents and short-term investments at
December 31, 2007 were $12,304,000, representing 67.2% of total assets, compared
to $12,072,000, or 72.1% of total assets, at December 31, 2006. The increase was
primarily due to the cash provided by operating activities totaling $945,000,
partially offset by the repurchase and retirement of common stock totaling
$567,000 and purchases of capital equipment totaling $146,000.
Cash provided by operating activities totaling $945,000 during the year
ended December 31, 2007 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 $1,669,000 in accordance with
contractual requirements; and
o an increase in accounts payable in the amount of $549,000 associated
with the purchase of goods and services rendered in accordance with job
completion requirements.
Partially offset by the following factors:
o an increase in costs and estimated earnings in excess of billings in
the amount of $909,000 in accordance with contractual
requirements; and
o an increase in inventories in the amount of $390,000 relating to the
purchase of safety stock and long-lead time items.
The Company's cash and cash equivalents and short-term investments at
December 31, 2006 were $12,072,000, representing 72.1% of total assets, down
from $17,397,000, or 77.0% of total assets, at December 31, 2005. The decrease
was primarily due to the repurchase and retirement of common stock of $5,143,000
and purchases of capital equipment of $131,000.
Cash used by operating activities totaling $51,000 during the year ended
December 31, 2006 was primarily due to the following factors:
o a decrease in customers' deposits and billings in excess of costs and
estimated earnings in the amount of $650,000 in accordance with
contractual requirements.
Partially offset by the following factors:
o a decrease in receivables in the amount of $110,000 primarily associated
with the collection of an income tax refund which was partially offset
by an increase in customer billings in accordance with contractual
requirements;
o a decrease in costs and estimated earnings in excess of billings in the
amount of $172,000 in accordance with contractual requirements; and
o a decrease in prepaid expenses and other current assets of $217,000
primarily associated with the amortization of insurance premiums in
accordance with policy expiration dates.
31
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Liquidity and Capital Resources (Continued)
-------------------------------
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 repurchased $567,000 of its common stock in 2007 compared with
$5,143,000 in 2006. Subsequent to December 31, 2007, the Company's Board of
Directors amended its existing stock repurchase program by increasing the amount
it has authorized management to repurchase from up to $15,000,000 of the
Company's common stock to up to $17,000,000. The Company has approximately $2.9
million (including the most recent amendment) authorized by the Board of
Directors to use for future stock repurchases.
The Company has a line of credit facility which may not exceed $5,000,000
and is to be used primarily for working capital purposes. Interest on the line
of credit facility is at the LIBOR Market Index Rate plus 1.4%. As of December
31, 2007, the Company did not have any borrowings under the line of credit
facility; however, the leasing agreement associated with the Company's principal
office is secured with a $200,000 letter of credit. Therefore, as of December
31, 2007, the amount of available line of credit was $4,800,000.
The line of credit facility contains various non-financial covenants and is
secured by all of the Company's accounts receivables and inventory. The Company
was in compliance with all covenants as of December 31, 2007. The line of credit
facility expires effective June 30, 2008. The Company expects to renew the line
of credit facility under similar terms and conditions during 2008.
The Company anticipates that its financial resources, consisting of cash
and cash equivalents and short-term investments, and its line of credit, will be
adequate to satisfy its future cash requirements through the next year. Sales
volume, as well as cash liquidity, may experience fluctuations due to the
unpredictability of future contract sales and the dependence upon a limited
number of large contracts with a limited number of customers.
The Company is currently exploring various business strategies designed to
enhance the value of the Company's assets for its stockholders. The Company is
continuing to evaluate and actively explore a range of possible options,
including transactions intended to improve liquidity and maximize stockholder
value, and consideration of the acquisition of complementary assets and/or
businesses. The Company may not be able to effect any of these strategic
options.
--------------------------------
32
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Contractual Obligations
-----------------------
The Company leases approximately 25,000 square feet in Easton, Pennsylvania
for use as its principal office. The leasing agreement requires fixed monthly
rental payments of $19,345. 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. On November 14, 2007, the Company
amended the lease agreement to extend the term of the lease for a period of five
years commencing immediately upon the February 21, 2008 expiration date of the
original term of the lease. The amended lease agreement requires fixed monthly
rental payments of $18,000 for five years through the February 20, 2013
expiration date of the lease. The amended lease agreement incorporates the terms
and conditions of the original lease agreement.
Future contractual obligations and commercial commitments at December 31,
2007 as noted above are as follows:
Payments Due by Period
------------------------------------------------------------------------------------------
Total 2008 2009 2010 2011 2012 After 2012
------------------------------------------------------------------------------------------
Contractual obligations:
Operating leases.......... $ 1,119,000 219,000 216,000 216,000 216,000 216,000 36,000
------------------------------------------------------------------------------------------
Total................... $ 1,119,000 219,000 216,000 216,000 216,000 216,000 36,000
==========================================================================================
Amount of Commitment Expiration Per Period
Total Amounts ------------------------------------------------------------------------
Committed 2008 2009 2010 2011 2012 After 2012
------------------------------------------------------------------------------------------
Other commercial
commitments:
Letters of credit......... $ 200,000 200,000 - - - - -
The Company has an Executive Officer Severance Policy (the "Severance
Policy") for executive officers without an employment agreement, which applies
in the event that an executive officer is terminated by the Company for reasons
other than "cause," as such term is defined in the Severance Policy. Under the
Severance Policy, executive officers will receive a portion of their regular
straight-time pay based on their position and length of service with the
Company, medical coverage, and executive outplacement services. For further
information, please refer to the Company's disclosure regarding the "Executive
Officer Severance Policy" in Item 11 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
------------------------------
As of December 31, 2007, 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), obligations (including contingent obligations) under a contract
that would be accounted for as a derivative instrument, 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.
Related Party Transactions
--------------------------
From time to time, the Company enters into transactions with related
parties. For further information, please refer to the Company's disclosure
regarding "Commitments and Related Party Transactions" in Note 9 of the Notes to
Consolidated Financial Statements.
--------------------------------
33
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109, Accounting for Income Taxes, which
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation requires that the Company recognize in the
financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure. The
Company adopted the provisions of FIN 48 on January 1, 2007.
In September 2006, the Financial Accounting Standards Board issued SFAS No.
157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value,
establishes a market-based framework or hierarchy for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 is applicable
whenever another accounting pronouncement requires or permits assets and
liabilities to be measured at fair value. SFAS No. 157 does not expand or
require any new fair value measures. The provisions of SFAS No. 157 are to be
applied prospectively and are effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 157 will have on the
Company's financial statements.
In February 2007, the Financial Accounting Standards Board issued SFAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115 ("SFAS No. 159"). SFAS No. 159
permits entities to elect to measure many financial instruments and certain
other items at fair value. Upon adoption of SFAS No. 159, an entity may elect
the fair value option for eligible items that exist at the adoption date.
Subsequent to the initial adoption, the election of the fair value option should
only be made at initial recognition of the asset or liability or upon a
remeasurement event that gives rise to new-basis accounting. The decision about
whether to elect the fair value option is applied on an instrument-by-instrument
basis, is irrevocable and is applied only to an entire instrument and not only
to specified risks, cash flows or portion of that instrument. SFAS No. 159 does
not affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value nor does it eliminate disclosure
requirements included in other accounting standards. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 159 will have on the
Company's financial statements.
In December 2007, the Financial Accounting Standards Board issued SFAS No.
141(R), Business Combinations ("SFAS No. 141R"). SFAS No. 141R replaces SFAS No.
141, Business Combinations and applies to all transactions or other events in
which an entity obtains control of one or more businesses. SFAS No. 141R
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
additional information needed to evaluate and understand the nature and
financial effect of the business combination. SFAS No. 141R is effective
prospectively for fiscal years beginning after December 15, 2008 and may not be
applied before that date. The Company is currently evaluating the impact, if
any, the adoption of SFAS No. 141R will have on the Company's financial
statements.
34
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------
In December 2007, the Financial Accounting Standards Board issued SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statements--an amendment
of ARB No. 51 ("SFAS No. 160"). SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, with earlier adoption prohibited. SFAS No. 160 requires the recognition of
a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
earnings attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS No. 160 also
amends certain of ARB No. 51's consolidation procedures for consistency with the
requirements of SFAS No. 141R. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling
interest. The Company is currently evaluating the impact, if any, the adoption
of SFAS No. 160 will have on the Company's financial statements.
--------------------------------
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
-------- ----------------------------------------------------------
The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risk, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments are material
to its results of operations.
35
Item 8. Consolidated Financial Statements and Supplementary Data
------- --------------------------------------------------------
I N D E X
o Report of Independent Registered Public Accounting Firm.............................. 37
o Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2007 and 2006........................... 38
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006, and 2005................................................. 40
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2007, 2006, and 2005...................... 41
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006, and 2005................................................. 42
Notes to Consolidated Financial Statements........................................ 44
o All schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes.
36
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, 2007 and 2006, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2007. 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, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109,
on January 1, 2007 and Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, using the modified prospective approach, effective
January 1, 2006.
/S/ KPMG LLP
Philadelphia, Pennsylvania
March 28, 2008
37
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2007 and 2006
(In Thousands, Except Share Data)
December 31, December 31,
2007 2006
------------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents....................... $ 12,104 2,447
Short-term investments.......................... 200 9,625
------------------- ------------------
Total cash and cash equivalents and
short-term investments...................... 12,304 12,072
------------------- ------------------
Receivables:
Trade......................................... 2,640 2,557
Notes and other receivables................... 310 428
------------------- ------------------
Total receivables........................... 2,950 2,985
------------------- ------------------
Costs and estimated earnings in
excess of billings............................ 1,353 444
Inventories:
Raw materials................................. 160 100
Work-in-process............................... 224 29
Finished goods................................ 475 340
------------------- ------------------
Total inventories........................... 859 469
------------------- ------------------
Deferred income tax benefits.................... 263 288
Prepaid expenses and other current assets....... 113 112
------------------- ------------------
Total current assets.......................... 17,842 16,370
------------------- ------------------
Property, plant and equipment, at cost:
Machinery and equipment......................... 1,313 1,195
Less: accumulated depreciation................. 1,000 919
------------------- ------------------
Net property, plant and equipment............. 313 276
------------------- ------------------
Deferred income tax benefits....................... 161 96
Other assets....................................... - 10
------------------- ------------------
Total assets.................................. $ 18,316 16,752
=================== ==================
See accompanying notes to consolidated financial statements.
(Continued)
38
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets (Continued)
December 31, 2007 and 2006
(In Thousands, Except Share Data)
December 31, December 31,
2007 2006
------------------- ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable...................................... $ 1,726 1,177
Customers' deposits and billings in excess of
costs and estimated earnings........................ 3,063 1,394
Accrued salaries, wages, and commissions.............. 173 132
Income taxes payable.................................. - 541
Accrued product warranty.............................. 234 192
Deferred gain on sale-leaseback....................... 28 165
Unearned support contract revenue..................... 254 270
Accrued other liabilities............................. 324 425
----------------- -----------------
Total current liabilities......................... 5,802 4,296
----------------- -----------------
Long-term liabilities:
Income taxes payable.................................. 261 -
Deferred gain on sale-leaseback....................... - 28
----------------- -----------------
Total long-term liabilities....................... 261 28
----------------- -----------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and outstanding
2,769,192 shares as of December 31, 2007
and 2,873,891 shares as of December 31,
2006................................................ 2,769 2,874
Additional paid-in capital............................ 5,537 5,720
Retained earnings..................................... 3,947 3,834
----------------- -----------------
Total stockholders' equity........................ 12,253 12,428
----------------- -----------------
Total liabilities and stockholders' equity........ $ 18,316 16,752
================= =================
See accompanying notes to consolidated financial statements.
39
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended December 31, 2007, 2006, and 2005
(In Thousands, Except Share and Per Share Data)
December 31, December 31, December 31,
2007 2006 2005
---------------- ---------------- ----------------
Net sales................................. $ 21,448 17,788 16,676
Cost of sales............................. 16,228 12,492 12,140
---------------- ---------------- ----------------
Gross profit on sales.................. 5,220 5,296 4,536
---------------- ---------------- ----------------
Selling, general and administrative
expenses................................ 5,615 5,252 4,646
Product development costs................. 166 283 62
Interest expense.......................... 1 1 1
Interest income........................... (448) (527) (324)
Other income, net......................... (22) (162) (150)
---------------- ---------------- ----------------
5,312 4,847 4,235
---------------- ---------------- ----------------
Income (loss) from continuing
operations before income taxes......... (92) 449 301
Income tax expense (benefit).............. (433) (19) 93
---------------- ---------------- ----------------
Income from continuing
operations........................... 341 468 208
Income from discontinued
operations, net of income taxes...... - - 990
---------------- ---------------- ----------------
Net income................................ $ 341 468 1,198
================ ================ ================
Basic earnings per share:
Income from continuing
operations........................... $ .12 .14 .05
Income from discontinued
operations........................... - - .24
---------------- ---------------- ----------------
Net income................................ $ .12 .14 .29
================ ================ ================
Diluted earnings per share:
Income from continuing
operations........................... $ .12 .14 .05
Income from discontinued
operations........................... - - .24
---------------- ---------------- ----------------
Net income................................ $ .12 .14 .29
================ ================ ================
Weighted average shares
outstanding............................ 2,791,945 3,307,382 4,073,252
Dilutive effect of stock options.......... - 4,373 45,342
---------------- ---------------- ----------------
Weighted average shares
outstanding assuming dilution.......... 2,791,945 3,311,755 4,118,594
================ ================ ================
See accompanying notes to consolidated financial statements.
40
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the Years Ended December 31, 2007, 2006, and 2005
(In Thousands, Except Share Data)
Common Shares Additional Total
-------------------- Paid-In Retained Stockholders' Comprehensive
Number Amount Capital Earnings Equity Income
---------- ------- ---------- -------- ------------ -------------
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
Net income.................................... - - - 468 468 468
-------------
Comprehensive income.......................... - - - - - 468
=============
Nonvested stock grants, net of amortization... 12,500 12 14 - 26
Stock options exercised....................... 1,591 2 59 (61) -
Acquisition and retirement of common stock.... (679,219) (679) (1,368) (3,096) (5,143)
Other incentive plan activity................. - - 11 - 11
---------- ------- ---------- -------- ------------
Balance at December 31, 2006.................. 2,873,891 2,874 5,720 3,834 12,428
Net income.................................... - - - 341 341 341
-------------
Comprehensive income.......................... - - - - - 341
=============
Nonvested stock grants, net of amortization... (5,000) (5) 13 - 8
Effect of initial application of FIN 48....... - - - 37 37
Acquisition and retirement of common stock.... (99,699) (100) (202) (265) (567)
Other incentive plan activity................. - - 6 - 6
---------- ------- ---------- -------- ------------
Balance at December 31, 2007.................. 2,769,192 $ 2,769 5,537 3,947 12,253
========== ======= ========== ======== ============
See accompanying notes to consolidated financial statements.
41
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2007, 2006, and 2005
(In Thousands)
December 31, December 31, December 31,
2007 2006 2005
-------------------- ------------------ ------------------
Cash flows from operating activities:
Net income.......................................... $ 341 468 1,198
Less: income from discontinued operations........... - - 990
-------------------- ------------------ ------------------
Income from continuing operations..................... 341 468 208
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation of plant and
equipment................................... 109 104 90
Deferred tax expenses......................... 27 172 343
Amortization of deferred gain on
sale-leaseback.............................. (165) (165) (165)
Stock-based compensation...................... 14 37 18
Change in operating assets and
liabilities:
Receivables.............................. 35 110 (768)
Costs and estimated earnings
in excess of billings.................. (909) 172 (524)
Inventories.............................. (390) (125) 8
Prepaid expenses and other
current assets......................... (1) 217 (97)
Other assets............................. 10 - -
Accounts payable......................... 549 (214) (55)
Customers' deposits and
billings in excess of costs
and estimated earnings................. 1,669 (650) 802
Accrued salaries, wages,
and commissions........................ 41 30 2
Income taxes payable..................... (310) (109) 145
Accrued product warranty................. 42 3 (301)
Unearned support contract revenue........ (16) 31 54
Accrued other liabilities................ (101) (132) (212)
Net cash provided by
operating activities of
discontinued operations................ - - 601
-------------------- ------------------ ------------------
Net cash provided (used) by
operating activities............................. 945 (51) 149
-------------------- ------------------ ------------------
(Continued)
42
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2007, 2006, and 2005
(In Thousands)
December 31, December 31, December 31,
2007 2006 2005
-------------------- ------------------ ------------------
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 .................................... 9,925 7,585 10,875
Purchases of short-term investments................. (500) (500) (25,685)
Purchases of property, plant and
equipment........................................ (146) (131) (150)
Net cash used by investing activities
of discontinued operations....................... - - (254)
-------------------- ------------------ ------------------
Net cash provided by investing
activities....................................... 9,279 6,954 6,294
-------------------- ------------------ ------------------
Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan............. - - 623
Repurchase and retirement of
common stock..................................... (567) (5,143) (8,081)
-------------------- ------------------ ------------------
Net cash used by financing activities............... (567) (5,143) (7,458)
-------------------- ------------------ ------------------
Increase (decrease) in cash
and cash equivalents............................. 9,657 1,760 (1,015)
Cash and cash equivalents,
beginning of period.............................. 2,447 687 1,702
-------------------- ------------------ ------------------
Cash and cash equivalents, end of period............ $ 12,104 2,447 687
==================== =================== ==================
See accompanying notes to consolidated financial statements.
43
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, based out of Easton, Pennsylvania, (also referred to as "SI
Systems") is a specialized systems integrator supplying SI Systems' branded
automated material handling systems to manufacturing, assembly, order
fulfillment, and distribution operations customers located primarily in North
America, including the U.S. government. 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 to provide turnkey solutions for its customers' unique material
handling needs. The Company's engineering staff develops and designs computer
control programs required for the efficient operation of the systems and for
optimizing manufacturing, assembly, and fulfillment operations.
The Company'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, 2007, 2006, and 2005 are as follows (in thousands):
For the year ended December 31, 2007:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 17,737 82.7%
Aftermarket sales............................. 3,711 17.3%
------------------- ------------------
Total sales................................... $ 21,448 100.0%
=================== ==================
For the year ended December 31, 2006:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 14,576 81.9%
Aftermarket sales............................. 3,212 18.1%
------------------- ------------------
Total sales................................... $ 17,788 100.0%
=================== ==================
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%
=================== ==================
The Company's products are sold worldwide through its own sales personnel.
Domestic and international sales during the years ended December 31, 2007, 2006,
and 2005 are as follows (in thousands):
44
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Description of Business and Concentration of Credit Risk (Continued)
--------------------------------------------------------
For the year ended December 31, 2007:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 14,935 69.6%
International sales........................... 6,513 30.4%
------------------- ------------------
Total sales................................... $ 21,448 100.0%
=================== ==================
For the year ended December 31, 2006:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 16,866 94.8%
International sales........................... 922 5.2%
------------------- ------------------
Total sales................................... $ 17,788 100.0%
=================== ==================
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%
=================== ==================
Sales from external customers for each of the Company's products during the
years ended December 31, 2007, 2006, and 2005 are as follows (in thousands):
December 31, 2007 December 31, 2006 December 31, 2005
--------------------------- --------------------------- ---------------------------
% of Total % of Total % of Total
Sales Sales Sales Sales Sales Sales
------------ ------------ ------------ ------------ ------------ ------------
LO-TOW(R) sales................ $ 6,367 29.7% $ 6,458 36.3% $ 5,691 34.1%
CARTRAC(R) sales............... 119 .5% 1,975 11.1% 34 .2%
DISPEN-SI-MATIC(R),
SINTHESIS(R), and
related order fulfillment
sales....................... 11,216 52.3% 6,092 34.2% 7,813 46.9%
Other sales.................... 35 .2% 51 .3% 76 .4%
Aftermarket sales.............. 3,711 17.3% 3,212 18.1% 3,062 18.4%
------------ ------------ ------------ ------------ ------------ ------------
Total sales................. $ 21,448 100.0% $ 17,788 100.0% $ 16,676 100.0%
============ =========== ============ ============ ============ ============
In the year ended December 31, 2007, two customers accounted for over 10%
of sales, and they are listed as follows: Vistakon, a division of Johnson &
Johnson Vision Care - $7,625,000 or 35.6%, and General Motors - $3,008,000 or
14.0%. In the year ended December 31, 2006, one customer accounted for over 10%
of sales and is listed as follows: Caterpillar - $2,098,000 or 11.8% of total
sales. In the year ended December 31, 2005, five customers accounted for over
10% of sales, and they are listed as follows: BMG Direct Marketing - $2,492,000
or 14.9%, SI/BAKER - $1,990,000 or 11.9%, Vistakon, a division of Johnson &
Johnson Vision Care - $1,867,000 or 11.2%, E-Z-GO Division of Textron -
$1,812,000 or 10.9%, and Honda of America Mfg. - $1,723,000 or 10.3%. No other
customer accounted for over 10% of sales.
45
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Description of Business and Concentration of Credit Risk (Continued)
--------------------------------------------------------------------
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, 2007, two customers owed the Company in
excess of 10% of trade receivables, and they are listed as follows: Cummins
Engine - $1,451,000 or 55.0% and Vistakon, a division of Johnson & Johnson
Vision Care - $344,000 or 13.0%. 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.
Principles of Consolidation
---------------------------
The consolidated financial statements for the fiscal years ended prior to
2006 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.
Financial Instruments
---------------------
The Company believes the market values of its 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 available for sale, 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.
46
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
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, 2007 and 2006.
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 are recorded at cost and 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 - 7 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.
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.
The Company records advance payments for unearned support contracts in the
balance sheet as a current liability. Revenue on individual support contracts is
deferred and recognized on a straight-line basis over the one-year term of each
individual support contract.
Product Development Costs
-------------------------
The Company expenses product development costs as incurred.
47
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Accrued Product Warranty
------------------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements and
the type of system sold, with a typical warranty period of one year. The Company
provides an accrual for estimated future warranty costs and potential product
liability claims based upon a percentage of cost of sales, typically two percent
of the cost of the system being sold, and a detailed review of products still in
the warranty period is performed each quarter.
A roll-forward of warranty activities is as follows (in thousands):
Beginning Additions (Reductions) Ending
Balance Charged to Balance
January 1 Costs and Expenses Deductions December 31
--------------- ------------------------- --------------- ------------------
2007.............. $ 192 128 (86) 234
2006.............. $ 189 71 (68) 192
2005.............. $ 490 (242) (59) 189
Unearned Support Contract Revenue
---------------------------------
The Company offers its Order Fulfillment customers one-year support
contracts for an annual service fee. The support contracts cover a customer's
single distribution center or warehouse where the Company's products are
installed. As part of its support contracts, the Company provides analysis,
consultation, and technical information to the customer's personnel on matters
relating to the operation of its Order Fulfillment System and related equipment
and/or peripherals.
The Company records advance payments for unearned support contracts in the
balance sheet as a current liability. Revenue on individual support contracts is
deferred and recognized on a straight-line basis over the one-year term of each
individual support contract.
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
------------------------
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised) "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R addresses
all forms of share-based payment awards, including shares issued under employee
stock purchase plans, stock options, restricted and nonvested stock, and stock
appreciation rights. It requires companies to recognize in the statement of
operations the grant-date fair value of stock options and other equity-based
compensation issued to employees. 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 used prior to
January 1, 2006.
48
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Stock-Based Compensation (Continued)
------------------------
Effective January 1, 2006, the Company adopted SFAS No. 123R and began
expensing the grant-date fair value of employee stock options over the related
requisite service period. Prior to January 1, 2006, the Company applied
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense was recognized in net income for
employee stock options, as options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. The Company
recognized compensation expense on options granted to non-employee directors.
Stock-based compensation expense was approximately $6,000 for employee stock
options for the year ended December 31, 2007. The impact of adopting SFAS No.
123R in 2006 was approximately $7,000 of stock-based compensation expense for
employee stock options and did not have a significant impact on basic and
diluted earnings per share for the year ended December 31, 2006. The pro forma
impact of expensing employee stock options in 2005 would have been $27,000 or a
reduction of diluted earnings per share by approximately $.01 for the year based
on the disclosures required by SFAS No. 123.
The Company adopted SFAS No. 123R using the modified prospective transition
method and therefore has not restated prior periods. Under this transition
method, compensation cost associated with employee stock options recognized in
2007 and 2006 includes attribution of the fair value related to the remaining
unvested portion of stock option awards granted prior to January 1, 2006, and
attribution related to new awards granted after January 1, 2006.
The expense associated with stock-based compensation arrangements is a
non-cash charge. In the Consolidated Statements of Cash Flows, stock-based
compensation expense is an adjustment to reconcile net income to cash provided
(used) by operating activities.
Prior to the adoption of SFAS No. 123R, the Company presented tax benefits,
if any, resulting from stock-based compensation as operating cash flows in the
Consolidated Statements of Cash Flows. SFAS No. 123R requires that certain cash
flows resulting from tax deductions in excess of compensation cost recognized in
the financial statements be classified as financing cash flows. For the years
ended December 31, 2007 and 2006, no excess tax benefits were generated.
For stock options granted prior to the adoption of SFAS No. 123R, the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to its stock option plan would have been as follows:
49
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Stock-Based Compensation (Continued)
------------------------
For the Year
Ended
December 31, 2005
-----------------
Net income, as reported.................................. $ 1,198
Deduct: total stock-based employee
compensation expense determined
under fair value based method, net of
related tax effects................................... (27)
----------------
Pro forma net income..................................... $ 1,171
================
Basic earnings per share:
As reported........................................... $ .29
Pro forma............................................. $ .29
Diluted earnings per share:
As reported........................................... $ .29
Pro forma............................................. $ .28
Earnings Per Share
------------------
Basic and diluted earnings per share for the years ended December 31, 2007,
2006, and 2005 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 June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109, Accounting for Income Taxes, which
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation requires that the Company recognize in the
financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure. The
Company adopted the provisions of FIN 48 on January 1, 2007.
In September 2006, the Financial Accounting Standards Board issued SFAS No.
157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value,
establishes a market-based framework or hierarchy for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 is applicable
whenever another accounting pronouncement requires or permits assets and
liabilities to be measured at fair value. SFAS No. 157 does not expand or
require any new fair value measures. The provisions of SFAS No. 157 are to be
applied prospectively and are effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 157 will have on the
Company's financial statements.
50
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------------------
In February 2007, the Financial Accounting Standards Board issued SFAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115 ("SFAS No. 159"). SFAS No. 159
permits entities to elect to measure many financial instruments and certain
other items at fair value. Upon adoption of SFAS No. 159, an entity may elect
the fair value option for eligible items that exist at the adoption date.
Subsequent to the initial adoption, the election of the fair value option should
only be made at initial recognition of the asset or liability or upon a
remeasurement event that gives rise to new-basis accounting. The decision about
whether to elect the fair value option is applied on an instrument-by-instrument
basis, is irrevocable and is applied only to an entire instrument and not only
to specified risks, cash flows or portion of that instrument. SFAS No. 159 does
not affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value nor does it eliminate disclosure
requirements included in other accounting standards. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 159 will have on the
Company's financial statements.
In December 2007, the Financial Accounting Standards Board issued SFAS No.
141(R), Business Combinations ("SFAS No. 141R"). SFAS No. 141R replaces SFAS No.
141, Business Combinations and applies to all transactions or other events in
which an entity obtains control of one or more businesses. SFAS No. 141R
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
additional information needed to evaluate and understand the nature and
financial effect of the business combination. SFAS No. 141R is effective
prospectively for fiscal years beginning after December 15, 2008 and may not be
applied before that date. The Company is currently evaluating the impact, if
any, the adoption of SFAS No. 141R will have on the Company's financial
statements.
In December 2007, the Financial Accounting Standards Board issued SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statements--an amendment
of ARB No. 51 ("SFAS No. 160"). SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, with earlier adoption prohibited. SFAS No. 160 requires the recognition of
a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
earnings attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS No. 160 also
amends certain of ARB No. 51's consolidation procedures for consistency with the
requirements of SFAS No. 141R. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling
interest. The Company is currently evaluating the impact, if any, the adoption
of SFAS No. 160 will have on the Company's financial statements.
51
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(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 as an attachment to the Company's definitive proxy statement
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.
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 remained in
place to August 5, 2006, the one-year anniversary of the closing sale of the
asset sale. There was no claim under the letter of credit during its existence.
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 operating results of
this discontinued operation.
52
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(2) Discontinued Operations -- Sale of Ermanco (Continued)
--- ------------------------------------------
The following are the condensed results of operations for Ermanco (in
thousands):
December 31, 2005
-----------------
Net sales............................................... $ 28,132
-----------------
Income from operations before income taxes.............. $ 2,523
Income tax expense...................................... 916
-----------------
Income from operations after income taxes............... 1,607
Loss on sale before income taxes........................ (964)
Income tax benefit...................................... (347)
-----------------
Loss on sale after income tax benefit................... (617)
-----------------
Income from discontinued operations..................... $ 990
=================
(3) Uncompleted Contracts
--- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows (in
thousands):
December 31, 2007 December 31, 2006
---------------------- -----------------------
Costs and estimated earnings on
uncompleted contracts........................... $ 15,478 14,672
Less: billings to date............................ (17,188) (15,622)
----------------------- ------------------------
$ (1,710) (950)
======================= ========================
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings
in excess of billings....................... $ 1,353 444
Customers' deposits and billings in
excess of costs and estimated earnings...... (3,063) (1,394)
----------------------- ------------------------
$ (1,710) (950)
======================= ========================
(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%. As of December
31, 2007, the Company did not have any borrowings under the line of credit
facility; however, the leasing agreement associated with the Company's principal
office is secured with a $200,000 letter of credit. Therefore, as of December
31, 2007, the amount of available line of credit was $4,800,000.
The line of credit facility contains various non-financial covenants and is
secured by all of the Company's accounts receivable and inventory. The Company
was in compliance with all covenants as of December 31, 2007. The line of credit
facility expires effective June 30, 2008. The Company expects to renew the line
of credit facility under similar terms and conditions during 2008.
53
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(5) Stock Options and Nonvested Stock
--- ---------------------------------
1997 Equity Compensation Plan
The Company's stock-based compensation program, the 1997 Equity
Compensation Plan ("ECP"), expired in July 2007. Prior to expiration, the ECP
provided for grants of stock options, restricted and nonvested stock, and stock
appreciation rights to selected employees, key advisors who performed valuable
services, and directors of the Company. In addition, the ECP provided for grants
of performance units to employees and key advisors. Prior to expiration, the
ECP, as amended by stockholders in August 2000 and June 2001, authorized up to
1,012,500 shares of common stock for issuance pursuant to the terms of the plan.
No further grants are available under the plan.
Under the Company's ECP, officers, directors, and key employees have been
granted options to purchase shares of common stock at the market price at the
date of grant. Options vest in four equal annual installments beginning on the
first anniversary of the date of grant; thus, at the end of four years, the
options are fully exercisable. Vested stock option awards may be exercised
through payment of cash, exchange of mature shares, or through a broker. As of
December 31, 2007, 7,500 options are outstanding under the plan, and all options
have a term of seven years.
Stock-based compensation expense recognized during the years ended December
31, 2007 and 2006 for stock-based compensation programs was $14,000 and $37,000,
respectively. Stock-based compensation expense recognized during the years ended
December 31, 2007 and 2006 consisted of expensing $6,000 and $7,000,
respectively, for employee stock options, and $0 and $4,000, respectively, for
directors' stock options, and $8,000 and $26,000, respectively, for nonvested
stock. Stock-based compensation expense recognized during the year ended
December 31, 2005 consisted of expensing $18,000 for directors' stock options.
All of the stock-based compensation expense recognized was a component of
selling, general and administrative expenses. Income was recognized during the
three months ended March 31, 2007 as a result of the forfeiture of 5,000 shares
of nonvested stock due to the resignation of Mr. Hoffner from the Company
effective March 1, 2007.
Stock Options
On March 8, 2006, the Board of Directors of the Company granted 12,500
stock options to its executive officers. The fair value of options granted was
estimated using the Black Scholes option valuation model that used the
assumptions noted in the table below. Expected volatility and expected dividend
yield are based on actual historical experience of the Company's stock and
dividends over the historical period equal to the option term. The dividend
yield on the Company's common stock is assumed to be zero since the Company has
not paid any cash dividends since 1999 and has no present intention to declare
cash dividends. The expected life represents the period of time that options
granted are expected to be outstanding and was calculated using the simplified
method. The assumptions given below result from certain groups of employees
exhibiting different behavior. The Company does not expect to have any
forfeitures of its stock option awards based on the historical experience of the
group of employees that received the stock option awards. The risk-free rate is
based on the U. S. Treasury Securities with terms equal to the expected time of
exercise as of the grant date.
------------------------------------------------------------
Expected volatility............................ 18.0%
Expected dividend yield........................ 0.0%
Expected life (in years)....................... 4.75
Risk-free interest rate........................ 4.75%
-------------------------------------------------------------
54
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(5) Stock Options and Nonvested Stock (Continued)
--- --------------------------------
Stock Options (Continued)
The grant-date fair value of options granted on March 8, 2006 was $2.60 per
option.
A summary of stock option activity is presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Term Intrinsic
Options Price (In Years) Value
--------- ------------- ----------------------- --------------
Outstanding at January 1, 2007........... 32,500 $ 8.89
Granted................................ - -
Exercised.............................. - -
Forfeited.............................. (25,000) 8.56
---------- ------------
Outstanding at December 31, 2007......... 7,500 $ 10.01 5.2 $ -
========== ============
Exercisable at December 31, 2007......... 1,875 $ 10.01 5.2 $ -
During the year ended December 31, 2006, the Company received 10,944 shares
of its common stock as payment for the exercise of 12,535 stock options in
accordance with the ECP. The total intrinsic value of stock options exercised
during the year ended December 31, 2006 was $13,663. Upon the exercise of stock
options under the 1997 ECP, the Company issues new common stock from its
authorized shares.
There were no stock options granted during the year ended December 31,
2007.
The compensation expense recognized during the years ended December 31,
2007 and 2006 for stock options was $6,000 and $7,000, respectively. The total
compensation expense of $23,000 is expected to be recognized on the
straight-line basis over the stated vesting period consistent with the terms of
the arrangement. As of December 31, 2007, there is unrecognized compensation
cost of $11,000 on the stock option awards which will be recognized over the
next 2.2 years.
As of December 31, 2005, there were no unvested employee stock options.
Therefore, no compensation cost related to stock options granted to employees
prior to January 1, 2006 was recognized.
Nonvested Stock
The grant-date fair value of nonvested stock is determined on the date of
grant based on the market price of the stock, and compensation cost is generally
amortized to expense on a straight-line basis over the vesting period during
which employees perform related services.
On March 8, 2006, the Company issued 12,500 shares of nonvested stock to
its executive officers. Participants are entitled to cash dividends and to vote
their respective shares. The shares are subject to forfeiture if employment is
terminated prior to March 8, 2010.
On March 1, 2007, Mr. Hoffner resigned from his positions as President and
CEO and as a director of the Company. Due to his resignation from the Company,
Mr. Hoffner forfeited his 5,000 shares of nonvested stock.
55
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(5) Stock Options and Nonvested Stock (Continued)
--- ---------------------------------
Nonvested Stock (Continued)
A summary of nonvested stock activity is presented below:
Nonvested Shares Grant Date Fair Value
------------------------------- ---------------------------
Nonvested at January 1, 2007.......... 12,500 $ 10.01
Granted............................ - -
Vested............................. - -
Forfeited.......................... (5,000) 10.01
------------------------------- ---------------------------
Nonvested at December 31, 2007........ 7,500 $ 10.01
=============================== ===========================
The compensation expense recognized during the years ended December 31,
2007 and 2006 for nonvested stock awards was $8,000 and $26,000, respectively.
The total compensation cost of $75,000 is expected to be recognized on the
straight-line basis over the four-year vesting period consistent with the terms
of the arrangement. As of December 31, 2007, there is unrecognized compensation
cost of $41,000 on the nonvested stock awards which will be recognized over the
next 2.2 years.
(6) Employee Benefit Plans
--- ----------------------
The Company has a defined contribution Retirement Savings Plan for its
employees. Employees age 21 and above, with at least 90 days of service, are
eligible to participate in the Plan. Under the 401(k) feature of the Plan, the
Company matches 100% of the first 3% of pay which the employee contributes to
the Plan and 50% of the next 2% 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;
however, there were no profit sharing contributions for the years ended December
31, 2007, 2006, and 2005. Total expense for the Retirement Savings Plan was
$174,000, $147,000, and $129,000 for the years ended December 31, 2007, 2006,
and 2005, respectively.
(7) Income Taxes
--- ------------
The provision for income tax expense (benefit) associated with continuing
operations consists of the following (in thousands):
For the Year Ended For the Year Ended For the Year Ended
December 31, 2007 December 31, 2006 December 31, 2005
------------------------- -------------------------- ------------------------
Federal - current.......... $ (434) (168) (251)
- deferred......... 42 152 338
------------------------- -------------------------- ------------------------
(392) (16) 87
------------------------- -------------------------- ------------------------
State - current.......... (26) (23) 1
- deferred......... (15) 20 5
------------------------- -------------------------- ------------------------
(41) (3) 6
------------------------- -------------------------- ------------------------
Foreign - current.......... - - -
------------------------- -------------------------- ------------------------
$ (433) (19) 93
========================= ========================== ========================
56
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(7) Income Taxes (Continued)
--- ------------
The income tax expense (benefit) was allocated as follows (in thousands):
For the Year Ended For the Year Ended For the Year Ended
December 31, 2007 December 31, 2006 December 31, 2005
------------------------ -------------------------- ------------------------
Continuing operations........ $ (433) (19) 93
Discontinued operations...... - - 569
------------------------ -------------------------- ------------------------
$ (433) (19) 662
======================== ========================== ========================
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 Ended For the Year Ended For the Year Ended
December 31, 2007 December 31, 2006 December 31, 2005
------------------------ -------------------------- ------------------------
Computed tax expense
(benefit) at statutory
rate of 34%................ $ (31) 153 102
Increase (reduction) in
taxes resulting from:
State income taxes,
net of federal
benefit................ (27) (2) 4
Tax-exempt
interest............... (97) (151) (86)
Change in tax
contingency
reserve................ (309) (49) -
Miscellaneous items...... 31 30 73
------------------------ -------------------------- ------------------------
$ (433) (19) 93
======================== ========================== ========================
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, 2007 and 2006 are presented below (in thousands):
December 31, December 31,
2007 2006
------------------- -----------------
Deferred tax assets:
Net operating and built-in loss carryforward...... $ 105 89
Credit carryforward............................... 29 -
Inventories....................................... 107 99
Accrued restructuring costs....................... 22 22
Accrued warranty costs............................ 92 74
Accruals for other expenses, not yet
deductible for tax purposes..................... 135 158
------------------- -----------------
Total gross deferred tax assets............... 490 442
------------------- -----------------
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation.................. (32) (24)
Prepaid expenses.................................. (34) (34)
------------------- -----------------
Total gross deferred tax liabilities.......... (66) (58)
------------------- -----------------
Net deferred tax assets....................... $ 424 384
=================== =================
57
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(7) Income Taxes (Continued)
--- ------------
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. At December 31, 2007
approximately $650,000 of federal taxable income and $1,730,000 of state taxable
income is needed to fully realize the Company's recorded net deferred tax
assets. 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, 2007.
On January 1, 2007, the Company adopted the Financial Accounting Standards
Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109, Accounting for Income
Taxes, which clarifies the accounting for uncertainty in income taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Interpretation requires that the Company recognize in
the financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure.
As a result of the implementation of FIN 48, the Company recognized a
decrease of $37,000 in the liability for unrecognized tax benefits, which was
accounted for as an increase to the January 1, 2007 balance of retained
earnings. As of the date of adoption and after the impact of recognizing the
decrease in liability noted above, the Company's unrecognized tax benefits
totaled $692,000, of which $590,000 would impact the effective tax rate if
recognized.
The Company recognizes interest and penalties for income tax matters in
income tax expense. In conjunction with the adoption of FIN 48, the Company had
a balance of approximately $117,000 ($80,000, net of federal benefit) for
potential interest and penalties at January 1, 2007 which is included as a
component of the $692,000 unrecognized tax benefit noted above. To the extent
interest and penalties are not assessed with respect to uncertain tax positions,
amounts accrued will be reduced and reflected as a reduction of the overall
income tax provision.
A reconciliation of the beginning and ending amount of unrecognized tax
benefits, exclusive of interest and penalties, is as follows (in thousands):
Balance at January 1, 2007................................... $ 575
Increases related to prior year tax positions................ -
Decreases related to prior year tax positions................ -
Increases related to current year tax positions.............. -
Settlements.................................................. (3)
Lapse of statue.............................................. (369)
------------
Balance at December 31, 2007................................. $ 203
============
As of December 31, 2007, the Company's net unrecognized tax benefits
totaled $261,000, of which $193,000 would impact the effective tax rate if
recognized. As of December 31, 2007, the Company has a balance of approximately
$75,000 ($58,000, net
58
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(7) Income Taxes (Continued)
--- ------------
of federal benefit) for potential interest and penalties, which is a component
of the $261,000 unrecognized tax benefit noted above.
The Company estimates that the total unrecognized tax benefits may decrease
by approximately $30,000 due to the expiration of statutes of limitations prior
to December 31, 2008.
The Company is subject to U.S. federal income tax as well as income tax of
multiple state and foreign jurisdictions. The Company has substantially
concluded all U.S. federal income tax matters for years through 2003. The
Company has operations in approximately 30 state and foreign taxing
jurisdictions. The Company has substantially concluded state income tax matters
for years through 2001.
(8) Contingencies
--- -------------
From time to time, the Company is involved in various claims and legal
actions arising in the ordinary course of business. Although the amount of any
liability that could arise with respect to currently pending actions cannot be
accurately predicted, in the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's financial
position, results of operations, or liquidity.
(9) 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 approximately 25,000 square
feet of office space for five years. The leasing agreement requires fixed
monthly rental payments of $19,345. 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. On November 14,
2007, the Company amended the lease agreement to extend the term of the lease
for a period of five years commencing immediately upon the February 21, 2008
expiration date of the original term of the lease. The amended lease agreement
requires fixed monthly rental payments of $18,000 for five years through the
February 20, 2013 expiration date of the lease. The amended lease agreement
incorporates the terms and conditions of the original lease agreement.
In accordance with SFAS No. 13 and SFAS No. 28, the leaseback does not meet
the criteria for classification as a capital lease; hence, it is classified as
an operating lease. The sale-leaseback resulted in a total gain of $2,189,000,
of which $1,363,000 was recorded as a gain in 2003. The seller-lessee (Company)
retained more than a minor part (25,000 square feet) but less than substantially
all of the use of the property (173,000 square feet) through the leaseback and
realized a profit on the sale in excess of the present value of the minimum
lease payments over the lease term. The present value of the stream of lease
payments utilizing the Company's incremental borrowing rate of 10.0% was
$826,000. The $826,000 of deferred profit is amortized in equal amounts as a
reduction in rent expense over the five-year term of the lease. During the years
ended December 31, 2007, 2006, and 2005, $165,000, $165,000, and $165,000,
respectively, of the deferred gain was recognized.
59
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(9) Commitments and Related Party Transactions (Continued)
--- ------------------------------------------
Total rental expense in the years ended December 31, 2007, 2006, and 2005
approximated $247,000, $259,000, and $231,000, respectively.
Future minimum rental commitments at December 31, 2007 are as follows (in
thousands):
Operating Leases
--------------------
2008............................................ $ 219
2009............................................ 216
2010............................................ 216
2011............................................ 216
2012............................................ 216
After 2012...................................... 36
--------------------
Total ........................................ $ 1,119
====================
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, Inc. for
various marketing and business evaluation assignments from 1995 through 2005.
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 year ended December 31,
2005 approximated $44,000. Mr. Hoffner resigned from his positions as President
and CEO and as a director of the Company effective March 1, 2007.
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 at the time of the transaction. 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.
(10) Cash Flow Information
---- ---------------------
Supplemental disclosures of cash flow information for the years ended
December 31, 2007, 2006, and 2005 are as follows (in thousands):
For the Year Ended For the Year Ended For the Year Ended
December 31, 2007 December 31, 2006 December 31, 2005
------------------------ ----------------------- -------------------------
Supplemental disclosures
of cash flow information:
Cash paid (received)
during the period for:
Interest expense........ $ 1 1 1
======================== ======================= =========================
Income taxes............ $ (41) (738) 2,718
======================== ======================= =========================
60
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(11) Quarterly Financial Information (Unaudited)
---- -------------------------------------------
Selected Quarterly Financial Data
---------------------------------
(In thousands, except per share amounts)
For the Year Ended First Second Third Fourth
December 31, 2007 Quarter Quarter Quarter Quarter
------------------------------------------------------- -------------- -------------- ------------- --------------
Net sales.......................................... $ 3,607 6,019 7,298 4,524
Gross profit on sales.............................. $ 930 1,475 1,739 1,076
Income (loss) from continuing operations........... $ (268) 11 656 (58)
Net income (loss).................................. $ (268) 11 656 (58)
Basic earnings (loss) per share:
Income (loss) from continuing operations........... $ (.09) - .24 (.02)
Net income (loss).................................. $ (.09) - .24 (.02)
Diluted earnings (loss) per share:
Income (loss) from continuing operations........... $ (.09) - .24 (.02)
Net income (loss).................................. $ (.09) - .24 (.02)
For the Year Ended First Second Third Fourth
December 31, 2006 Quarter Quarter Quarter Quarter
------------------------------------------------------- -------------- -------------- ------------- --------------
Net sales.......................................... $ 4,220 4,823 5,209 3,536
Gross profit on sales.............................. $ 1,287 1,508 1,401 1,100
Income from continuing operations.................. $ 1 171 239 57
Net income......................................... $ 1 171 239 57
Basic earnings per share:
Income from continuing operations.................. $ - .05 .07 .02
Net income......................................... $ - .05 .07 .02
Diluted earnings per share:
Income from continuing operations.................. $ - .05 .07 .02
Net income......................................... $ - .05 .07 .02
(12) Stock Repurchase Program
---- ------------------------
On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. The Company's Board
of Directors amended its existing stock repurchase program on several occasions
during 2005 and 2006 by increasing the amount it has authorized management to
repurchase from up to $1,000,000 of the Company's common stock to up to
$14,000,000.
On 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.
61
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(12) Stock Repurchase Program (Continued)
---- ------------------------
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 at the time of the transaction. 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.
During the year ended December 31, 2007, the Company repurchased 99,699
shares of common stock at a weighted average cost, including brokerage
commissions, of $5.68 per share. Cash expenditures for the stock repurchases
during the year ended December 31, 2007 were $566,732. From the inception of the
Company's stock repurchase program on August 12, 2004 through December 31, 2007,
the Company repurchased 1,637,718 shares of common stock at a weighted average
cost, including brokerage commissions, of $8.62 per share. Cash expenditures for
the stock repurchases since the inception of the program were $14,116,143. As of
December 31, 2007, $883,857 remained available for repurchases under the stock
repurchase program.
Subsequent to December 31, 2007, the Company's Board of Directors amended
its existing stock repurchase program by increasing the amount it has authorized
management to repurchase from up to $15,000,000 of the Company's common stock to
up to $17,000,000.
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 regard to the stock repurchase program. The
purchase price for the shares of the Company's common stock repurchased was
reflected as a reduction to stockholders' equity. The Company allocates the
purchase price of the repurchased shares as a reduction to common stock for the
par value of the shares repurchased, with the excess of the purchase price over
par value being allocated between additional paid-in capital and retained
earnings. All shares of common stock that were repurchased by the Company since
the inception of the program were subsequently retired.
(13) Subsequent Events
---- -----------------
On January 9, 2008, 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 $15,000,000 of the Company's common stock to up to
$17,000,000.
--------------------------------
62
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, 2007. 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.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets, (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors, and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
Management assessed our internal control over financial reporting as of
December 31, 2007, the end of the Company's fiscal year. Management based its
assessment on criteria established in 2006. Management's assessment included
evaluation of such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies, and
our overall control environment.
Based on its assessment, management has concluded that our internal control
over financial reporting was effective as of the end of the fiscal year to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in
accordance with generally accepted accounting principles. The results of
management's assessment were reviewed with the Audit Committee of the Board of
Directors.
63
Item 9A. Controls and Procedures (Continued)
-------- -----------------------
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
Item 9B. Other Information
-------- -----------------
Not applicable.
64
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
-------- --------------------------------------------------
Information concerning the Company's directors is as follows:
Name, Other Positions or Offices With The Company Director
and Principal Occupation for Past Five Years Since Age
------------------------------------------------------------------------------- ----------- ------
Robert J. Blyskal............................................................. 2007 53
Mr. Blyskal is a private investor who from 2004 through his retirement in
2005 served as President and Chief Operating Officer of GSI Commerce, Inc.,
an e-commerce solutions provider that enables various organizations to
operate e-commerce businesses. From 2003 to 2004, Mr. Blyskal was a
consultant to NeighborCare Pharmacies Inc., a provider of pharmacy services,
infusion, medical supplies and equipment, and oxygen and respiratory
medications to the long-term care marketplace. From 1993 to 2003, Mr.
Blyskal held several executive-level positions, including Executive Vice
President of Operations and Technology, Senior Vice President of Pharmacy
Operations, and Vice President and General Manager, at Medco Health
Solutions, Inc., a pharmacy benefits manager with mail order pharmacy
operations.
Theodore W. Myers............................................................. 2002 64
Theodore W. Myers is the Chairman of the Board of the Company, a position he
has held 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.
Anthony W. Schweiger.......................................................... 2001 66
Anthony W. Schweiger is President and CEO of The Tomorrow Group, LLC, a
governance and management consultancy. He is also Chairman and Managing
Principal of e-brilliance, LLC, an IT consulting firm. 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 & Finance 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.
65
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
------------------------------------------------------------------------------- ----------- ------
Samuel L. Torrence............................................................ 2007 57
Samuel L. Torrence currently serves as the President of Just Born, Inc., a
privately owned confectionery manufacturer of hard candy, jellybeans,
marshmallows, and other candy products, a position he has held since 2005.
Mr. Torrence joined Just Born in 2002 as Executive Vice President. From 1993
to 2001, Mr. Torrence held several executive-level positions, including
Executive Vice President of Human Resources and Administration, Executive
Vice President of Administration & Parts Operations, Senior Vice President of
Total Quality Management, and Vice President of Human Resources and Total
Quality Management, at Mack Trucks, Inc., a manufacturer of heavy- and
medium-duty trucks for use in a variety of industries.
Leonard S. Yurkovic........................................................... 2002 70
Leonard S. Yurkovic returned to the Company as Acting CEO on March 1, 2007.
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 CEO in 1988. Mr. Yurkovic initially retired from the Company
as CEO and a member of the Board of Directors in 1999. Mr. 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.
The aforementioned directors of the Company hold their positions as
directors until the next Annual Meeting of Stockholders.
--------------------------------
The names, ages, and offices with the Company of its executive officers are
as follows:
Name Age Office
---- --- --------
Leonard S. Yurkovic 70 Acting Chief Executive Officer, effective March 1,
2007, Director
Joel L. Hoffner 63 President and Chief Executive Officer, Director
until his resignation on March 1, 2007
William J. Casey 64 Executive Vice President of the Company and
President and Chief Operating Officer of SI Systems
John F. Lehr 47 Vice President of the Company and Managing
Director of Order Fulfillment
Ronald J. Semanick 46 Vice President - Finance, Chief Financial Officer,
Treasurer, and Secretary
66
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------
Information regarding Mr. Yurkovic is provided above.
Mr. 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. in
2000. 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 December 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, Inc. for various marketing and
business evaluation assignments from 1995 through 2005. Mr. Hoffner resigned
from his positions as President and CEO and as a director of the Company
effective March 1, 2007.
Mr. Casey whose career with the Company spans 40 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. Mr. Casey was appointed President and Chief Operating
Officer of SI Systems effective March 1, 2007. 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, Inc. 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 26 years, acting as
Board President in 2002-2003, Mr. Casey has served on its Board of Directors
since 1997 and 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 24 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. From 2000 through 2004, Mr.
Lehr focused on the development of industry specific analytical processes and
tools that assisted 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.
67
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------
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 and the Institute of Management 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 2007 all of our directors and
executive officers met all applicable Section 16(a) filing requirements.
--------------------------------
Audit Committee
---------------
The Audit Committee consists of three directors, Messrs. Blyskal, 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.
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.
--------------------------------
68
Item 11. Executive Compensation
-------- ----------------------
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
1. Executive Compensation Program Philosophies and Objectives
----------------------------------------------------------
Paragon's executive compensation program is based on the following
philosophies and objectives:
o The Compensation Committee (for purposes of this Executive Compensation
section, the "Committee") of the Board of Directors is responsible for
establishing the Company's executive compensation program, subject to
final approval by the Company's Board of Directors;
o The executive compensation program should enable Paragon to attract,
retain, and motivate individuals with the skills and talent necessary
to provide a meaningful contribution to Paragon while reinforcing
Paragon's culture and desired behaviors;
o The executive compensation program should remain competitive with
industry and similar sized company compensation programs. To that end,
the program should provide "median rewards for median performance" and
"superior rewards for superior performance" when measured against
appropriate Company targets and comparative groups;
o Accountability for performance is essential in aligning an executive's
interest with those of Paragon's stockholders. Therefore, an
executive's compensation package should be largely based on the
Company's achievement of specified financial and stockholder return
objectives as well as the executive's achievement of specified
individual objectives;
o The executive compensation program should take into account internal
equity among the executive officer group. Equity ownership is viewed as
a critical component to assure that the executives' Company financial
interests are closely aligned with those of the Company stockholders;
o Executive compensation should be delivered in a mixture of base salary,
cash incentive, and health and welfare programs that are effective in
retaining high performing executive officers while motivating them to
achieve current year business objectives as well as to deliver
long-term goals; and
o The executive compensation program should promote collaboration and
teamwork across the Company.
The Committee selects compensation elements for its executive compensation
program with these philosophies and objectives in mind. The executive
compensation program reflects that the Company operates with a small team of
executives. The executives are given significant and extensive responsibilities
that encompass both the Company's strategic plan and direct day-to-day
activities in sales, finance, customer communications, product development,
marketing, manufacturing, and other similar activities. Additionally, the
Committee regularly reviews overall Company performance and individual executive
contributions, performance, leadership traits, and representation of the
Company.
69
Item 11. Executive Compensation (Continued)
-------- ----------------------
Although the Committee believes that employment contracts do not ensure or
guarantee that executives' efforts, attention, and commitment are aligned with
maximizing the success of the Company and stockholder value, it is recognized
that under certain circumstances these contracts are necessary. Currently, there
are no employment contracts with any of the executives. The Committee continues
to be diligent in considering when employment contracts are necessary and in the
best interest of the Company and the Company's stockholders.
2. Executive Compensation Program Process and Oversight
----------------------------------------------------
The Committee provides advice, direction, and oversight responsibility for
the compensation and human resources programs, processes, and functions of
Paragon, including establishing a mandatory retirement age for executives and
directors. The Committee has the sole authority at the Company's expense, to
engage and terminate consulting firms and legal counsel, as the Committee deems
advisable, to advise the Committee with respect to executive compensation and
human resource matters, including the sole authority to approve the consultant's
fees and other engagement terms.
Paragon's Board of Directors has delegated to the Committee the following
responsibilities and authority:
o The Committee is responsible for developing and endorsing the executive
compensation program philosophies and objectives discussed above;
o With respect to Paragon's Chief Executive Officer ("CEO"), the
Committee:
- Reviews and approves corporate goals and objectives relevant to
the compensation of the CEO, annually evaluates the CEO's
performance in light of these goals and objectives, and
communicates the results to the CEO and the full Board;
- Recommends (for approval by the independent directors) the CEO's
compensation levels (including base salary, cash incentive
compensation, and other direct and indirect benefits) based on its
evaluation of the CEO; and
- Considers, among other items, Paragon's performance and relative
stockholder return and the value of total compensation to CEO's at
comparable companies.
o The Committee approves compensation for all executives below the level
of CEO, including, if applicable, new and amended employment and
severance agreements for these executives;
o The Committee assists the Board of Directors in establishing and
periodically updating appropriate base salary and cash incentive
compensation;
o The Committee administers these plans in order to attract, retain, and
motivate skilled and talented executives and to align such plans with
Paragon's financial performance, business strategies, and growth in
stockholder value;
o The Committee provides necessary determinations in connection with
executive compensation to qualify for tax deductions in excess of
limitations under applicable regulations, including section 162(m) of
the Internal Revenue Code as applicable; and
70
Item 11. Executive Compensation (Continued)
-------- ----------------------
o The Committee guides the Board of Directors regarding all elements of
appropriate director compensation and human resource matters, including
establishing appropriate retirement policies.
The Committee recognizes the importance of maintaining sound principles for
the development and administration of executive compensation and benefit
programs and has taken steps that significantly enhance the Committee's ability
to effectively carry out its responsibilities and ensure that Paragon's
compensation and benefit programs further the philosophies and objectives set
forth above. Among other things, the Committee has taken the following actions:
(1) retained Aon Consulting ("Aon"), independent compensation consultant,
in 2005 to advise the Committee on executive compensation and reward
issues; and
(2) implemented a more robust executive performance management process,
including annual management-based objectives ("MBOs"), which are
reviewed and approved by the Committee, to strengthen the link between
executive pay and performance.
Management's participation in the compensation process is critical in
creating an equitably tailored program that is both effective in motivating the
executive team and in ensuring that the process appropriately reflects Paragon's
culture and current strategies. Each year, Paragon's executives are required to
develop a new set of MBOs for themselves and their respective areas of
responsibility, consisting of both qualitative and quantitative goals. They are
also required to review them with Paragon's CEO. These MBOs must be approved by
the CEO and serve as a basis for measuring the amount of cash incentive awards
to which each executive is entitled. The process and timing for setting these
objectives and assessing performance against these objectives are discussed in
detail below.
The Committee uses the following resources, processes, and procedures to
help it effectively perform its responsibilities:
o Executive sessions, without management present, to discuss various
compensation matters, including the compensation of the CEO;
o Executive sessions with the CEO present to discuss recommendations of
the CEO pertaining to executive compensation;
o An independent executive compensation consultant who advises the
Committee from time to time on compensation matters; and
o A periodic review of all executive compensation and benefit programs
for competitiveness, reasonableness, and cost-effectiveness.
The Committee believes that the total compensation provided to the
Company's executives is reasonable and meets the philosophies and objectives of
the compensation program for the Company's executives.
Compensation Surveys and Benchmarking
From time to time, the Committee periodically reviews surveys and
benchmarking data consisting of total compensation and each of its elements:
base salary and cash incentive compensation. In determining 2007 executive
compensation, the Committee targeted executive compensation for executives, at
the lower end of the competitive range of survey data of companies from
nationally recognized executive compensation surveys.
71
Item 11. Executive Compensation (Continued)
-------- ----------------------
Principal Components of Executive Compensation
In the past, executives have been primarily compensated by a combination of
base salary and discretionary incentives. The Company is deliberately moving to
a managed program more consistent with the stated compensation philosophies and
objectives. In the future, executives' total compensation will be more heavily
weighted towards performance-based, variable compensation, with annual base
salary ranging from 50% to 75% of a Named Executive's total compensation
package.
Although the Committee has not established specific ratios for each of the
principal compensation components, it strives to maintain a reasonable and
competitive balance between base salary and cash incentive compensation. For
compensation setting purposes, each executive is considered individually;
however, the same considerations apply to all executives. In setting base
salary, the primary factors are the scope of the executive's duties and
responsibilities, the executive's performance of those duties and
responsibilities, and a general evaluation of the competitive market conditions
for similar executives with each of the Company's respective executive's
experience.
The Company also compensates its executives with other customary benefits
such as medical coverage, group life insurance, travel accident insurance,
disability coverage, and a defined contribution retirement savings plan. The
Company does not provide significant perquisites or post-retirement benefits to
its executives, such as a defined benefit pension plan.
Base Salary
The Committee provides base salaries to executive officers to attract and
retain talent, provide competitive compensation for the performance of the
executives' basic job duties and responsibilities, and recognize individual
contributions to the Company's financial performance. The Committee generally
targets base salary levels to be at the lower end of the competitive range and,
therefore, base salaries are not intended to exceed the median of market data
provided by the Company's compensation consultant. Base salaries may be adjusted
at the discretion of the Board of Directors based on the recommendation of the
Committee. Based on recommendations of the CEO and the Committee's review of the
applicable compensation survey data, as discussed above, base salaries of all
executive officers for 2007 were set at levels at the lower end of the
competitive range. The Committee typically recommends and the Board of Directors
sets base salaries at these levels due to differences in revenue size among the
companies included in the published survey sources. The Committee believes that
the base salaries paid to the Company's executive officers are reasonable and
are the primary component of the Company's compensation program.
On January 1, 2006, Mr. Hoffner was hired as the Company's President and
CEO at a salary of $200,000 per annum and subsequently reduced to $155,000. The
salary paid to Mr. Hoffner was arrived at through negotiations with Mr. Hoffner
and was subsequently adjusted to be equal to the salary paid to each of Messrs.
Casey and Lehr, two of the Company's principal executives. On March 1, 2007, Mr.
Hoffner resigned from his positions as President and CEO and as a director of
the Company.
Mr. Yurkovic returned to the Company as Acting CEO on March 1, 2007 at a
base salary of $10,500 per month and is not eligible for director compensation
while in this position. The salary paid to Mr. Yurkovic was arrived at through
negotiations with Mr. Yurkovic.
72
Item 11. Executive Compensation (Continued)
-------- ----------------------
Changes, if any, to base salaries for all employees generally will take
effect on March 1; however, base salaries of executives are also reviewed at the
time of a promotion or other change in responsibilities.
In connection with his change in responsibilities and promotion to Vice
President of the Company, effective November 14, 2005, Mr. Lehr received an
increase of $5,000 in base salary, bringing his base salary to $155,000. During
2007, Mr. Lehr received no increase in base salary and his base salary remains
at $155,000, the per annum rate of pay that was set on November 14, 2005.
In connection with his change in responsibilities and promotion to
Executive Vice President of the Company, effective November 14, 2005, Mr. Casey
received an increase of $15,000 in base salary, bringing his base salary to
$155,000. Also, effective March 1, 2007, in connection with his change in
responsibilities and promotion to President and Chief Operating Officer ("COO")
of SI Systems, Mr. Casey received an increase of $20,000 in base salary,
bringing his base salary to $175,000.
During 2007, Mr. Semanick received no increase in base salary and his base
salary remains at $124,373, the per annum rate of pay that was set on March 1,
2005.
Bonus Awards
While the Company implements a more managed program for executive
compensation, it has primarily utilized discretionary cash bonus awards to
recognize the contributions of selected executives based on the Board of
Directors' judgment of the executive's overall performance. When appropriate,
the Committee recommends the recipients and amounts of these discretionary cash
bonus awards each year for approval by the Board of Directors. Discretionary
cash bonuses may vary among executives, with no one executive guaranteed a
minimum cash bonus amount. There were no cash bonus awards recommended by the
Committee or approved by the Board of Directors during 2007.
Equity Awards
The Company's stock-based compensation program, the 1997 Equity
Compensation Plan ("ECP"), expired in July 2007. Prior to expiration, the ECP
provided for grants of stock options, restricted and nonvested stock, and stock
appreciation rights to selected employees, key employees who performed valuable
services, and directors of the Company. In addition, the ECP provided for grants
of performance units to employees and key advisors. There were no equity awards
granted during 2007 and no further grants are available under the plan.
As of December 31, 2007, 7,500 stock options and 7,500 shares of restricted
and nonvested stock are outstanding under the plan. All stock options have a
term of seven years from the March 8, 2006 date of grant, while the restricted
and nonvested shares of stock vest on the four-year anniversary of the March 8,
2006 date of grant.
The Committee believes that equity awards are an important component of a
compensation program because they have the effect of retaining executives and
aligning executives' financial interests with the interests of stockholders.
Prior to the expiration of the ECP, equity awards were granted from time to time
as a component of the compensation program to focus on aspects of performance
such as stock price appreciation, total return to stockholders, and increasing
longer-term value for stockholders. However, at the Annual Meeting of
Stockholders held on August 1, 2007, the stockholders of the Company did not
approve the proposed Company's 2007 Equity Incentive Plan.
73
Item 11. Executive Compensation (Continued)
-------- ----------------------
Other Compensation
In addition to the compensation described above, executives named in the
Summary Compensation Table receive certain other benefits. Such benefits include
a monthly auto allowance for executives of $800 for the business usage of
personal automobiles and Company contributions under the Company's 401(k)
retirement savings plan. Participation in the Company's 401(k) retirement
savings plan and Company contributions and benefits related to the retirement
savings plan are made available to all of the Company's employees. The costs to
the Company associated with providing these benefits for executives named in the
Summary Compensation Table are reflected in the "All Other Compensation" column
of the Summary Compensation Table.
The Company also provides other benefits, such as medical coverage, group
life insurance, travel accident insurance, and disability coverage, to each
executive named in the Summary Compensation Table, which are also provided to
all of the Company's employees. The value of these benefits is not required to
be included in the Summary Compensation Table because such benefits are made
available to all employees. The Company also provides vacation and other paid
holidays to all employees, including the executives named in the Summary
Compensation Table, which are comparable to those provided by other companies.
Severance
The Company has an Executive Officer Severance Policy (the "Severance
Policy") for an executive without an employment agreement, which applies in the
event that an executive is terminated by the Company for reasons other than
"cause," as such term is defined in the Severance Policy. The Severance Policy
was established to provide a competitive benefit in order to motivate qualified
individuals to accept executive positions with the Company. Under the Severance
Policy, the CEO will receive 52 week's regular straight-time pay while the other
executives will receive one week's regular straight-time pay based on their
years of service with the Company in accordance with the following schedule:
----------------------------------------------------------------------------------------------
Severance Pay
Years of Service (Weeks)
----------------------------------------------------------------------------------------------
1 year of service or less 13 Weeks
Greater than 1 year of service, but less than 7 years of service 26 Weeks
Greater than 7 years of service, but less than 14 years of service 39 Weeks
Greater than 14 years of service or CEO of the Company 52 Weeks
----------------------------------------------------------------------------------------------
During the aforementioned severance payout period, the Company will provide
the executive continued medical coverage in accordance with the same terms
offered during employment. The Company will also provide executive outplacement
services for terminated executives. For additional information concerning the
Severance Policy, see "Potential Payments upon Termination or Change in Control"
below.
Change in Control
The Company does not have change-in-control agreements with its executives
named in the Summary Compensation Table. However, the provisions of the 1997
Equity Compensation Plan applicable to change in control apply to nonvested
stock and stock option grants issued under the Company's 1997 Equity
Compensation Plan. Upon a change in control, all nonvested shares subject to
forfeiture immediately prior to the change in control will become
non-forfeitable and the restrictions and conditions on all outstanding nonvested
stock shall immediately lapse, and all outstanding stock options shall
automatically accelerate and become fully exercisable. For additional
information concerning change in control provisions applicable to nonvested
stock and stock option grants issued under the Company's 1997 Equity
Compensation Plan, see "Potential Payments upon Termination or Change in
Control" below.
74
Item 11. Executive Compensation (Continued)
-------- ----------------------
Financial Restatement
The Company does not have a formal policy regarding the effects of a
financial restatement on incentive compensation. The Company may, to the extent
permitted by applicable law, seek recoupment of incentive compensation, if
applicable, paid to any executive where the payment was predicated upon the
achievement of certain financial results that were subsequently the subject of a
restatement, the executive is found to have engaged in fraud or misconduct that
caused or partially caused the need for the restatement, and a lower payment
would have been made to the executive based upon the restated financial results.
In each such instance, the Company, to the extent practicable, may seek to
recover the amount by which the individual executive's incentive compensation
for the relevant period exceeded the payment that would have been made based on
the restated financial results.
The Company's Practices with Respect to the Granting of Equity Awards
The Company's stock-based compensation program, the 1997 Equity
Compensation Plan, expired in July 2007. No further grants are available under
the 1997 Equity Compensation Plan. Prior to the expiration of the 1997 Equity
Compensation Plan, equity awards were granted from time to time by the Board of
Directors and were based upon the recommendations of the Committee.
o Timing of Grants. Regularly scheduled meetings of the Board of
Directors generally occur in the month of the dissemination of the
Company's earnings release for the immediately preceding fiscal
quarter. From time to time, equity awards were typically granted at one
of these regularly scheduled meetings and, as a rule, further grants
were not made for the remainder of the year. On limited occasions,
grants may have occurred at other regularly scheduled meetings of the
Board of Directors during the year, primarily for approving a
compensation package for a newly hired or promoted executive. The
timing of such grants were driven solely by the activity related to the
need for the hiring or promotion; not the price of the Company's common
stock or the timing of any news release of Company information.
o Option Exercise Price. Historically, the exercise price of a newly
granted stock option was at the closing price on the American Stock
Exchange on the date of grant.
Stockholding Guidelines
The Committee also believes that it is in the best interests of
stockholders for the Company's directors and executives to own a minimum
required amount of the Company's common stock, thereby aligning their interests
with the interests of stockholders. Accordingly, on March 8, 2006, the Board of
Directors implemented stock ownership guidelines applicable for all of the
Company's directors and executives. The current stock ownership guidelines are
as follows:
o The CEO of the Company is required to own at least 15,000 shares of the
Company's common stock and all other executives and directors of the
Company are required to own at least 10,000 shares of the Company's
common stock.
o The common stock ownership requirement may be reached over a time
period not exceeding the later of (1) five years from the March 8, 2006
policy inception date, or (2) five years from the date the director or
executive begins his or her tenure as a director or executive with the
Company.
o Directors of the Company are required to make an investment in the
Company's common stock prior to or at the time of their election or
appointment to the Company's Board of Directors, as long as such
purchases do not violate the Company's insider trading policy.
75
Item 11. Executive Compensation (Continued)
-------- ----------------------
Securities Trading Policy
Directors, executives, and employees of the Company may not engage in any
transaction in which they may profit from short-term speculative swings in the
value of the Company's securities. This prohibition includes "short sales"
(selling borrowed securities which the seller hopes can be purchased at a lower
price in the future) or "short sales against the box" (selling owned, but not
delivered securities), and other hedging transactions designed to minimize an
individual's risk inherent in owning the Company's common stock. In addition,
the securities trading policy is designed to ensure compliance with all insider
trading rules.
Perquisites
The Company does not provide significant perquisites to its executives, nor
does it have an executive perquisite program. The Board of Directors and the
Committee believe that providing significant perquisites to executives would not
be consistent with the Company's overall compensation philosophies and
objectives because awarding such perquisites do not necessary align an
executive's interest with long-term stockholder value.
Tax Implications of Executive Compensation
Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 in
compensation per year on the amount that the Company may deduct with respect to
each of its Named Executives. The limitation does not apply to compensation that
qualifies as "performance-based compensation" or falls within other exceptions
provided in the statute. However, the Committee retains the discretion to
approve elements of compensation for specific executives in the future that may
not be fully deductible when the Committee deems the compensation appropriate in
light of its philosophies and objectives. The Committee believes that all
compensation paid to the executives in 2007 did not exceed the deductible limit
and will be deductible for federal income tax purposes.
3. Report of the Compensation Committee
------------------------------------
The Committee has reviewed and discussed the Compensation Discussion and
Analysis for the year ended December 31, 2007 required by Item 402(b) of
Regulation S-K with management, and based on such review and discussions, the
Committee recommended to the Board that the Compensation Discussion and Analysis
for the year ended December 31, 2007 be included in this Annual Report on Form
10-K.
The Members of the Compensation Committee:
Samuel L. Torrence, Chairman
Theodore W. Myers
Anthony W. Schweiger
Mr. Torrence became a member of the Compensation Committee in March 2007
and Chairman of the Compensation Committee in August 2007. Mr. L. Jack Bradt, a
former director of the Company, served on the Compensation Committee until his
retirement from the Board of Directors in August 2007.
--------------------------------
76
Item 11. Executive Compensation (Continued)
-------- -----------------------
Set forth below is certain information relating to compensation received by
the Company's Principal Executive Officer or PEO (its CEO), Principal Financial
Officer or PFO (its Chief Financial Officer), and other most highly compensated
executives of the Company in 2007 and 2006 (collectively, the "Named
Executives"). No executive has an employment agreement with the Company.
SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------------
Stock Option All Other
Name and Salary Bonus Awards Awards Compensation Total
Principal Positions Year ($) (1) ($) ($) (2) ($) (3) ($) (4) ($)
----------------------------------------------------------------------------------------------------------------------
Principal Executive
-------------------
Officer
-------
Leonard S. Yurkovic 2007 105,000 - - - 24,160 129,160
Acting CEO (5) 2006 - - - - - -
Principal Executive
-------------------
Officer
-------
Joel L. Hoffner 2007 38,750 - (10,427) 542 4,188 33,053
President and 2006 155,000 - 10,427 2,709 13,800 181,936
CEO (6)
Principal Financial
-------------------
Officer
-------
Ronald J. Semanick 2007 124,373 - 6,256 1,625 14,775 147,029
Vice President - 2006 124,373 5,000 5,214 1,354 14,575 150,516
Finance, Chief Financial
Officer, and Treasurer
William J. Casey 2007 172,365 - 6,256 1,625 16,045 196,291
Executive Vice 2006 155,000 10,000 5,214 1,354 15,800 187,368
President (7)
John F. Lehr 2007 155,000 - 6,256 1,625 9,600 172,481
Vice President 2006 155,000 - 5,214 1,354 9,600 171,168
----------------------------------------------------------------------------------------------------------------------
(1) This column includes employee pre-tax contributions to the Company's 401(k)
retirement savings plan.
(2) This column reflects the dollar amount recognized for financial accounting
reporting purposes for the fiscal years ended December 31, 2007 and 2006,
in accordance with SFAS No. 123(R) pursuant to the Company's 1997 Equity
Compensation Plan and, therefore, includes amounts from awards granted in
and, if applicable, prior to 2006. There were no stock awards during the
year ended December 31, 2007, and no further grants are available under the
1997 Equity Compensation Plan. These amounts reflect the Company's
accounting expense for these awards, and do not correspond to the actual
value that will be recognized by the Named Executive.
(3) This column reflects the dollar amount recognized for financial accounting
reporting purposes for the fiscal years ended December 31, 2007 and 2006,
in accordance with SFAS No. 123(R) pursuant to the Company's 1997 Equity
Compensation Plan and, therefore, includes amounts from awards granted in
and, if applicable, prior to 2006. There were no stock options granted
during the year ended December 31, 2007, and no further grants are
available under the 1997 Equity Compensation Plan. These amounts reflect
the Company's accounting expense for these awards, and do not correspond to
the actual value that will be recognized by the Named Executives. The
assumptions used in the calculation of these amounts are described in Note
5 of the Notes to Consolidated Financial Statements included in this Annual
Report on Form 10-K.
77
Item 11. Executive Compensation (Continued)
-------- ----------------------
(4) This column includes the following additional compensation:
------------------------------------------------------------------------------------------------------
Company CEO Meals All Other
Auto Contributions and Lodging Compensation
Allowance to 401(k)Plan Expenses Total
Name Year ($) (a) ($) (b) ($) (c) ($)
------------------------------------------------------------------------------------------------------
Leonard S. Yurkovic 2007 8,000 4,110 12,050 24,160
2006 - - - -
Joel L. Hoffner 2007 2,400 1,788 - 4,188
2006 9,600 4,200 - 13,800
Ronald J. Semanick 2007 9,600 5,175 - 14,775
2006 9,600 4,975 - 14,575
William J. Casey 2007 9,600 6,445 - 16,045
2006 9,600 6,200 - 15,800
John F. Lehr 2007 9,600 - - 9,600
2006 9,600 - - 9,600
------------------------------------------------------------------------------------------------------
(a) This column includes monthly auto allowance of $800 for the business
usage of personal automobiles.
(b) This column includes the amounts expensed for financial reporting
purposes for Company contributions to the Company's 401(k) retirement
savings plan pertaining to basic, matching, and profit sharing
contributions. For further information, please refer to the Company's
"Employee Benefit Plans" in Note 6 of the Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K.
(c) This column includes meals and lodging expenses for Mr. Yurkovic while
away from his Maryland residence and working at the Company's
headquarters in Easton, Pennsylvania.
(5) Mr. Yurkovic rejoined the Company as Acting CEO on March 1, 2007 at a base
salary of $10,500 per month and is not eligible for director compensation
while in this position.
(6) Mr. Hoffner became President and CEO of the Company on January 1, 2006 and
resigned from his positions as President and CEO and as a director of the
Company effective March 1, 2007.
(7) Mr. Casey rejoined the Company on December 29, 2003 and became Executive
Vice President of the Company on October 14, 2005. Mr. Casey was appointed
President and COO of SI Systems effective March 1, 2007, at which time his
base salary was increased to $175,000.
---------------------------------
78
Item 11. Executive Compensation (Continued)
-------- ----------------------
GRANTS OF PLAN-BASED AWARDS DURING THE YEAR ENDED
DECEMBER 31, 2007
----------------------------------------------------------------------------------------------------------------------
All Other All Other Exercise
Stock Option or Grant Date
Awards: Awards: Base Fair Value
Number of Number of Price Closing of
Shares of Securities of Price on Stock and
Stock or Underlying Option Grant Option
Grant Approval Units Options Awards Date Awards
Name Date Date (#) (#) ($/Sh) ($/Sh) ($)
----------------------------------------------------------------------------------------------------------------------
Leonard S. Yurkovic - - - - - - -
Joel L. Hoffner - - - - - - -
Ronald J. Semanick - - - - - - -
William J. Casey - - - - - - -
John F. Lehr - - - - - - -
----------------------------------------------------------------------------------------------------------------------
There were no grants of plan-based awards during the year ended December 31,
2007, and no further grants are available under the 1997 Equity Compensation
Plan.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007
---------------------------------------------------------------------------------------------------------------------
Number of Number of Market
Securities Securities Number of Value of
Underlying Underlying Shares or Shares or
Unexercised Unexercised Units of Units of
Options Options Option Stock That Stock That
(#) (#) Exercise Option Have Not Have Not
------------------------------------- Price Expiration Vested Vested
Name Exercisable (1) Unexercisable (1) ($) Date (#) (2) ($) (3)
---------------------------------------------------------------------------------------------------------------------
Leonard S. Yurkovic - - - - - -
Joel L. Hoffner - - - - - -
Ronald J. Semanick 625 1,875 10.01 3/8/13 2,500 17,275
William J. Casey 625 1,875 10.01 3/8/13 2,500 17,275
John F. Lehr 625 1,875 10.01 3/8/13 2,500 17,275
---------------------------------------------------------------------------------------------------------------------
(1) This column includes the stock options awarded on March 8, 2006 under the
Company's 1997 Equity Compensation Plan. The options have a term of seven
years and vest in four equal annual installments beginning on the first
anniversary of the date of grant. Thus, at the end of four years the
options are fully exercisable. Due to his resignation from the Company
effective March 1, 2007, Mr. Hoffner forfeited his 5,000 stock options.
(2) This column includes the nonvested stock awarded on March 8, 2006 under the
Company's 1997 Equity Compensation Plan. The nonvested stock grants vest on
March 8, 2010, the four-year anniversary of the date of grant. Due to his
resignation from the Company effective March 1, 2007, Mr. Hoffner forfeited
his 5,000 shares of nonvested stock.
(3) The market value of shares of stock that have not vested was based on the
closing market price of the Company's common stock on December 31, 2007 of
$6.91 per share.
79
Item 11. Executive Compensation (Continued)
-------- ----------------------
OPTION EXERCISES AND STOCK VESTED IN THE YEAR ENDED
DECEMBER 31, 2007
--------------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
-------------------------------------------- -------------------------------------------
Number of Shares Value Realized Number of Shares Value Realized
Acquired on Exercise on Exercise Acquired on Vesting on Vesting
Name (#) ($) (#) ($)
--------------------------------------------------------------------------------------------------------------------
Leonard S. Yurkovic - - - -
Joel L. Hoffner - - - -
Ronald J. Semanick - - - -
William J. Casey - - - -
John F. Lehr - - - -
--------------------------------------------------------------------------------------------------------------------
There were no stock options exercised or vesting of stock awards during the year
ended December 31, 2007.
PENSION BENEFITS TABLE
----------------------------------------------------------------------------------------------------------
Present Value
Number of Years of Accumulated Payments During Last
Plan Credited Service Benefit Fiscal Year
Name Name (#) ($) ($)
----------------------------------------------------------------------------------------------------------
This table has been omitted because it is not applicable to the Company
and its Named Executives.
----------------------------------------------------------------------------------------------------------
NONQUALIFIED DEFERRED COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------------
Registrant Aggregate
Executive Contributions in Earnings Aggregate
Contributions Last in Last Fiscal Withdrawals/ Aggregate Balance at
in Last Fiscal Year Fiscal Year Year Distributions Last Fiscal Year-End
Name ($) ($) ($) ($) ($)
-----------------------------------------------------------------------------------------------------------------------------------
This table has been omitted because it is not applicable to the Company
and its Named Executives.
-----------------------------------------------------------------------------------------------------------------------------------
80
Item 11. Executive Compensation (Continued)
-------- ----------------------
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
AS OF DECEMBER 31, 2007
The information below describes and estimates certain compensation that
would become payable under existing plans and arrangements if the Named
Executive's employment had terminated on December 31, 2007, given the Named
Executive's compensation and, if applicable, based on the Company's closing
stock price on that date. These benefits are in addition to benefits available
generally to non-executive employees such as Company contributions under the
Company's 401(k) retirement savings plan and accrued vacation pay.
-----------------------------------------------------------------------------------------------------------------------------------
Before Change After Change
in Control in Control
-------------------------------------
Termination Termination
w/o Cause or w/o Cause or
for Good for Good Change in
Name Benefit Reason Reason Control
-----------------------------------------------------------------------------------------------------------------------------------
Leonard S. Yurkovic (1) Severance pay $ - $ - $ -
Outplacement services - - -
Health care benefits continuation - - -
Value of nonvested stock subject
to acceleration - - -
Value of stock options subject
to acceleration - - -
Joel L. Hoffner (2) Severance pay - - -
Outplacement services - - -
Health care benefits continuation - - -
Value of nonvested stock subject
to acceleration - - - (3)
Value of stock options subject
to acceleration - - - (4)
Ronald J. Semanick Severance pay 124,373 124,373 -
Outplacement services 10,000 10,000 -
Health care benefits continuation 4,874 4,874 -
Value of nonvested stock subject
to acceleration - - 17,275 (3)
Value of stock options subject
to acceleration - - - (4)
William J. Casey Severance pay 175,000 175,000 -
Outplacement services 10,000 10,000 -
Health care benefits continuation 10,868 10,868 -
Value of nonvested stock subject
to acceleration - - 17,275 (3)
Value of stock options subject
to acceleration - - - (4)
John F. Lehr Severance pay 77,500 77,500 -
Outplacement services 10,000 10,000 -
Health care benefits continuation 4,781 4,781 -
Value of nonvested stock subject
to acceleration - - 17,275 (3)
Value of stock options subject
to acceleration - - - (4)
-----------------------------------------------------------------------------------------------------------------------------------
81
Item 11. Executive Compensation (Continued)
-------- ----------------------
(1) Mr. Yurkovic is not eligible for termination benefits per his employment
arrangement with the Company.
(2) Mr. Hoffner resigned from his positions as President and CEO and as a
director of the Company effective March 1, 2007 and is no longer
eligible for termination benefits.
(3) On March 8, 2006, the Compensation Committee awarded nonvested stock
under the 1997 Equity Compensation Plan to Messrs. Hoffner (5,000
shares), Semanick (2,500 shares), Casey (2,500 shares), and Lehr (2,500
shares). The value associated with the accelerated vesting of nonvested
stock has been determined based on the closing market price of the
Company's common stock on December 31, 2007 of $6.91 per share. Due to
his resignation from the Company effective March 1, 2007, Mr. Hoffner
forfeited his 5,000 shares of nonvested stock.
(4) The closing market price of the Company's common stock on December 31,
2007 was $6.91 per share, while the exercise price of outstanding stock
options is $10.01 per share. Therefore, the stock options are
not-in-the-money at December 31, 2007 and would not provide any
additional value to the Named Executives. Due to his resignation from
the Company effective March 1, 2007, Mr. Hoffner forfeited his 5,000
stock options.
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; and
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.
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.
Non-employee directors serving on Committees of the Board of Directors receive
meeting fees of $1,500 for Audit Committee Meetings and $1,000 for all other
Committee Meetings of the Board of Directors. Directors are also reimbursed for
their customary and usual expenses incurred in attending Board and Committee
Meetings including those for travel, food, and lodging.
82
Item 11. Executive Compensation (Continued)
-------- ----------------------
DIRECTOR COMPENSATION TABLE
FOR THE YEAR ENDED DECEMBER 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
Change in
Pension Value
Fees and Nonqualified
Earned or Non-Equity Deferred
Paid in Stock Option Incentive Plan Compensation All Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
-----------------------------------------------------------------------------------------------------------------------------------
Robert J. Blyskal $ 29,000 - - - - - $ 29,000
L. Jack Bradt (1) 22,000 - - - - - 22,000
Theodore W. Myers 45,000 - - - - - 45,000
Anthony W. Schweiger 38,000 - - - - - 38,000
Samuel L. Torrence 31,400 - - - - - 31,400
Leonard S. Yurkovic (2) 2,000 - - - - - 2,000
-------------------------------------------------------------------------------------------------------
Total $ 167,400 - - - - - $ 167,400
=======================================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Bradt served on the Board of Directors of the Company until his
retirement from the Board of Directors in August 2007.
(2) Mr. Yurkovic received compensation for director's fees prior to his
appointment as Acting CEO of the Company on March 1, 2007. He is not
eligible for director compensation while in this position.
Options outstanding at December 31, 2007 pertaining to the Company's
directors are as follows:
-------------------------------------------------------------------------------------------------------------------
Number of Securities Number of Securities
Underlying Underlying
Unexercised Options Unexercised Options Option
(#) (#) Exercise Option
Grant --------------------------------------------------- Price Expiration
Name Date Exercisable Unexercisable ($) Date
-------------------------------------------------------------------------------------------------------------------
Robert J. Blyskal - - - - -
Theodore W. Myers - - - - -
Anthony W. Schweiger - - - - -
Samuel L. Torrence - - - - -
Leonard S. Yurkovic - - - - -
-------------------------------------------------------------------------------------------------------------------
There are no stock options outstanding at December 31, 2007 pertaining to
the Company's directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Committee is currently comprised of Mr. Torrence, Chairman and Messrs.
Myers and Schweiger. Mr. Torrence became a member of the Compensation Committee
in March 2007 and Chairman of the Compensation Committee in August 2007. Mr.
Bradt, formerly the CEO of the Company until 1987, served on the Compensation
Committee until his retirement from the Board of Directors in August 2007. No
Named Executive of the Company serves as a member of the Board of Directors or
Committee of any entity that has one or more Named Executives serving as a
member of the Company's Board of Directors or Committee.
83
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
and Related Stockholder Matters
-------------------------------
The following table sets forth certain information as of March 20, 2008
(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 executives of the Company
named in the Summary Compensation Table, and (iv) by all current executives and
directors of the Company as a group. Unless otherwise stated, the beneficial
owners exercise sole voting and/or investment power over their shares.
Amount and Right to Acquire
Nature of Under Options
Name and Address of Beneficial Exercisable Percent of
Title of Class Beneficial Owner (1) Ownership Within 60 Days Class (2)
----------------------- ------------------------------ ------------------------ ------------------- -------------
Common Stock, Emerald Advisers, Inc. (3)
Par Value 1703 Oregon Pike
$1.00 Per Share Suite 101
Lancaster, PA 17601 217,590 - 7.9%
Common Stock, L. Jack Bradt (4)
Par Value 580 Riverwoods Way
$1.00 Per Share Bethlehem, PA 18018 170,324 - 6.2%
Common Stock, Robert J. Blyskal - - *
Par Value
$1.00 Per Share
Common Stock, Theodore W. Myers (5) 26,200 - *
Par Value
$1.00 Per Share
Common Stock, Anthony W. Schweiger 11,319 - *
Par Value
$1.00 Per Share
Common Stock, Samuel L. Torrence 1,000 - *
Par Value
$1.00 Per Share
Common Stock, Leonard S. Yurkovic 19,000 - *
Par Value
$1.00 Per Share
Common Stock, Ronald J. Semanick (6) 17,370 1,250 *
Par Value
$1.00 Per Share
Common Stock, William J. Casey (6) 2,500 1,250 *
Par Value
$1.00 Per Share
Common Stock, John F. Lehr (6) 2,500 1,250 *
Par Value
$1.00 Per Share
Common Stock, All current directors and
Par Value executive officers as a group
$1.00 Per Share (8 persons) (5) (6) 79,889 3,750 3.0%
--------------------------------------
*Represents less than 1%.
84
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
and Related Stockholder Matters (Continued)
-------------------------------
(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 20, 2008 (2,740,392) 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 28, 2008.
(3) This information is presented in reliance on information disclosed in a
Schedule 13G/A filed with the Securities and Exchange Commission on
February 1, 2008.
(4) Includes 51,262 shares held by members of Mr. Bradt's immediate family. Mr.
Bradt disclaims beneficial ownership of such shares. Mr. Bradt has 161,000
shares pledged as security for loans. Mr. Bradt retired from the Company's
Board of Directors in August 2007.
(5) Includes 2,800 shares held by members of Mr. Myers' immediate family. Mr.
Myers disclaims beneficial ownership of such shares.
(6) Includes nonvested shares awarded on March 8, 2006 under the Company's 1997
Equity Compensation Plan to Messrs. Semanick (2,500 shares), Casey (2,500
shares), and Lehr (2,500 shares). The nonvested stock grants vest on March
8, 2010, the four-year anniversary of the date of grant.
Equity Compensation Plan Information
------------------------------------
The Company's stock-based compensation program, the 1997 Equity
Compensation Plan ("the 1997 Plan"), expired in July 2007. Currently, 7,500
options are outstanding under the 1997 Plan, and all options have a term of
seven years. No further grants are available under the 1997 Plan.
The following table gives information about equity awards under the
Company's 1997 Plan.
(a) (b) (c)
--------------------- -------------------- ---------------------------
Number of Weighted Number of
Securities to be Average Securities Remaining
Issued Upon Exercise Available for Future
Exercise of Price of Issuance Under
Outstanding Outstanding Equity
Options, Options, Compensation Plans
Warrants Warrants (Excluding Securities
Plan Category and Rights and Rights Reflected in Column (a)
------------------------------ --------------------- -------------------- ---------------------------
Equity compensation
plans approved by
security holders 7,500 $ 10.01 -
Equity compensation
plans not approved by
security holders - - -
--------------------- -------------------- ---------------------------
Total 7,500 $ 10.01 -
===================== ==================== ===========================
85
Item 13. Certain Relationships and Related Transactions and Director
-------- -----------------------------------------------------------
Independence
------------
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, Inc. for
various marketing and business evaluation assignments from 1995 through 2005.
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 year ended December
31, 2005 approximated $44,000. Mr. Hoffner resigned from his positions as
President and CEO and a director of the Company effective March 1, 2007.
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.
With the exception of Mr. Yurkovic, the Company's Acting CEO, each of the
members of the Company's Board of Directors is considered "independent" within
the meaning of the rules of the American Stock Exchange and the Securities and
Exchange Commission.
Item 14. Principal Accounting 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 2007 and 2006. Fees for all services provided
by KPMG for the fiscal years ended December 31, 2007 and 2006 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 $166,800 for 2007 and $129,800 for 2006.
Audit-Related Fees
------------------
KPMG did not provide audit-related services for the Company in 2007 and
2006.
Tax Fees
--------
KPMG's fees for tax services were $64,000 for 2007 and $68,150 for 2006.
The services rendered in 2007 and 2006 were in connection with tax compliance
and tax consultation services related to the Company's annual federal and state
tax returns.
86
Item 14. Principal Accountant Fees and Services (Continued)
-------- --------------------------------------------------
All Other Fees
--------------
No other fees were charged by KPMG to the Company in 2007 and 2006 other
than those referenced above.
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 registered public accountants 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
registered public accountants 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 2007.
87
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, 2007 and 2006
Consolidated Statements of Operations for the years ended December
31, 2007, 2006, and 2005
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2007, 2006, and 2005
Consolidated Statements of Cash Flows for the years ended December
31, 2007, 2006, and 2005
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]).
88
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.4 Executive Employment Agreement with William R. Johnson dated
March 29, 1999* (incorporated by reference to Exhibit 10.10
to Form 10-Q for the quarterly period ended May 30, 1999).
10.5 Employment Agreement with Leon C. Kirschner* (incorporated by
reference to Exhibit 10.11 to Form 8-K, filed on October
15, 1999).
10.6 Line of Credit Loan Agreement entered into September 30, 1999 by
and between SI Handling Systems, Inc., Ermanco Incorporated, and
First Union National Bank (incorporated by reference to Exhibit
10.12 to Form 8-K, filed on October 15, 1999).
10.7 Promissory Note related to the Line of Credit Loan Agreement
entered into September 30, 1999 by and between SI Handling
Systems, Inc., Ermanco Incorporated, and First Union National Bank
(incorporated by reference to Exhibit 10.13 to Form 8-K, filed on
October 15, 1999).
10.8 First Amendment to Term Note and Loan Agreement dated March 30,
2000 (incorporated by reference to Exhibit 10.17 to Form
10-Q, filed on May 15, 2000).
10.9 Registration Rights Agreement (incorporated by reference to
Exhibit 10.1 to Form S-3, filed on July 5, 2000).
10.10 Amended and Restated Executive Employment Agreement with William
R. Johnson dated October 1, 2001* (incorporated by reference to
Exhibit 10.22 to Amendment No. 1 to Annual Report on Form 10-K for
the year ended December 31, 2001).
10.11 Amended and Restated Executive Employment Agreement with Leon C.
Kirschner dated August 28, 2002* (incorporated by reference to
Exhibit 10.23 to Form 10-Q, filed on November 14, 2002).
10.12 Sixth Amendment to Line of Credit Note and Loan Agreement dated
August 9, 2002 (incorporated by reference to Exhibit
10.24 to Form 10-Q, filed on November 14, 2002).
10.13 Sixth Amendment to Promissory Note and Loan Agreement (Term Loan)
dated November 13, 2002 (incorporated by reference to
Exhibit 10.25 to Annual Report on Form 10-K for the year ended
December 31, 2002).
10.14 Seventh Amendment to Line of Credit Note and Loan Agreement
(Line of Credit) dated November 13, 2002 (incorporated by
reference to Exhibit 10.26 to Annual Report on Form 10-K for the
year ended December 31, 2002).
10.15 Agreement of Sale between J. G. Petrucci Company, Inc. or its
Assigns and Paragon Technologies, Inc. dated November 8,
2002 (incorporated by reference to Exhibit 10.27 to Form 10-Q,
filed on May 14, 2003).
10.16 Amendment I to Agreement of Sale between J. G. Petrucci Company,
Inc. and Paragon Technologies, Inc. dated January 2,
2003 (incorporated by reference to Exhibit 10.28 to Form 10-Q,
filed on May 14, 2003).
89
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.17 Amendment II to Agreement of Sale between Triple Net Investments
XIII, L.P. and Paragon Technologies, Inc. dated January
13, 2003 (incorporated by reference to Exhibit 10.29 to Form 10-Q,
filed on May 14, 2003).
10.18 Amendment III to Agreement of Sale between Triple Net Investments,
XIII, L.P. and Paragon Technologies, Inc. dated January 17, 2003
(incorporated by reference to Exhibit 10.30 to Form 10-Q, filed
on May 14, 2003).
10.19 Lease Agreement between Triple Net Investments XIII, L.P. and
Paragon Technologies, Inc. dated February 21, 2003
(incorporated by reference to Exhibit 10.31 to Form 10-Q, filed on
May 14, 2003).
10.20 Eighth Amendment to Line of Credit Note and Loan Agreement (Line
of Credit) dated June 5, 2003 (incorporated by reference to
Exhibit 10.32 to Form 10-Q, filed on August 14, 2003).
10.21 Loan Agreement (Term Loan A and Term Loan B) entered into June 5,
2003 by and between Paragon Technologies, Inc., Ermanco
Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.33 to Form 10-Q, filed on
August 14, 2003).
10.22 Promissory Note related to Term Loan A entered into June 5, 2003
by and between Paragon Technologies, Inc., Ermanco Incorporated,
and Wachovia Bank, National Association (incorporated by reference
to Exhibit 10.34 to Form 10-Q, filed on August 14, 2003).
10.23 Promissory Note related to Term Loan B entered into June 5, 2003
by and between Paragon Technologies, Inc., Ermanco Incorporated,
and Wachovia Bank, National Association (incorporated by reference
to Exhibit 10.35 to Form 10-Q, filed on August 14, 2003).
10.24 Security Agreement related to Term Loan A dated June 5, 2003 by
and between Paragon Technologies, Inc. and Wachovia Bank, National
Association (incorporated by reference to Exhibit 10.36 to Form
10-Q, filed on August 14, 2003).
10.25 First Amendment to Term Loan A and B Agreement dated August 4,
2003 by and between Paragon Technologies, Inc. and Wachovia Bank,
National Association (incorporated by reference to Exhibit 10.37
to Form 10-Q, filed on November 13, 2003).
10.26 Ninth Amendment to Line of Credit Note and Loan Agreement dated
August 4, 2003 by and between Paragon Technologies, Inc. and
Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.38 to Form 10-Q, filed on November 13, 2003).
10.27 Amendment to Lease Agreement by and between Spring Lake Properties
Holdings, L.C. and Ermanco Incorporated dated April 1, 2004
(incorporated by reference to Exhibit 10.27 to Form 10-Q, filed on
August 12, 2004).
90
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
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).
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).
10.36 Loan Agreement (Line of Credit) entered into June 20, 2006 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 10, 2006).
10.37 Promissory Note related to the Line of Credit entered into June
20, 2006 by and between Paragon Technologies, Inc. and Wachovia
Bank, National Association (incorporated by reference to Exhibit
10.37 to Form 10-Q, filed on August 10, 2006).
10.38 Security Agreement related to the Line of Credit entered into June
20, 2006 by and between Paragon Technologies, Inc. and Wachovia
Bank, National Association (incorporated by reference to Exhibit
10.38 to Form 10-Q, filed on August 10, 2006).
91
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.39 Separation and Mutual Release Agreement dated February 20, 2007,
by and between Paragon Technologies, Inc. and Joel Hoffner
(incorporated by reference to Exhibit 10.39 to Form 8-K, filed on
February 21, 2007).
10.40 Consulting Agreement dated February 20, 2007, by and between
Paragon Technologies, Inc. and Joel Hoffner (incorporated by
reference to Exhibit 10.40 to Form 8-K, filed on February 21,
2007).
10.41 Renewal Agreement for the Promissory Note related to the Line of
Credit entered into June 20, 2007 by and between Paragon
Technologies, Inc. and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.41 to Form 10-Q, filed on
August 10, 2007).
10.42 Amendment to Lease Agreement between Triple Net Investments XIII,
L.P. and Paragon Technologies, Inc. dated November 14,
2007 (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 Leonard S. Yurkovic,
Acting CEO (filed herewith).
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 signed by Ronald J. Semanick, Chief
Financial Officer and Vice President - Finance and Treasurer
(filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
signed by Leonard S. Yurkovic, Acting 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 10.42, 14, 21, 23.1, 31.1, 31.2, 32.1, and 32.2 are filed with
this report.
(c) Not applicable.
92
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 28, 2008 By /s/ Theodore W. Myers
--------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 28, 2008 By /s/ Leonard S. Yurkovic
--------------------------------------
Leonard S. Yurkovic
Acting Chief Executive Officer
93
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 28, 2008 /s/ Theodore W. Myers
----------------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 28, 2008 /s/ Leonard S. Yurkovic
----------------------------------------------
Leonard S. Yurkovic
Acting Chief Executive Officer, Director
Dated: March 28, 2008 /s/ Ronald J. Semanick
----------------------------------------------
Ronald J. Semanick
Vice President-Finance, Chief Financial
Officer, Treasurer, and Secretary
(Principal Accounting and Financial Officer)
Dated: March 28, 2008 /s/ Robert J. Blyskal
----------------------------------------------
Robert J. Blyskal
Director
Dated: March 28, 2008 /s/ Anthony W. Schweiger
----------------------------------------------
Anthony W. Schweiger
Director
Dated: March 28, 2008 /s/ Samuel L. Torrence
----------------------------------------------
Samuel L. Torrence
Director
94
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).
95
EXHIBIT INDEX (Continued)
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10.11 Amended and Restated Executive Employment Agreement with Leon C.
Kirschner dated August 28, 2002* (incorporated by reference
to Exhibit 10.23 to Form 10-Q, filed on November 14, 2002).
10.12 Sixth Amendment to Line of Credit Note and Loan Agreement dated August
9, 2002 (incorporated by reference to Exhibit 10.24 to Form 10-Q,
filed on November 14, 2002).
10.13 Sixth Amendment to Promissory Note and Loan Agreement (Term Loan)
dated November 13, 2002 (incorporated by reference to Exhibit 10.25
to Annual Report on Form 10-K for the year ended December 31, 2002).
10.14 Seventh Amendment to Line of Credit Note and Loan Agreement
(Line of Credit) dated November 13, 2002 (incorporated by
reference to Exhibit 10.26 to Annual Report on Form 10-K for the year
ended December 31, 2002).
10.15 Agreement of Sale between J. G. Petrucci Company, Inc. or its Assigns
and Paragon Technologies, Inc. dated November 8, 2002
(incorporated by reference to Exhibit 10.27 to Form 10-Q, filed on
May 14, 2003).
10.16 Amendment I to Agreement of Sale between J. G. Petrucci Company, Inc.
and Paragon Technologies, Inc. dated January 2, 2003
(incorporated by reference to Exhibit 10.28 to Form 10-Q, filed on
May 14, 2003).
10.17 Amendment II to Agreement of Sale between Triple Net Investments XIII,
L.P. and Paragon Technologies, Inc. dated January 13, 2003
(incorporated by reference to Exhibit 10.29 to Form 10-Q, filed on
May 14, 2003).
10.18 Amendment III to Agreement of Sale between Triple Net Investments,
XIII, L.P. and Paragon Technologies, Inc. dated January 17, 2003
(incorporated by reference to Exhibit 10.30 to Form 10-Q, filed on
May 14, 2003).
10.19 Lease Agreement between Triple Net Investments XIII, L.P. and Paragon
Technologies, Inc. dated February 21, 2003 (incorporated by reference
to Exhibit 10.31 to Form 10-Q, filed on May 14, 2003).
10.20 Eighth Amendment to Line of Credit Note and Loan Agreement (Line of
Credit) dated June 5, 2003 (incorporated by reference to
Exhibit 10.32 to Form 10-Q, filed on August 14, 2003).
10.21 Loan Agreement (Term Loan A and Term Loan B) entered into June 5, 2003
by and between Paragon Technologies, Inc., Ermanco Incorporated, and
Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.33 to Form 10-Q, filed on August 14, 2003).
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).
96
EXHIBIT INDEX (Continued)
-------------
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).
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).
97
EXHIBIT INDEX (Continued)
-------------
10.36 Loan Agreement (Line of Credit) entered into June 20, 2006 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 10, 2006).
10.37 Promissory Note related to the Line of Credit entered into June 20,
2006 by and between Paragon Technologies, Inc. and Wachovia Bank,
National Association (incorporated by reference to Exhibit 10.37 to
Form 10-Q, filed on August 10, 2006).
10.38 Security Agreement related to the Line of Credit entered into June 20,
2006 by and between Paragon Technologies, Inc. and Wachovia Bank,
National Association (incorporated by reference to Exhibit 10.38 to
Form 10-Q, filed on August 10, 2006).
10.39 Separation and Mutual Release Agreement dated February 20, 2007, by and
between Paragon Technologies, Inc. and Joel Hoffner (incorporated by
reference to Exhibit 10.39 to Form 8-K, filed on February 21, 2007).
10.40 Consulting Agreement dated February 20, 2007, by and between Paragon
Technologies, Inc. and Joel Hoffner (incorporated by reference to
Exhibit 10.40 to Form 8-K, filed on February 21, 2007).
10.41 Renewal Agreement for the Promissory Note related to the Line of Credit
entered into June 20, 2007 by and between Paragon Technologies, Inc.
and Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.41 to Form 10-Q, filed on August 10, 2007).
10.42 Amendment to Lease Agreement between Triple Net Investments XIII, L.P.
and Paragon Technologies, Inc. dated November 14, 2007 (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 Leonard S. Yurkovic, Acting CEO
(filed herewith).
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 signed by Ronald J. Semanick, Chief Financial Officer and Vice
President - Finance and Treasurer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
signed by Leonard S. Yurkovic, Acting 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.
98