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, 2008
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 NYSE Amex
(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
definitions 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 | |
Smaller Reporting Company |X|
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 NYSE Amex, formerly known as the
American Stock Exchange) on June 30, 2008, the last day of the Registrant's
second fiscal quarter, was approximately $15.3 million. For purposes of
determining this amount only, Registrant has defined affiliates as including (a)
the executive officers named in Part III of this 10-K report, (b) all directors
of Registrant, and (c) each stockholder that has informed Registrant by June 30,
2008 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, 2009 was 1,668,677.
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...................34
Item 8. Financial Statements and Supplementary Data..................................35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................................59
Item 9A. Controls and Procedures......................................................59
Item 9B. Other Information............................................................60
PART III.......................................................................................61
Item 10. Directors and Executive Officers of the Registrant...........................61
Item 11. Executive Compensation.......................................................65
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...............................80
Item 13. Certain Relationships and Related Transactions
and Director Independence...............................................82
Item 14. Principal Accounting Fees and Services.......................................82
PART IV........................................................................................84
Item 15. Exhibits and Financial Statement Schedules...................................84
Signatures...................................................................89
Exhibit Index................................................................91
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 (R) horizontal
transportation technologies.
The Company's automated material handling systems are marketed, designed,
sold, installed, and serviced by its own staff or subcontractors as labor saving
devices to improve productivity, quality, and reduce costs. The Company's
integrated material handling solutions involve both standard and specially
designed components and include integration of non-proprietary automated
handling technologies to provide turnkey solutions for its customers' unique
material handling needs. The Company's engineering staff develops and designs
computer control programs required for the efficient operation of the systems
and for optimizing manufacturing, assembly, and fulfillment operations.
The Company continues to review opportunities with the goal of maximizing
resources, increasing stockholder value, and considering strategies and
transactions intended to improve liquidity. At this time, the Company believes
that an increase in stockholder value will be best obtained through increases in
the Company's internal technology base, 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 of these strategic options.
------------------------------
4
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, 2008, 2007, and 2006 are as follows (in thousands):
For the year ended December 31, 2008:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 13,617 81.5%
Aftermarket sales............................. 3,083 18.5%
------------------- ------------------
Total sales................................... $ 16,700 100.0%
=================== ==================
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%
=================== ==================
The Company's products are sold worldwide through its own sales personnel.
Domestic and international sales during the years ended December 31, 2008, 2007,
and 2006 are as follows (in thousands):
For the year ended December 31, 2008:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 11,987 71.8%
International sales........................... 4,713 28.2%
------------------- ------------------
Total sales................................... $ 16,700 100.0%
=================== ==================
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%
=================== ==================
5
Sales from external customers for each of the Company's products during the
years ended December 31, 2008, 2007, and 2006 are as follows (in thousands):
December 31, 2008 December 31, 2007 December 31, 2006
--------------------------- --------------------------- ---------------------------
% of Total % of Total % of Total
Sales Sales Sales Sales Sales Sales
------------ ------------ ------------ ------------ ------------ ------------
LO-TOW(R) sales............... $ 8,501 50.9% 6,367 29.7%
6,458 36.3%
CARTRAC(R) sales............... - -% 119 .5% 1,975 11.1%
DISPEN-SI-MATIC(R),
SINTHESIS(R), and
related order fulfillment
sales....................... 5,116 30.6% 11,216 52.3% 6,092 34.2%
Other sales.................... - -% 35 .2% 51 .3%
Aftermarket sales.............. 3,083 18.5% 3,711 17.3% 3,212 18.1%
-------------- --------------------------- -------------- ----------------------------
Total sales................. $ 16,700 100.0% 21,448 100.0% 17,788 100.0%
============ ============ ============ ============ ============ ============
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, 2008, 2007, and 2006 were $186,000, $317,000, and $732,000,
respectively.
In the year ended December 31, 2008, two customers accounted for over 10%
of sales, and they are listed as follows: Vistakon, a division of Johnson &
Johnson Vision Care - $3,321,000 or 19.9% and Cummins Engine - $3,099,000 or
18.6% of total sales. 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% of total sales. 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. No other customer accounted
for over 10% of sales.
The Company's backlog of orders at December 31, 2008 and December 31, 2007
were $4,946,000 and $7,934,000, respectively.
The Company's business is largely dependent upon a limited number of large
contracts with a limited number of customers. This dependence can cause
unexpected fluctuations in sales volume. Various external factors affect the
customers' decision-making process on expanding or upgrading their current
production or distribution sites. The customers' timing and placement of new
orders is often affected by factors such as the current economy, current
interest rates, and future expectations. The Company believes that its business
is not subject to seasonality, although the rate of new orders can vary
substantially from month to month. Since the Company recognizes sales on a
percentage of completion basis for its systems contracts, fluctuations in the
Company's sales and earnings occur with increases or decreases in major
installations. The Company expects to fill, within its 2009 calendar year, all
of the December 31, 2008 backlog of orders indicated above.
6
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 $8,501,000, $6,367,000, and $6,458,000 for the years
ended December 31, 2008, 2007, and 2006, 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 $0, $119,000, and $1,975,000 for the years ended
December 31, 2008, 2007, and 2006, respectively.
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.
7
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 $5,116,000, $11,216,000, and $6,092,000 for the years ended December
31, 2008, 2007, and 2006, 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 $3,083,000, $3,711,000, and $3,212,000 for the
years ended December 31, 2008, 2007, and 2006, respectively.
------------------------------
Product Warranty
----------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements and
the type of system sold, with a typical warranty period of one year.
Sales and Marketing
-------------------
The Company goes to market with a multiple brand, multiple channel strategy
under the SI Systems 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.
8
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.
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.
9
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 four patents, all of which have been issued in the United
States, with lives that expire from May 2012 through March 2023. Significant
design features of the LO-TOW(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 $114,000,
$166,000, and $283,000 for the years ended December 31, 2008, 2007, and 2006,
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.
Development programs in the year ended December 31, 2008 were primarily
aimed at improvements to the Company's Order Fulfillment systems technologies.
Order Fulfillment development efforts during the year ended December 31, 2008
included voice-directed replenishment and DISPEN-SI-MATIC(R) software
enhancements aimed at promoting workplace efficiencies for the Company's
customers.
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.
Employees
---------
As of December 31, 2008, the Company employed three executive officers and
46 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.
In February 2009, as part of a cost-reduction initiative aimed at profit
improvement, the Company reduced its workforce by five employees or
approximately 10% of its total workforce due to the economic slowdown.
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, 2008, two
customers accounted for over 10% of sales, and they are listed as follows:
Vistakon, a division of Johnson & Johnson Vision Care - $3,321,000 or 19.9% and
Cummins Engine - $3,099,000 or 18.6% of total sales. 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% of total sales. 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. No other customer
accounted for over 10% of sales.
The Company received $186,000 or 1.1% of its total sales from sales to
government agencies in the fiscal year ended December 31, 2008. 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 government
agencies. Each of the Company's contracts with federal agencies include various
federal government 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, 2008 was
$4,946,000, of which $21,000 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 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. Additionally, due to the uncertainty of the
Company's performance and the costs associated with meeting the continued
listing requirements of the NYSE Amex (formerly known as the American Stock
Exchange), risks associated with the Company include a possible voluntary or
involuntary delisting of the Company. 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 25,000 square
feet of office space for five years. The leasing agreement required fixed
monthly rental payments of $19,345 during the fifth year of the lease, which ran
from February 21, 2007 through February 20, 2008. 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, 2008.
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 NYSE Amex under the symbol "PTG."
The high and low sales prices for the years ended December 31, 2008 and 2007 are
as follows:
For the Year Ended For the Year Ended
December 31, 2008 December 31, 2007
---------------------------- ----------------------------
High Low High Low
------------ ------------ ------------ ------------
First Quarter.................. 7.45 4.90 6.43 5.47
Second Quarter................. 6.80 5.20 6.79 5.50
Third Quarter.................. 6.30 4.42 7.94 5.94
Fourth Quarter................. 4.84 2.41 8.84 6.35
The Company did not pay cash dividends during the years ended December 31,
2008, 2007, and 2006, 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, 2008, as shown by the records of the Company's transfer agent was
256. This figure does not include individual participants in security position
listings.
The closing market price of the Company's common stock on March 20, 2009
was $2.38.
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, 2008:
-----------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------
10/01/08 - 10/31/08 271,504 $ 4.76 271,504 $ 1,292,823 $ 1,926,114
11/01/08 - 11/30/08 82,138 $ 3.42 82,138 $ 281,073 $ 1,645,041
12/01/08 - 12/31/08 114,440 $ 2.87 114,440 $ 328,373 $ 3,316,668
-----------------------------------------------------------------
468,082 $ 4.06 468,082 $ 1,902,269
-----------------------------------------------------------------------------------------------------------
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, 2006, and 2007 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 $15,000,000.
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 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.
On August 27, 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 $17,000,000 of the Company's common stock to up to
$20,000,000.
On December 12, 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 $20,000,000 of the Company's common stock to up to
$22,000,000.
During the three months ended December 31, 2008, the Company repurchased
468,082 shares of common stock at a weighted average cost, including brokerage
commissions, of $4.06 per share. During the year ended December 31, 2008, the
Company repurchased 980,463 shares of common stock at a weighted average cost,
including brokerage commissions, of $4.66 per share. Cash expenditures for the
stock repurchases during the three and twelve months ended December 31, 2008
were $1,902,269 and $4,567,189, respectively. From the inception of the
Company's stock repurchase program on August 12, 2004 through December 31, 2008,
the Company repurchased 2,618,181 shares of common stock at a weighted average
cost, including brokerage commissions, of $7.14 per share. Cash expenditures for
the stock repurchases since the inception of the program were $18,683,332. As of
December 31, 2008, $3,316,668 remained available for repurchases under the stock
repurchase program.
Based on market conditions and other factors, additional repurchases may be
made from time to time, in compliance with SEC regulations, in the open market
or through privately negotiated transactions at the discretion of the Company.
There is no expiration date with regards to the stock repurchase program. 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, 2008, December
31, 2007, December 31, 2006, December 31, 2005, and December 31, 2004 with
comparison to the cumulative total return on the NYSE Amex Composite Index, and
a Peer Group of Construction and Related Machinery Companies. This comparison
assumes $100 was invested on December 31, 2003 in the Company's common stock and
in each of the foregoing indexes and assumes reinvestment of dividends.
[STOCK PERFORMANCE CHART OMITTED]
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
-------- -------- -------- -------- -------- --------
Paragon Technologies, Inc. 100 102 103 58 71 29
(1) Peer Group 100 129 279 299 402 161
NYSE Amex Composite Index 100 124 155 184 218 133
--------------------------------------------
(1) The self-constructed Peer Group of Construction and Related Machinery
Companies includes: Bolt Technology Corporation, Columbus McKinnon
Corporation, Lufkin Industries, 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. The Company included the
same members of the Peer Group in constructing the stock performance chart
as it did in the prior year, with the exception of A.S.V., Inc., which was
acquired by Terex Corporation in March 2008, Quipp, Inc., which was
acquired by Illinois Tool Works Inc. in June 2008, and Industrial Rubber
Products, Inc., which stopped trading in September 2008.
------------------------------
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 financial information
for each of the years in the five-year period ended December 31, 2008. The
selected financial data presented below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and 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
---------------------------------------------------- -------------
12/31/08 12/31/07 12/31/06 12/31/05 12/31/04
------------ ------------- ------------ ------------ -------------
Net sales..................... $ 16,700 21,448 17,788 16,676 11,702
Income (loss) from
continuing operations
before income taxes......... $ (234) (92) 449 301 (271)
Income tax expense
(benefit)................... 453 (433) (19) 93 (106)
------------ ------------- ------------ ------------ -------------
Income (loss) from
continuing operations....... (687) 341 468 208 (165)
Income from
discontinued operations,
net of income taxes......... - - - 990 1,638
------------ ------------- ------------ ------------ -------------
Net income (loss)............. $ (687) 341 468 1,198 1,473
============ ============= ============ ============ =============
Basic earnings (loss)
per share:
Income (loss) from
continuing operations..... $ (.28) .12 .14 .05 (.04)
Income from
discontinued
operations................ - - - .24 .38
------------ ------------- ------------ ------------ -------------
Net income (loss)............. $ (.28) .12 .14 .29 .34
============ ============= ============ ============ =============
Diluted earnings (loss)
per share:
Income (loss) from
continuing operations..... $ (.28) .12 .14 .05 (.04)
Income from
discontinued
operations................ - - - .24 .38
------------ ------------- ------------ ------------ -------------
Net income (loss)............. $ (.28) .12 .14 .29 .34
============ ============= ============ ============ =============
Total assets (1).............. $ 10,618 18,316 16,752 22,596 33,424
Long-term liabilities......... $ 257 261 28 193 2,761
Cash dividends per
share....................... $ - - - - -
On August 5, 2005, the Company completed the sale of substantially all of
the assets and liabilities of Ermanco.
22
Item 6. Selected Financial Data (Continued)
------- -----------------------------------
(1) During the year ended December 31, 2008, the Company repurchased 980,463
shares of common stock at a weighted average cost, including brokerage
commissions, of $4.66 per share. Cash expenditures for the stock
repurchases during the year ended December 31, 2008 were $4,567,189. 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 11 of the Notes to 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 financial
statements and related notes thereto included in this Annual Report on Form 10-K
for the year ended December 31, 2008. 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.
------------------------------
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, 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 the backlog of orders 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 of orders 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 of orders, orders, sales, and
Capacity Utilization for the years ended December 31, 2008, 2007, 2006, 2005,
2004, and 2003:
(Dollars in Thousands) 2008 2007 2006 2005 2004 2003
---------- ----------- ---------- ----------- ---------- -----------
Backlog of orders --
Beginning................. $ 7,934 5,932 6,918 5,514 4,052 4,834
Add: orders............... 13,712 23,450 16,802 18,080 13,164 11,301
Less: sales............... 16,700 21,448 17,788 16,676 11,702 12,083
---------- ----------- ---------- ----------- ---------- -----------
Backlog of orders --
Ending.................... $ 4,946 7,934 5,932 6,918 5,514 4,052
========== =========== ========== =========== ========== ===========
Capacity Utilization......... 78.2% 81.0% 80.9% 80.2% 78.0% 76.0%
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, 2008, 2007, 2006, 2005, 2004, and 2003:
(Dollars in Thousands) 2008 2007 2006 2005 2004 2003
---------- ----------- ---------- ----------- ---------- -----------
Current assets............... $ 10,331 17,842 16,370 22,134 14,249 14,720
---------- ----------- ---------- ----------- ---------- -----------
Current liabilities.......... $ 3,356 5,802 4,296 5,337 7,355 9,583
Current ratio................ 3.08 3.08 3.81 4.15 1.94 1.54
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 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.
24
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Key Performance Metrics Relevant to the Company (Continued)
-----------------------------------------------
Critical Accounting Policies and Estimates (Continued)
------------------------------------------
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.
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, 2008, 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.
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. A detailed review of products still in the
warranty period is performed each quarter. 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.
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.
--------------------------------
25
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2008 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2007
-----------------
Earnings Summary
----------------
The Company had a net loss of $687,000 (or $0.28 basic loss per share) for
the year ended December 31, 2008, compared to net income of $341,000 (or $0.12
basic earnings per share) for the year ended December 31, 2007. The decrease in
net income was primarily due to:
o a decrease during 2008 in sales and gross profit of $4,748,000 and
$313,000, respectively, as described below;
o a decrease of $107,000 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 the reduced level of interest rates earned on
funds available for investment;
o a decrease of $23,000 in other income, net attributable to a decrease
in royalty income from a license agreement related to material handling
equipment sales; and
o an increase in income tax expense of $886,000 as described below.
Partially offsetting the above decrease in net income was:
o a decrease in selling, general and administrative expenses of $249,000
as described below; and
o a decrease in product development costs of $52,000 as described below.
Net Sales and Gross Profit on Sales
-----------------------------------
2008 2007
----------------- ------------------
Net sales.............................................. $ 16,700,000 21,448,000
Cost of sales.......................................... 11,793,000 16,228,000
----------------- ------------------
Gross profit on sales.................................. $ 4,907,000 5,220,000
================= ==================
Gross profit as a percentage of sales.................. 29.4% 24.3%
================= ==================
The decrease in sales was associated with a smaller amount of orders
received during 2008 when compared to the amount of orders received during 2007
due to the economic slowdown.
Gross profit, as a percentage of sales, for the year ended December 31,
2008, when compared to the year ended December 31, 2007, was favorably impacted
by 9.8% due to product mix, and unfavorably impacted by 4.7% due to the reduced
absorption of overhead costs.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $5,366,000 were lower
by $249,000 for the year ended December 31, 2008 than for the for the year ended
December 31, 2007. The favorable variance in selling, general and administrative
expenses was primarily attributable to a decrease of $523,000 of expenditures
relating to sales efforts in response to quoting and sales activities, and a
decrease of $181,000 in professional fees, consulting, and insurance expenses.
Partially offsetting the aforementioned favorable variance was an increase of
$102,000 in marketing expenses primarily associated with product promotion,
$100,000 of provision related to the allowance for doubtful accounts associated
with a possible uncollectible receivable, $123,000 of severance costs pertaining
to the reduction of employees due to the economic slowdown, and a $132,000
decrease in the recognition of deferred profit on the sale of the Company's
Easton, Pennsylvania facility as a result of the expiration of the amortization
period in February 2008.
26
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2008 Compared to the Year Ended
-------------------------------------------------------------------------------
December 31, 2007 (Continued)
-----------------
Product Development Costs
-------------------------
Product development costs, including patent expense, of $114,000 were
lower by $52,000 for the year ended December 31, 2008 than for the year ended
December 31, 2007. Development programs in the years ended December 31, 2008 and
2007 were primarily aimed at improvements to the Company's Order Fulfillment
systems technologies. Order Fulfillment development efforts during the years
ended December 31, 2008 and 2007 included voice-directed replenishment and
DISPEN-SI-MATIC(R) software enhancements aimed at promoting workplace
efficiencies for the Company's customers.
Interest Income
---------------
Interest income of $341,000 was lower by $107,000 for the year ended
December 31, 2008 than for the year ended December 31, 2007. The decrease in
interest income was 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 the reduced level of interest
rates earned on funds available for investment.
Other Expense (Income), Net
---------------------------
The unfavorable variance of $23,000 in other expense (income), net for
the year ended December 31, 2008 as compared to the year ended December 31, 2007
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 income tax expense of $453,000 during the year
ended December 31, 2008 compared to an income tax benefit of $433,000 during the
year ended December 31, 2007. Income tax expense for the year ended December 31,
2008 was higher than statutory federal and state tax rates primarily due to the
establishment of a full valuation allowance offsetting net deferred tax assets.
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.
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
-----------------
Earnings Summary
----------------
The Company had 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.
28
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 Expense (Income), Net
---------------------------
The unfavorable variance of $140,000 in other expense (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. 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.
--------------------------------
29
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, 2008 were $5,615,000, representing 52.9% of total assets, compared
to $12,304,000, or 67.2% of total assets, at December 31, 2007. The decrease was
primarily due to the repurchase and retirement of common stock totaling
$4,567,000, purchases of capital equipment totaling $103,000, and cash used by
operating activities totaling $2,019,000.
Cash used by operating activities totaling $2,019,000 during the year ended
December 31, 2008 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 $2,259,000 in accordance with
contractual requirements; and
o a decrease in accounts payable in the amount of $464,000 associated with
payments for purchases of goods and services rendered in accordance with
job completion requirements.
Partially offset by the following factors:
o a decrease in costs and estimated earnings in excess of billings in the
amount of $428,000 in accordance with contractual requirements;
o an increase in accrued product warranties in the amount of $161,000
primarily associated with the establishment of warranties for contracts
entering the warranty period; and
o a decrease in inventories in the amount of $154,000 utilized in
accordance with job completion requirements.
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.
30
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Liquidity and Capital Resources (Continued)
-------------------------------
The Company repurchased $4,567,000 of its common stock in 2008 compared
with $567,000 in 2007. On December 12, 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 $20,000,000 of the Company's
common stock to up to $22,000,000. As of December 31, 2008, the Company has
approximately $3,316,668 authorized by the Board of Directors to use for future
stock repurchases.
The Company's line of credit facility expired on September 30, 2008. Prior
to expiration, the Company had a line of credit facility which could not exceed
$5,000,000 and was to be used primarily for working capital purposes. Interest
on the line of credit facility was at the LIBOR Market Index Rate plus 1.4%. As
of its September 30, 2008 expiration date, the Company did not have any
borrowings under the line of credit facility.
The line of credit facility contained various non-financial covenants and
was secured by all of the Company's accounts receivables and inventory. The
Company was in compliance with all covenants prior to the line of credit
facility's September 30, 2008 expiration date.
On February 19, 2009, the Company established a $5,000,000 line of credit
facility with its principal bank to be used primarily for working capital
purposes. Interest on the line of credit facility is at the LIBOR Market Index
Rate plus 1.25%. The line of credit facility contains various non-financial
covenants and is secured by all of the Company's accounts receivable and
inventory. The line of credit facility expires on November 30, 2009.
The Company anticipates that its financial resources, consisting of cash
and cash equivalents, 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 continues 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 increases in
the Company's internal technology base, 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 of these strategic options.
--------------------------------
Contractual Obligations
-----------------------
The Company leases 25,000 square feet in Easton, Pennsylvania for use as
its principal office. The leasing agreement, as amended, requires fixed monthly
rental payments of $18,000. The terms of the lease also require the payment of a
proportionate share of the facility's operating expenses. The leasing agreement
is secured with a $200,000 letter of credit. The lease expires on February 20,
2013.
31
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Contractual Obligations (Continued)
-----------------------
During the third quarter of 2008, the Company issued a $638,000 letter of
credit in the ordinary course of business to secure cash received from a
customer in connection with the sale of an automated material handling system.
The expiration date of the letter of credit is April 15, 2009.
Future contractual obligations and commercial commitments at December 31,
2008 as noted above are as follows:
Payments Due by Period
------------------------------------------------------------------------------------------
Total 2009 2010 2011 2012 2013 After 2013
------------------------------------------------------------------------------------------
Contractual obligations:
Operating leases........ $ 900,000 216,000 216,000 216,000 216,000 36,000 -
------------------------------------------------------------------------------------------
Total................. $ 900,000 216,000 216,000 216,000 216,000 36,000 -
==========================================================================================
Amount of Commitment Expiration Per Period
------------------------------------------------------------------------
Total Amounts
Committed 2009 2010 2011 2012 2013 After 2013
------------------------------------------------------------------------------------------
Other commercial
commitments:
Letters of credit......... $ 838,000 838,000 - - - - -
As of December 31, 2008, the Company has unrecognized tax benefits of
$257,000. The timing of cash settlement cannot be reasonably estimated.
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, 2008, 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 8 of the Notes to
Financial Statements.
--------------------------------
32
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Recently Issued Accounting Pronouncements
-----------------------------------------
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. SFAS No. 157's fair value
measurement requirements for non-financial assets and liabilities that are not
required or permitted to be measured at fair value on a recurring basis have
been deferred until fiscal years beginning after November 15, 2008. The Company
has certain non-financial assets, such as long-lived assets, that may be
re-measured to fair value on a non-recurring basis. The Company adopted SFAS No.
157 for financial assets and liabilities on January 1, 2008. The adoption of
SFAS No. 157 did not have a material impact on the Company's financial
statements. The Company does not anticipate a material impact on its financial
statements from the adoption of SFAS No. 157 for its non-financial assets and
liabilities.
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. The Company adopted SFAS
No. 159 on January 1, 2008 and elected not to fair value any items under this
statement. The adoption of SFAS No. 159 did not have a material impact 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 will apply the guidance of the statement
to business combinations completed on or after January 1, 2009.
33
Item 7. Management's Discussion And Analysis Of Financial Condition And
------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------
In May 2008, the Financial Accounting Standards Board issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). SFAS
No. 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. This Statement will become
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles. The Company
does not anticipate a material impact on its financial statements from the
adoption of SFAS No. 162.
--------------------------------
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.
34
Item 8. Financial Statements and Supplementary Data
------- -------------------------------------------
I N D E X
o Report of Independent Registered Public Accounting Firm................ 36
o Financial Statements:
Balance Sheets, December 31, 2008 and 2007.......................... 37
Statements of Operations for the years ended
December 31, 2008, 2007, and 2006................................... 39
Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the years ended December 31, 2008,
2007, and 2006...................................................... 40
Statements of Cash Flows for the years ended
December 31, 2008, 2007, and 2006................................... 41
Notes to Financial Statements....................................... 43
o Financial Statement Schedule for the years ended December 31, 2008,
2007, and 2006:
II -- Valuation and Qualifying Accounts............................. 84
o All other schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements or related
notes.
35
[KPMG Logo]
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Paragon Technologies, Inc.:
We have audited the accompanying balance sheets of Paragon Technologies, Inc. as
of December 31, 2008 and 2007, and the related statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2008. In connection with our
audits of the financial statements, we also have audited the financial statement
schedule as listed in Item 15(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paragon Technologies, Inc. as
of December 31, 2008 and 2007, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in note 1 to the financial statements, on January 1, 2007 the
Company adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement
No. 109.
/S/ KPMG LLP
Philadelphia, Pennsylvania
March 30, 2009
36
PARAGON TECHNOLOGIES, INC.
Balance Sheets
December 31, 2008 and 2007
(In Thousands, Except Share Data)
December 31, December 31,
2008 2007
------------------ ------------------
Assets
------
Current assets:
Cash and cash equivalents....................... $ 5,615 12,104
Short-term investments.......................... - 200
------------------ ------------------
Total cash and cash equivalents and
short-term investments...................... 5,615 12,304
------------------ ------------------
Receivables:
Trade (net of allowance for doubtful
accounts of $100 as of
December 31, 2008 and $0 as
of December 31, 2007)....................... 2,627 2,640
Notes and other receivables................... 336 310
------------------ ------------------
Total receivables........................... 2,963 2,950
------------------ ------------------
Costs and estimated earnings in
excess of billings............................ 925 1,353
Inventories:
Raw materials................................. 178 160
Work-in-process............................... 11 224
Finished goods................................ 516 475
------------------ ------------------
Total inventories........................... 705 859
------------------ ------------------
Deferred income tax benefits.................... - 263
Prepaid expenses and other current assets....... 123 113
------------------ ------------------
Total current assets.......................... 10,331 17,842
------------------ ------------------
Property, plant and equipment, at cost:
Machinery and equipment......................... 1,371 1,313
Less: accumulated depreciation................. 1,084 1,000
------------------ ------------------
Net property, plant and equipment............. 287 313
------------------ ------------------
Deferred income tax benefits....................... - 161
------------------ ------------------
Total assets.................................. $ 10,618 18,316
================== ==================
See accompanying notes to financial statements.
(Continued)
37
PARAGON TECHNOLOGIES, INC.
Balance Sheets (Continued)
December 31, 2008 and 2007
(In Thousands, Except Share Data)
December 31, December 31,
2008 2007
------------------ ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable................................ $ 1,262 1,726
Customers' deposits and billings in excess of
costs and estimated earnings.................. 804 3,063
Accrued salaries, wages, and commissions........ 191 173
Accrued product warranties...................... 395 234
Deferred gain on sale-leaseback................. - 28
Unearned support contract revenue............... 392 254
Accrued other liabilities....................... 312 324
----------------- -----------------
Total current liabilities................... 3,356 5,802
----------------- -----------------
Long-term liabilities:
Income taxes payable............................ 257 261
----------------- -----------------
Total long-term liabilities................. 257 261
----------------- -----------------
Commitments and contingencies
(See Notes 7 and 8)
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and outstanding
1,786,229 shares as of December 31, 2008
and 2,769,192 shares as of December 31,
2007.......................................... 1,786 2,769
Additional paid-in capital...................... 3,586 5,537
Retained earnings............................... 1,633 3,947
----------------- -----------------
Total stockholders' equity.................. 7,005 12,253
----------------- -----------------
Total liabilities and stockholders' equity.. $ 10,618 18,316
================= =================
See accompanying notes to financial statements.
38
PARAGON TECHNOLOGIES, INC.
Statements of Operations
For the Years Ended December 31, 2008, 2007, and 2006
(In Thousands, Except Share and Per Share Data)
December 31, December 31, December 31,
2008 2007 2006
---------------- ---------------- ----------------
Net sales................................. $ 16,700 21,448 17,788
Cost of sales............................. 11,793 16,228 12,492
---------------- ---------------- ----------------
Gross profit on sales.................. 4,907 5,220 5,296
---------------- ---------------- ----------------
Selling, general and administrative
expenses................................ 5,366 5,615 5,252
Product development costs................. 114 166 283
Interest expense.......................... 1 1 1
Interest income........................... (341) (448) (527)
Other expense (income), net............... 1 (22) (162)
---------------- ---------------- ----------------
5,141 5,312 4,847
---------------- ---------------- ----------------
Income (loss) before income taxes......... (234) (92) 449
Income tax expense (benefit).............. 453 (433) (19)
---------------- ---------------- ----------------
Net income (loss)......................... $ (687) 341 468
================ ================ ================
Basic earnings (loss) per share........... $ (.28) .12 .14
================ ================ ================
Diluted earnings (loss) per share......... $ (.28) .12 .14
================ ================ ================
Weighted average shares
outstanding............................ 2,466,378 2,791,945 3,307,382
Dilutive effect of stock options.......... - - 4,373
---------------- ---------------- ----------------
Weighted average shares
outstanding assuming dilution.......... 2,466,378 2,791,945 3,311,755
================ ================ ================
See accompanying notes to financial statements.
39
PARAGON TECHNOLOGIES, INC.
Statements of Stockholders' Equity and Comprehensive Income (Loss)
For the Years Ended December 31, 2008, 2007, and 2006
(In Thousands, Except Share Data)
Common Shares Additional Total
-------------------- Paid-In Retained Stockholders' Comprehensive
Number Amount Capital Earnings Equity Income
--------- ------- ---------- -------- ------------ -------------
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
Net loss.................................. - - - (687) (687) (687)
-------------
Comprehensive loss........................ - - - - - (687)
=============
Nonvested stock grants, net of
amortization............................ (2,500) (3) 4 - 1
Acquisition and retirement of common
stock................................... (980,463) (980) (1,960) (1,627) (4,567)
Other incentive plan activity............. - - 5 - 5
--------- ------- ---------- -------- ------------
Balance at December 31, 2008.............. 1,786,229 $ 1,786 3,586 1,633 7,005
========= ======= ========== ======== ============
See accompanying notes to financial statements.
40
PARAGON TECHNOLOGIES, INC.
Statements of Cash Flows
For the Years Ended December 31, 2008, 2007, and 2006
(In Thousands)
December 31, December 31, December 31,
2008 2007 2006
-------------------- ------------------ ------------------
Cash flows from operating activities:
Net income (loss)................................... $ (687) 341 468
Adjustments to reconcile net
income (loss) to net cash provided
(used) by operating activities:
Depreciation of machinery and
equipment................................... 129 109 104
Deferred income tax expense................... 417 27 172
Provision for doubtful accounts............... 100 - -
Amortization of deferred gain on
sale-leaseback.............................. (28) (165) (165)
Stock-based compensation...................... 6 14 37
Change in operating assets and
liabilities:
Receivables.............................. (113) 35 110
Costs and estimated earnings
in excess of billings.................. 428 (909) 172
Inventories.............................. 154 (390) (125)
Prepaid expenses and other
current assets......................... (10) (1) 217
Other assets............................. - 10 -
Accounts payable......................... (464) 549 (214)
Customers' deposits and
billings in excess of costs
and estimated earnings................. (2,259) 1,669 (650)
Accrued salaries, wages,
and commissions........................ 18 41 30
Income taxes payable..................... 3 (310) (109)
Accrued product warranties............... 161 42 3
Unearned support contract revenue........ 138 (16) 31
Accrued other liabilities................ (12) (101) (132)
-------------------- ------------------ ------------------
Net cash provided (used) by
operating activities............................. (2,019) 945 (51)
-------------------- ------------------ ------------------
(Continued)
41
PARAGON TECHNOLOGIES, INC.
Statements of Cash Flows (Continued)
For the Years Ended December 31, 2008, 2007, and 2006
(In Thousands)
December 31, December 31, December 31,
2008 2007 2006
-------------------- ------------------ ------------------
Cash flows from investing activities:
Proceeds from sales of short-term
investments .................................... 200 9,925 7,585
Purchases of short-term investments................. - (500) (500)
Purchases of property, plant and
equipment........................................ (103) (146) (131)
-------------------- ------------------- ------------------
Net cash provided by investing
activities....................................... 97 9,279 6,954
-------------------- ------------------- ------------------
Cash flows from financing activities:
Repurchase and retirement of
common stock..................................... (4,567) (567) (5,143)
-------------------- ------------------- ------------------
Net cash used by financing activities............... (4,567) (567) (5,143)
-------------------- ------------------- ------------------
Increase (decrease) in cash
and cash equivalents............................. (6,489) 9,657 1,760
Cash and cash equivalents,
beginning of period.............................. 12,104 2,447 687
-------------------- ------------------- ------------------
Cash and cash equivalents, end of period............ $ 5,615 12,104 2,447
==================== =================== ==================
See accompanying notes to financial statements.
42
PARAGON TECHNOLOGIES, INC.
Notes To 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, 2008, 2007, and 2006 are as follows (in thousands):
For the year ended December 31, 2008:
% of Total
SI Systems Sales
------------------- ------------------
Systems sales................................. $ 13,617 81.5%
Aftermarket sales............................. 3,083 18.5%
------------------- ------------------
Total sales................................... $ 16,700 100.0%
=================== ==================
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%
=================== ==================
The Company's products are sold worldwide through its own sales personnel.
Domestic and international sales during the years ended December 31, 2008, 2007,
and 2006 are as follows (in thousands):
43
PARAGON TECHNOLOGIES, INC.
Notes To 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, 2008:
% of Total
SI Systems Sales
------------------- ------------------
Domestic sales................................ $ 11,987 71.8%
International sales........................... 4,713 28.2%
------------------- ------------------
Total sales................................... $ 16,700 100.0%
=================== ==================
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%
=================== ==================
Sales from external customers for each of the Company's products during the
years ended December 31, 2008, 2007, and 2006 are as follows (in thousands):
December 31, 2008 December 31, 2007 December 31, 2006
--------------------------- --------------------------- ---------------------------
% of Total % of Total % of Total
Sales Sales Sales Sales Sales Sales
------------ ------------ ------------ ------------ ------------ ------------
LO-TOW(R) sales............... $ 8,501 50.9% 6,367 29.7% 6,458 36.3%
CARTRAC(R) sales............... - -% 119 .5% 1,975 11.1%
DISPEN-SI-MATIC(R),
SINTHESIS(R), and
related order fulfillment
sales....................... 5,116 30.6% 11,216 52.3% 6,092 34.2%
Other sales.................... - -% 35 .2% 51 .3%
Aftermarket sales.............. 3,083 18.5% 3,711 17.3% 3,212 18.1%
-------------- --------------------------- -------------- ----------------------------
Total sales................. $ 16,700 100.0% 21,448 100.0% 17,788 100.0%
============== =========================== ============== ============================
In the year ended December 31, 2008, two customers accounted for over 10%
of sales, and they are listed as follows: Vistakon, a division of Johnson &
Johnson Vision Care - $3,321,000 or 19.9% and Cummins Engine - $3,099,000 or
18.6% of total sales. 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% of total sales. 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. No other customer accounted
for over 10% of sales.
44
PARAGON TECHNOLOGIES, INC.
Notes To 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, 2008, two customers owed the Company in
excess of 10% of trade receivables, and they are listed as follows: Cinetic
Automation - $1,030,000 or 39.2% and General Motors - $624,000 or 23.8%. 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.
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. Short-term investments as of December 31, 2008 and December
31, 2007 were $0 and $200,000, respectively.
45
PARAGON TECHNOLOGIES, INC.
Notes To 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. The Company writes off
receivables upon determination that no further collections are probable. The
allowance for doubtful accounts as of December 31, 2008 and December 31, 2007
was $100,000 and $0, respectively.
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,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts, 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.
46
PARAGON TECHNOLOGIES, INC.
Notes To 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. 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 Ending
Balance Charged to Balance
January 1 Costs and Expenses Deductions December 31
--------------- ------------------------- --------------- ------------------
2008.............. $ 234 253 (92) 395
2007.............. $ 192 128 (86) 234
2006.............. $ 189 71 (68) 192
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.
Valuation allowances are provided to reduce the carrying amounts of
deferred tax assets when it is more likely than not that some portion or all of
the deferred tax assets will not be realized. When 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 in the appropriate taxing jurisdictions during the periods
in which the temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
taxable income in carryback years, and tax planning strategies in making this
assessment.
47
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Income Taxes (Continued)
-----------
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.
The Company classifies interest and penalties related to unrecognized tax
benefits as a component of income tax expense. 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.
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation in accordance with 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.
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.
The expense associated with stock-based compensation arrangements is a
non-cash charge. In the Statements of Cash Flows, stock-based compensation
expense is an adjustment to reconcile net income (loss) to net cash provided
(used) by operating activities.
SFAS No. 123R requires that certain cash flows resulting from excess tax
benefits be classified as financing cash flows. For the years ended December 31,
2008, 2007, and 2006, no excess tax benefits were generated.
Earnings Per Share
------------------
Basic and diluted earnings per share for the years ended December 31, 2008,
2007, and 2006 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 incentive plan awards. 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.
48
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Recently Issued Accounting Pronouncements
-----------------------------------------
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. SFAS No. 157's fair value
measurement requirements for non-financial assets and liabilities that are not
required or permitted to be measured at fair value on a recurring basis have
been deferred until fiscal years beginning after November 15, 2008. The Company
has certain non-financial assets, such as long-lived assets, that may be
re-measured to fair value on a non-recurring basis. The Company adopted SFAS No.
157 for financial assets and liabilities on January 1, 2008. The adoption of
SFAS No. 157 did not have a material impact on the Company's financial
statements. The Company does not anticipate a material impact on its financial
statements from the adoption of SFAS No. 157 for its non-financial assets and
liabilities.
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. The Company adopted SFAS
No. 159 on January 1, 2008 and elected not to fair value any items under this
statement. The adoption of SFAS No. 159 did not have a material impact 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 will apply the guidance of the statement
to business combinations completed on or after January 1, 2009.
49
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(1) Description of Business and Summary of Significant Accounting Policies
--- ----------------------------------------------------------------------
(Continued)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------
In May 2008, the Financial Accounting Standards Board issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). SFAS
No. 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. This Statement will become
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles. The Company
does not anticipate a material impact on its financial statements from the
adoption of SFAS No. 162.
(2) Uncompleted Contracts
--- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows (in
thousands):
December 31, 2008 December 31, 2007
----------------------- ------------------------
Costs and estimated earnings on $ 7,978 15,478
uncompleted contracts...........................
Less: billings to date............................ (7,857) (17,188)
----------------------- ------------------------
$ 121 (1,710)
======================= ========================
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings
in excess of billings....................... $ 925 1,353
Customers' deposits and billings in
excess of costs and estimated earnings...... (804) (3,063)
----------------------- ------------------------
$ 121 (1,710)
======================= ========================
(3) Line of Credit
--- --------------
The Company's line of credit facility expired on September 30, 2008. Prior
to expiration, the Company had a line of credit facility which could not exceed
$5,000,000 and was to be used primarily for working capital purposes. Interest
on the line of credit facility was at the LIBOR Market Index Rate plus 1.4%. As
of its September 30, 2008 expiration date, the Company did not have any
borrowings under the line of credit facility.
The line of credit facility contained various non-financial covenants and
was secured by all of the Company's accounts receivable and inventory. The
Company was in compliance with all covenants prior to the line of credit
facility's September 30, 2008 expiration date.
On February 19, 2009, the Company established a $5,000,000 line of credit
facility with its principal bank to be used primarily for working capital
purposes. Interest on the line of credit facility is at the LIBOR Market Index
Rate plus 1.25%. The line of credit facility contains various non-financial
covenants and is secured by all of the Company's accounts receivable and
inventory. The line of credit facility expires on November 30, 2009.
50
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(4) 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, 2008, 5,000 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, 2008, 2007, and 2006 for stock-based compensation programs was $6,000,
$14,000, and $37,000, respectively. Stock-based compensation expense recognized
during the years ended December 31, 2008, 2007, and 2006 consisted of expensing
$5,000, $6,000, and $7,000, respectively, for employee stock options, and $0,
$0, and $4,000, respectively, for directors' stock options, and $1,000, $8,000,
and $26,000, respectively, for nonvested stock.
All of the stock-based compensation expense recognized was a component of
selling, general and administrative expenses. Income was recognized during the
three months ended March 31, 2007 as a result of the forfeiture of 5,000 shares
of nonvested stock due to the resignation of Mr. Hoffner from the Company
effective March 1, 2007. Also, income was recognized during the three months
ended December 31, 2008 as a result of the forfeiture of 2,500 shares of
nonvested stock due to the termination of Mr. Lehr from the Company effective
November 24, 2008.
51
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(4) Stock Options and Nonvested Stock (Continued)
--- ---------------------------------
Stock Options
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, 2008........... 7,500 $ 10.01
Granted................................ - -
Exercised.............................. - -
Forfeited.............................. (2,500) 10.01
---------- -------------
Outstanding at December 31, 2008......... 5,000 $ 10.01 4.2 $ -
========== =============
Exercisable at December 31, 2008......... 2,500 $ 10.01 4.2 $ -
There were no stock options granted or exercised during the years ended
December 31, 2008 and 2007.
As of December 31, 2008, there is unrecognized compensation cost of $3,000
on the stock option awards which will be recognized over the next 1.2 years.
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 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. Also, due to his
termination from the Company effective November 24, 2008, Mr. Lehr forfeited his
2,500 shares of nonvested stock.
A summary of nonvested stock activity is presented below:
Nonvested Shares Grant Date Fair Value
------------------------------- ---------------------------
Nonvested at January 1, 2008............. 7,500 $ 10.01
Granted............................... - -
Vested................................ - -
Forfeited............................. (2,500) 10.01
------------------------------- ---------------------------
Nonvested at December 31, 2008........... 5,000 $ 10.01
=============================== ===========================
As of December 31, 2008, there is unrecognized compensation cost of $15,000
on the nonvested stock awards which will be recognized over the next 1.2 years.
52
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(5) 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, 2008, 2007, and 2006. Total expense for the Retirement Savings Plan was
$168,000, $174,000, and $147,000 for the years ended December 31, 2008, 2007,
and 2006, respectively.
Effective March 30, 2009, Company contributions under the Company's
Retirement Savings Plan have been suspended for an indefinite period of time as
part of a cost-reduction initiative.
(6) Income Taxes
--- ------------
The provision for income tax expense (benefit) consists of the following
(in thousands):
For the Year Ended For the Year Ended For the Year Ended
December 31, 2008 December 31, 2007 December 31, 2006
------------------------- -------------------------- ------------------------
Federal - current.......... $ (5) (434) (168)
- deferred......... 213 42 152
------------------------- -------------------------- ------------------------
208 (392) (16)
------------------------- -------------------------- ------------------------
State - current.......... 41 (26) (23)
- deferred......... 204 (15) 20
------------------------- -------------------------- ------------------------
245 (41) (3)
------------------------- -------------------------- ------------------------
$ 453 (433) (19)
========================= ========================== ========================
The reconciliation between the U.S. federal statutory rate and the
Company's effective income tax rate is (in thousands):
For the Year Ended For the Year Ended For the Year Ended
December 31, 2008 December 31, 2007 December 31, 2006
------------------------- --------------------------- -----------------------
Computed tax expense (benefit)
at statutory rate of 34%.......... $ (80) (31) 153
Increase (reduction) in taxes
resulting from:
State income taxes, net
of federal benefit............ 4 (27) (2)
Tax-exempt interest............. (1) (97) (151)
Meals and entertainment
deduction..................... 25 29 24
Change in tax contingency
reserve....................... (4) (309) (49)
Valuation allowance............. 498 - -
Miscellaneous items............. 11 2 6
------------------------- --------------------------- -----------------------
$ 453 (433) (19)
========================= =========================== =======================
53
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(6) Income Taxes (Continued)
--- ------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2008 and
2007 are presented below (in thousands):
December 31, December 31,
2008 2007
------------------- -----------------
Deferred tax assets:
Net operating loss carryforward................... $ 97 $ 105
Credit carryforward............................... - 29
Inventory reserve................................. 105 107
Accrued restructuring costs....................... 11 22
Accrued warranty costs............................ 151 92
Tax benefit on reserve for unrecognized
tax benefits.................................... 80 67
Accruals for other expenses, not yet
deductible for tax purposes..................... 124 68
------------------- -----------------
Total gross deferred tax assets............... 568 490
Less: valuation allowance........................... (498) -
------------------- -----------------
Net deferred tax assets....................... 70 490
------------------- -----------------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation..................... (32) (32)
Prepaid expenses.................................. (38) (34)
------------------- -----------------
Total gross deferred tax liabilities.......... (70) (66)
------------------- -----------------
Net deferred tax assets....................... $ - $ 424
=================== =================
Valuation allowances are provided to reduce the carrying amount of deferred
tax assets when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. When 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 in the appropriate taxing jurisdictions during the periods
in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
taxable income in carryback years, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income, during 2008, management concluded that the Company's
deferred tax assets are more likely than not to expire before the Company can
use them.
The valuation allowance of $498,000 as of December 31, 2008 was primarily
related to $418,000 of deferred tax assets and $80,000 of the federal income tax
portion of unrecognized tax benefits. The valuation allowance for deferred tax
assets primarily relates to inventory, warranty, net operating loss
carryforwards, and other temporary differences.
54
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(6) Income Taxes (Continued)
--- ------------
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.
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
Settlements...................................... (3)
Lapse of statute................................. (369)
----------------
Balance at December 31, 2007..................... 203
Lapse of statute................................. (24)
----------------
Balance at December 31, 2008..................... $ 179
================
As of December 31, 2008, the Company's net unrecognized tax benefits
totaled $257,000, all of which would impact the effective tax rate if
recognized. 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.
The Company classifies interest and penalties related to unrecognized tax
benefits as a component of income tax expense. 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. For the years ended December 31, 2008 and 2007, $1,000 and $(25,000),
respectively, of expense (benefit) related to interest and penalties, net of
federal benefit, was recognized in the statements of operations.
During the year ended December 31, 2008, the Company decreased the total
unrecognized tax benefits by $24,000 due to the expiration of statutes of
limitations.
55
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(6) Income Taxes (Continued)
--- ------------
The Company estimates that the total unrecognized tax benefits may decrease
by approximately $57,000 due to the expiration of statutes of limitations prior
to December 31, 2009.
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 2004. The
Company has operations in approximately 30 state and foreign taxing
jurisdictions. The Company has substantially concluded state income tax matters
for years through 2002.
(7) 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.
(8) Commitments and Related Party Transactions
--- ------------------------------------------
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 25,000 square
feet of office space for five years. The leasing agreement required fixed
monthly rental payments of $19,345 during the fifth year of the lease, which ran
from February 21, 2007 through February 20, 2008. 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 was amortized in equal amounts as a
reduction in rent expense over the five-year term of the lease. The amortization
of the deferred profit expired during the first quarter of 2008. During the
years ended December 31, 2008, 2007, and 2006, $28,000, $165,000, and $165,000,
respectively, of the deferred gain was recognized.
56
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(8) Commitments and Related Party Transactions (Continued)
--- ------------------------------------------
Total rental expense in the years ended December 31, 2008, 2007, and 2006
approximated $244,000, $247,000, and $259,000, respectively.
Future minimum rental commitments at December 31, 2008 are as follows (in
thousands):
Operating Leases
----------------
2009............................................ $ 216
2010............................................ 216
2011............................................ 216
2012............................................ 216
2013............................................ 36
After 2013...................................... -
----------------
Total ........................................ $ 900
================
(9) Cash Flow Information
--- ---------------------
Supplemental disclosures of cash flow information for the years ended
December 31, 2008, 2007, and 2006 are as follows (in thousands):
For the Year Ended For the Year Ended For the Year Ended
December 31, 2008 December 31, 2007 December 31, 2006
------------------------ ----------------------- -------------------------
Supplemental disclosures
of cash flow information:
Cash paid (received)
during the period for:
Interest expense........ $ - 1 1
======================== ======================= =========================
Income taxes............ $ 146 (41) (738)
======================== ======================= =========================
(10) Quarterly Financial Information (Unaudited)
---- -------------------------------
Selected Quarterly Financial Data
---------------------------------
(In thousands, except per share amounts)
For the Year Ended First Second Third Fourth
December 31, 2008 Quarter Quarter Quarter Quarter
--------------------------------------------------- -------------- -------------- ------------- --------------
Net sales.......................................... $ 5,045 4,123 3,715 3,817
Gross profit on sales.............................. $ 1,526 965 1,175 1,241
Net income (loss).................................. $ 106 (109) (601) (83)
Basic earnings (loss) per share.................... $ .04 (.04) (.24) (.04)
Diluted earnings (loss) per share.................. $ .04 (.04) (.24) (.04)
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
Net income (loss).................................. $ (268) 11 656 (58)
Basic earnings (loss) per share.................... $ (.09) - .24 (.02)
Diluted earnings (loss) per share.................. $ (.09) - .24 (.02)
57
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(11) 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, 2006, and 2007 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 $15,000,000.
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.
On August 27, 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 $17,000,000 of the Company's common stock to up to
$20,000,000.
On December 12, 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 $20,000,000 of the Company's common stock to up to
$22,000,000.
During the year ended December 31, 2008, the Company repurchased 980,463
shares of common stock at a weighted average cost, including brokerage
commissions, of $4.66 per share. Cash expenditures for the stock repurchases
during the year ended December 31, 2008 were $4,567,189. From the inception of
the Company's stock repurchase program on August 12, 2004 through December 31,
2008, the Company repurchased 2,618,181 shares of common stock at a weighted
average cost, including brokerage commissions, of $7.14 per share. Cash
expenditures for the stock repurchases since the inception of the program were
$18,683,332. As of December 31, 2008, $3,316,668 remained available for
repurchases under the stock repurchase program.
Based on market conditions and other factors, additional repurchases may be
made from time to time, in compliance with SEC regulations, in the open market
or through privately negotiated transactions at the discretion of the Company.
There is no expiration date with 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.
(12) Subsequent Events
---- -----------------
On February 19, 2009, the Company established a $5,000,000 line of credit
facility with its principal bank to be used primarily for working capital
purposes. Interest on the line of credit facility is at the LIBOR Market Index
Rate plus 1.25%. The line of credit facility contains various non-financial
covenants and is secured by all of the Company's accounts receivable and
inventory. The line of credit facility expires on November 30, 2009.
58
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
(12) Subsequent Events (Continued)
---- -----------------
Effective March 30, 2009, Company contributions under the Company's
Retirement Savings Plan have been suspended for an indefinite period of time as
part of a cost-reduction initiative.
In February 2009, as part of a cost-reduction initiative aimed at profit
improvement, the Company reduced its workforce by five employees or
approximately 10% of its total workforce due to the economic slowdown. The
Company incurred a charge, primarily for severance costs, to first quarter 2009
earnings of approximately $150,000.
-------------------------------
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, 2008. 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.
59
PARAGON TECHNOLOGIES, INC.
Notes To Financial Statements (Continued)
Item 9A. Controls and Procedures (Continued)
-------- -----------------------
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, 2008, the end of the Company's fiscal year. 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. In conducting its assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control -- Integrated Framework.
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.
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.
60
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
--------------------------------------------------------------------------------- ------------ -------
Ronald J. Izewski................................................................ 2008 52
Ronald J. Izewski currently serves as the Senior Vice President ("SVP")
and Chief Financial Officer ("CFO") of Just Born, Inc., a privately owned
confectionery manufacturer of jellybeans, marshmallows, and other candy
products. Mr. Izewski joined Just Born in 1995 as Vice President of the
Finance Division, assumed the role of CFO in 2002, and was promoted to
SVP/CFO in 2007. From 1984 to 1995, Mr. Izewski held several financial
leadership positions, including Vice President and General Manager of the
Donruss Trading Cards Division, at the Leaf Candy Company. From 1978 to 1984,
Mr. Izewski was an Audit Supervisor in the Chicago, Illinois office of
Coopers & Lybrand, a public accounting firm.
Theodore W. Myers................................................................ 2002 65
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.
Robert J. Schwartz............................................................... 2008 71
Robert J. Schwartz is the founder and President of Land Equity Inc., a
real estate firm located in Lebanon, New Jersey. For over 30 years,
Land Equity Inc. has specialized in commercial and industrial land
sales. Mr. Schwartz began his career in real estate in 1967 and has
established his company in key markets of Massachusetts, New Jersey,
Pennsylvania, and Maryland.
Samuel L. Torrence............................................................... 2007 58
Samuel L. Torrence retired as President of Just Born, Inc. on June 30,
2008, a position he held since 2005. Just Born is a privately owned
confectionery manufacturer of jellybeans, marshmallows, and other candy
products. 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.
61
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
--------------------------------------------------------------------------------- ------------ -------
Leonard S. Yurkovic.............................................................. 2002 71
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 71 Acting Chief Executive Officer, effective March 1,
2007, Director
William J. Casey 65 Executive Vice President of the Company and
President and Chief Operating Officer of SI Systems
John F. Lehr 48 Vice President of the Company and Vice President
of Sales of SI Systems until his termination
on November 24, 2008.
Ronald J. Semanick 47 Vice President - Finance, Chief Financial Officer,
Treasurer, and Secretary
Information regarding Mr. Yurkovic is provided above.
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 27 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.
62
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------
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. Mr. Lehr was appointed Vice President of Sales of SI Systems effective
August 8, 2008. 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. Mr. Lehr's employment with the Company was terminated on November
24, 2008.
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 was also the Treasurer and
Corporate Secretary of SI/BAKER, INC., Paragon's former 50/50 joint venture
company with McKesson Automation Systems Inc., until it was sold to McKesson
Automation Systems Inc. in September 2003. 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 2008 all of our directors and
executive officers met all applicable Section 16(a) filing requirements.
------------------------------
63
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------
Audit Committee
---------------
The Audit Committee consists of three directors, Messrs. Izewski, Myers,
and Schwartz, all of whom are considered "independent" within the meaning of the
rules of the Securities and Exchange Commission and the NYSE Amex, formerly
known as 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. Izewski's education and qualifications as a certified
public accountant, his experience as a chief financial officer and audit
supervisor, and his professional experience, Mr. Izewski is an "audit committee
financial expert" within the meaning of the rules of the Securities and Exchange
Commission and, therefore, Mr. Izewski qualifies as a financially sophisticated
audit committee member within the meaning of the rules of the NYSE Amex,
formerly known as 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 NYSE Amex, formerly known as 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.
------------------------------
64
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.
65
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
66
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 2008 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.
67
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 2008 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.
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. During 2008, Mr. Yurkovic received no increase
in base salary and his base pay remained at $10,500 per month, the rate of pay
that was set on March 1, 2007. Effective March 2, 2009, Mr. Yurkovic's salary
was temporarily reduced by approximately 60% to $4,000 per month as part of a
cost-reduction initiative.
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.
68
Item 11. Executive Compensation (Continued)
-------- ----------------------
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
2008, Mr. Lehr received no increase in base salary and his base salary remained
at $155,000, the per annum rate of pay that was set on November 14, 2005. Mr.
Lehr's employment with the Company was terminated on November 24, 2008.
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 2008, Mr. Casey received no
increase in base salary and his base salary remained at $175,000, the per annum
rate of pay that was set on March 1, 2007. Effective March 2, 2009, Mr. Casey's
salary was temporarily reduced by 10% to $157,500 as part of a cost-reduction
initiative.
During 2008, Mr. Semanick received no increase in base salary and his base
salary remained at $124,373, the per annum rate of pay that was set on March 1,
2005. Effective March 2, 2009, Mr. Semanick's salary was temporarily reduced by
10% to $111,936 as part of a cost-reduction initiative.
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 2008.
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 2008 and no further grants are available under the plan.
As of December 31, 2008, 5,000 stock options and 5,000 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.
69
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.
Effective March 2, 2009, all monthly auto allowances were eliminated and
replaced with mileage reimbursement at the standard mileage rate of 55 cents per
mile for business miles driven as part of a cost-reduction initiative.
In addition, effective March 30, 2009, Company contributions under the
Company's 401(k) retirement savings plan have been suspended for an indefinite
period of time as part of a cost-reduction initiative.
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 up to a maximum of 18 months 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.
70
Item 11. Executive Compensation (Continued)
-------- ----------------------------------
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.
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 was 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 NYSE Amex,
formerly known as the American Stock Exchange on the date of grant.
71
Item 11. Executive Compensation (Continued)
-------- ----------------------
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.
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 2008 did not exceed the deductible limit
and will be deductible for federal income tax purposes.
72
Item 11. Executive Compensation (Continued)
-------- ----------------------
3. Report of the Compensation Committee
-- ------------------------------------
The Committee has reviewed and discussed the Compensation Discussion and
Analysis for the year ended December 31, 2008 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, 2008 be included in this Annual Report on Form
10-K.
Current Members of the Compensation Former Member of the Compensation
Committee: Committee:
Samuel L. Torrence, Chairman Anthony W. Schweiger
Theodore W. Myers
Robert J. Schwartz
Mr. Schweiger, a former director of the Company, served on the Compensation
Committee until his resignation in April 2008, at which time Mr. Schwartz became
a member of the Compensation Committee.
------------------------------
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 2008, 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
--------------------------- 2008 126,000 - - - 27,049 153,049
Leonard S. Yurkovic 2007 105,000 - - - 24,160 129,160
Acting CEO (5) 2006 - - - - - -
Principal Financial Officer
---------------------------
Ronald J. Semanick
Vice President - 2008 124,373 - 6,256 1,625 14,575 146,829
Finance, Chief Financial 2007 124,373 - 6,256 1,625 14,775 147,029
Officer, and Treasurer (6) 2006 124,373 5,000 5,214 1,354 14,575 150,516
William J. Casey 2008 175,000 - 6,256 1,625 15,800 198,681
Executive Vice 2007 172,365 - 6,256 1,625 16,045 196,291
President (7) 2006 155,000 10,000 5,214 1,354 15,800 187,368
John F. Lehr 2008 146,555 - (11,470) 1,490 94,081 230,656
Vice 2007 155,000 - 6,256 1,625 9,600 172,481
President (8) 2006 155,000 - 5,214 1,354 9,600 171,168
---------------------------------------------------------------------------------------------------------------------
73
Item 11. Executive Compensation (Continued)
-------- ----------------------
(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, 2008, 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 years ended December 31, 2008 and 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, 2008, 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 years ended December 31, 2008 and 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. For further information, please refer to the Company's "Stock
Options and Nonvested Stock" in Note 4 of the Notes to Financial Statements
included in this Annual Report on Form 10-K.
(4) This column includes the following additional compensation:
-----------------------------------------------------------------------------------------------------------------
Company CEO Meals All Other
Auto Contributions and Lodging Severance Compensation
Allowance to 401(k) Plan Expenses Benefits Total
Name Year ($) (a) ($) (b) ($) (c) ($) (d) ($)
-----------------------------------------------------------------------------------------------------------------
Leonard S. Yurkovic 2008 9,600 5,040 12,409 - 27,049
2007 8,000 4,110 12,050 - 24,160
2006 - - - - -
Ronald J. Semanick 2008 9,600 4,975 - - 14,575
2007 9,600 5,175 - - 14,775
2006 9,600 4,975 - - 14,575
William J. Casey 2008 9,600 6,200 - - 15,800
2007 9,600 6,445 - - 16,045
2006 9,600 6,200 - - 15,800
John F. Lehr 2008 8,800 - - 85,281 94,081
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. Effective March 2, 2009, all monthly
auto allowances were eliminated and replaced with mileage reimbursement
at the standard mileage rate of 55 cents per mile for business miles
driven as part of a cost-reduction initiative.
74
Item 11. Executive Compensation (Continued)
-------- ----------------------
(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 matching and profit sharing contributions.
Effective March 30, 2009, Company contributions under the Company's
401(k) retirement savings plan have been suspended for an indefinite
period of time as part of a cost-reduction initiative. For further
information, please refer to the Company's "Employee Benefit Plans" in
Note 5 of the Notes to 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.
(d) This column includes severance benefits for Mr. Lehr.
(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. Effective March 2, 2009, Mr. Yurkovic's salary was
temporarily reduced by approximately 60% to $4,000 per month as part of a
cost-reduction initiative.
(6) Effective March 2, 2009, Mr. Semanick's salary was temporarily reduced by
10% to $111,936 as part of a cost-reduction initiative.
(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. Effective March 2, 2009, Mr. Casey's
salary was temporarily reduced by 10% to $157,500 as part of a
cost-reduction initiative.
(8) The Company entered into a Separation Agreement and Release ("the
Agreement") with Mr. Lehr dated November 24, 2008, whereby the Company
agreed to provide Mr. Lehr with compensation and other benefits pursuant to
the terms of the Company's Executive Officer Severance Policy. In
consideration for entering into the Agreement, Mr. Lehr will receive 26
week's regular straight-time pay valued at $77,500 less applicable tax
withholdings, healthcare benefits for up to six months of medical coverage
valued at $4,781, and outplacement services valued at $3,000.
------------------------------
GRANTS OF PLAN-BASED AWARDS DURING THE YEAR ENDED
DECEMBER 31, 2008
----------------------------------------------------------------------------------------------------------------------
All Other All Other Exercise
Stock Option or Grant Date
Awards: Awards: Base Fair Value
Number of Number of Price Closing of
Shares of Securities of Price on Stock and
Stock or Underlying Option Grant Option
Grant Approval Units Options Awards Date Awards
Name Date Date (#) (#) ($/Sh) ($/Sh) ($)
----------------------------------------------------------------------------------------------------------------------
Leonard S. Yurkovic - - - - - - -
Ronald J. Semanick - - - - - - -
William J. Casey - - - - - - -
John F. Lehr - - - - - - -
----------------------------------------------------------------------------------------------------------------------
75
Item 11. Executive Compensation (Continued)
-------- ----------------------
There were no grants of plan-based awards during the year ended December 31,
2008, and no further grants are available under the 1997 Equity Compensation
Plan.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2008
---------------------------------------------------------------------------------------------------------------------
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 - - - - - -
Ronald J. Semanick 1,250 1,250 10.01 3/8/13 2,500 6,950
William J. Casey 1,250 1,250 10.01 3/8/13 2,500 6,950
John F. Lehr - - - - - -
---------------------------------------------------------------------------------------------------------------------
(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 termination from the Company
effective November 24, 2008, Mr. Lehr forfeited his 2,500 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
termination from the Company effective November 24, 2008, Mr. Lehr
forfeited his 2,500 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, 2008 of
$2.78 per share.
OPTION EXERCISES AND STOCK VESTED IN THE YEAR ENDED
DECEMBER 31, 2008
--------------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
-------------------------------------------- -------------------------------------------
Number of Shares Value Realized Number of Shares Value Realized
Acquired on Exercise on Exercise Acquired on Vesting on Vesting
Name (#) ($) (#) ($)
--------------------------------------------------------------------------------------------------------------------
Leonard S. Yurkovic - - - -
Ronald J. Semanick - - - -
William J. Casey - - - -
John F. Lehr - - - -
-------------------------------------------------------------------------------------------------------------------
There were no stock options exercised or vesting of stock awards during the year
ended December 31, 2008.
76
Item 11. Executive Compensation (Continued)
-------- ----------------------
PENSION BENEFITS TABLE
----------------------------------------------------------------------------------------------------------
Present Value
Number of Years of Accumulated Payments During Last
Plan Credited Service Benefit Fiscal Year
Name Name (#) ($) ($)
----------------------------------------------------------------------------------------------------------
This table has been omitted because it is not applicable to the Company
and its Named Executives.
----------------------------------------------------------------------------------------------------------
NONQUALIFIED DEFERRED COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------------
Registrant Aggregate
Executive Contributions in Earnings Aggregate
Contributions Last in Last Fiscal Withdrawals/ Aggregate Balance at
in Last Fiscal Year Fiscal Year Year Distributions Last Fiscal Year-End
Name ($) ($) ($) ($) ($)
-----------------------------------------------------------------------------------------------------------------------------------
This table has been omitted because it is not applicable to the Company
and its Named Executives.
-----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
AS OF DECEMBER 31, 2008
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, 2008, 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 - - -
Ronald J. Semanick (2) Severance pay 124,373 124,373 -
Outplacement services 10,000 10,000 -
Health care benefits continuation 6,261 6,261 -
Value of nonvested stock subject
to acceleration - - 6,950 (3)
Value of stock options subject
to acceleration - - - (4)
77
Item 11. Executive Compensation (Continued)
-------- ----------------------
-----------------------------------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------------------------------
William J. Casey (5) Severance pay 175,000 175,000 -
Outplacement services 10,000 10,000 -
Health care benefits continuation 14,177 14,177 -
Value of nonvested stock subject
to acceleration - - 6,950 (3)
Value of stock options subject
to acceleration - - - (4)
John F. Lehr (6) Severance pay - - -
Outplacement services - - -
Health care benefits continuation - - -
Value of nonvested stock subject
to acceleration - - - (3)
Value of stock options subject
to acceleration - - - (4)
-----------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Yurkovic is not eligible for termination benefits per his employment
arrangement with the Company.
(2) Effective March 2, 2009, Mr. Semanick's salary was temporarily reduced
by 10% to $111,936 as part of a cost-reduction initiative.
(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, 2008 of $2.78 per share. Due to
his termination from the Company effective November 24, 2008, Mr. Lehr
forfeited his 2,500 shares of nonvested stock.
(4) The closing market price of the Company's common stock on December 31,
2008 was $2.78 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, 2008 and would not provide any
additional value to the Named Executives. Due to his termination from
the Company effective November 24, 2008, Mr. Lehr forfeited his 2,500
stock options.
(5) Effective March 2, 2009, Mr. Casey's salary was temporarily reduced by
10% to $157,500 as part of a cost-reduction initiative.
(6) The Company entered into a Separation Agreement and Release ("the
Agreement") with Mr. Lehr dated November 24, 2008, whereby the Company
agreed to provide Mr. Lehr with compensation and other benefits pursuant
to the terms of the Company's Executive Officer Severance Policy. In
consideration for entering into the Agreement, Mr. Lehr will receive 26
week's regular straight-time pay valued at $77,500 less applicable tax
withholdings, healthcare benefits for up to six months of medical
coverage valued at $4,781, and outplacement services valued at $3,000.
The cost to the Company associated with providing the compensation and
other benefits for Mr. Lehr pursuant to the terms of the Company's
Executive Officer Severance Policy are reflected in the "All Other
Compensation" column of the Summary Compensation Table.
78
Item 11. Executive Compensation (Continued)
-------- ----------------------------------
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.
Effective August 8, 2008, the Chairman of the Compensation Committee receives an
annual retainer of $2,500. 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.
Effective March 2, 2009, the annual retainers and meeting fees were
temporarily reduced by 10%. As part of this cost-reduction initiative, the
Chairman of the Board of Directors and other non-employee directors receive an
annual retainer of $21,600 and $10,800, respectively; a fee of $1,350 for each
Board meeting attended; a fee of $540 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 $270 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 $4,500, and the Chairman of the
Compensation Committee receives an annual retainer of $2,250. Non-employee
directors serving on Committees of the Board of Directors receive meeting fees
of $1,350 for Audit Committee Meetings and $900 for all other Committee Meetings
of the Board of Directors.
DIRECTOR COMPENSATION TABLE
FOR THE YEAR ENDED DECEMBER 31, 2008
-----------------------------------------------------------------------------------------------------------------------------------
Change in
Pension Value
Fees and Nonqualified
Earned or Non-Equity Deferred
Paid in Stock Option Incentive Plan Compensation All Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
-----------------------------------------------------------------------------------------------------------------------------------
Robert J. Blyskal $ 8,500 - - - - - $ 8,500
Ronald J. Izewski (2) 27,750 - - - - - 27,750
Theodore W. Myers 47,000 - - - - - 47,000
Robert J. Schwartz (2) 25,000 - - - - - 25,000
Anthony W. Schweiger (1) 12,667 - - - - - 12,667
Samuel L. Torrence 36,250 - - - - - 36,250
Leonard S. Yurkovic (3) - - - - - - -
-------------------------------------------------------------------------------------------------------
Total $ 157,167 - - - - - $ 157,167
=======================================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
79
Item 11. Executive Compensation (Continued)
-------- ----------------------
(1) On April 17, 2008, Messrs. Blyskal and Schweiger resigned as directors of
the Company.
(2) Messrs. Izewski and Schwartz were elected to the Board of Directors of the
Company effective April 18, 2008.
(3) 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, 2008 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
-------------------------------------------------------------------------------------------------------------------
Ronald J. Izewski - - - - -
Theodore W. Myers - - - - -
Robert J. Schwartz - - - - -
Samuel L. Torrence - - - - -
Leonard S. Yurkovic - - - - -
-------------------------------------------------------------------------------------------------------------------
There are no stock options outstanding at December 31, 2008 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 Schwartz. Mr. Schweiger, a former director of the Company, served on
the Committee until his resignation in April 2008, at which time Mr. Schwartz
became a member of the Committee. 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.
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, 2009
(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.
80
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
and Related Stockholder Matters (Continued)
-------------------------------
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) 147,590 - 8.8%
Par Value $1.00 Per Share 1703 Oregon Pike
Suite 101
Lancaster, PA 17601
Common Stock, Dimensional Fund 123,494 - 7.4%
Par Value $1.00 Per Share Advisors LP (4)
Palisades West, Building One
6300 Bee Cave Road
Austin, TX 78746
Common Stock, Ronald J. Izewski 1,000 - *
Par Value $1.00 Per Share
Common Stock, Theodore W. Myers (5) 26,200 - 1.6%
Par Value $1.00 Per Share
Common Stock, Robert J. Schwartz 85,019 - 5.1%
Par Value $1.00 Per Share
Common Stock, Samuel L. Torrence 10,000 - *
Par Value $1.00 Per Share
Common Stock, Leonard S. Yurkovic 19,000 - 1.1%
Par Value $1.00 Per Share
Common Stock, Ronald J. Semanick (6) 17,370 1,875 1.2%
Par Value $1.00 Per Share
Common Stock, William J. Casey (6) 2,500 1,875 *
Par Value $1.00 Per Share
Common Stock, All current directors and
Par Value $1.00 Per Share executive officers as a group
(7 persons) (5) (6) 161,089 3,750 9.9%
------------------------------------------------
*Represents less than 1%.
(1) Unless otherwise indicated, the address for each stockholder listed on the
table is c/o Paragon Technologies, Inc., 600 Kuebler Road, Easton,
Pennsylvania 18040.
(2) The percentage for each individual, entity or group is based on the
aggregate number of shares outstanding as of March 20, 2009 (1,668,677) 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 20, 2009.
(3) This information is presented in reliance on information disclosed in a
Schedule 13G/A filed with the Securities and Exchange Commission on January
22, 2009.
(4) This information is presented in reliance on information disclosed in a
Schedule 13G filed with the Securities and Exchange Commission on February
9, 2009.
(5) Includes 13,100 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) and Casey
(2,500 shares). The nonvested stock grants vest on March 8, 2010, the
four-year anniversary of the date of grant.
81
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
and Related Stockholder Matters (Continued)
-------------------------------
Equity Compensation Plan Information
------------------------------------
The Company's stock-based compensation program, the 1997 Equity
Compensation Plan ("the 1997 Plan"), expired in July 2007. Currently, 5,000
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 5,000 $ 10.01 -
approved by security holders
Equity compensation plans not
approved by security holders - - -
-------------------- -------------------- -----------------------------
Total 5,000 $ 10.01 -
==================== ==================== =============================
Item 13. Certain Relationships and Related Transactions and Director
-------- -----------------------------------------------------------
Independence
------------
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 NYSE Amex, formerly known as 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 2008 and 2007. Fees for all services provided
by KPMG for the fiscal years ended December 31, 2008 and 2007 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 $161,000 for 2008 and $166,800 for 2007.
82
Item 14. Principal Accountant Fees and Services (Continued)
-------- --------------------------------------
Audit-Related Fees
------------------
KPMG did not provide audit-related services for the Company in 2008 and
2007.
Tax Fees
--------
KPMG's fees for tax services were $44,000 for 2008 and $64,000 for 2007.
The services rendered in 2008 and 2007 were in connection with tax compliance
and tax consultation services related to the Company's annual federal and state
tax returns.
All Other Fees
--------------
No other fees were charged by KPMG to the Company in 2008 and 2007 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 2008.
83
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
-------- ------------------------------------------
(a) 1. Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
Balance Sheets, December 31, 2008 and 2007
Statements of Operations for the years ended December 31, 2008, 2007,
and 2006
Statements of Stockholders' Equity and Comprehensive Income
(Loss) for the years ended December 31, 2008, 2007, and 2006
Statements of Cash Flows for the years ended December 31, 2008, 2007,
and 2006
Notes to Financial Statements
2. Index to Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
For the Years Ended December 31, 2008, 2007, and 2006.
(In Thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at
of Year Expenses Deductions End of Year
-------------- -------------- --------------- -------------
Accounts receivable --
Allowance for doubtful accounts:
2008.................................. $ - 105 5 100
============== ============== =============== =============
2007.................................. $ - - - -
============== ============== =============== =============
2006.................................. $ - - - -
============== ============== =============== =============
Deferred income tax asset --
Valuation allowance:
2008.................................. $ - 498 - 498
============== ============== =============== =============
2007.................................. $ - - - -
============== ============== =============== =============
2006.................................. $ - - - -
============== ============== =============== =============
All other schedules are omitted as the required information is
inapplicable or the information is presented in the 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).
84
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
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 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).
10.5 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).
10.6 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).
10.7 Registration Rights Agreement (incorporated by reference to
Exhibit 10.1 to Form S-3, filed on July 5, 2000).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
85
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
86
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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).
10.29 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).
10.30 Termination Agreement dated January 1, 2006 by and between
Paragon Technologies, Inc. and The QTX Group (incorporated by
reference to Exhibit 10.35 to Annual Report on Form 10-K for the
year ended December 31, 2005).
10.31 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).
10.32 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).
10.33 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).
10.34 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).
87
PART IV (Continued)
-------
Item 15. Exhibits and Financial Statement Schedules (Continued)
-------- ------------------------------------------
10.35 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).
10.36 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).
10.37 Amendment to Lease Agreement between Triple Net Investments
XIII, L.P. and Paragon Technologies, Inc. dated November 14,
2007 (incorporated by reference to Exhibit 10.42 to Annual
Report on Form 10-K for the year ended December 31, 2007).
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 14, 21, 23.1, 31.1, 31.2, 32.1, and 32.2 are filed with this
report.
(c) Not applicable.
88
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARAGON TECHNOLOGIES, INC.
Dated: March 30, 2009 By /s/ Theodore W. Myers
----------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 30, 2009 By /s/ Leonard S. Yurkovic
----------------------------------------
Leonard S. Yurkovic
Acting Chief Executive Officer
89
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. This Annual Report
may be signed in multiple identical counterparts, all of which taken together,
shall constitute a single document.
Dated: March 30, 2009 /s/ Theodore W. Myers
-----------------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 30, 2009 /s/ Leonard S. Yurkovic
-----------------------------------------------
Leonard S. Yurkovic
Acting Chief Executive Officer, Director
Dated: March 30, 2009 /s/ Ronald J. Semanick
-----------------------------------------------
Ronald J. Semanick
Vice President-Finance, Chief Financial
Officer, Treasurer, and Secretary
(Principal Accounting and Financial Officer)
Dated: March 30, 2009 /s/ Ronald J. Izewski
-----------------------------------------------
Ronald J. Izewski
Director
Dated: March 30, 2009 /s/ Robert J. Schwartz
-----------------------------------------------
Robert J. Schwartz
Director
Dated: March 30, 2009 /s/ Samuel L. Torrence
----------------------------------------------
Samuel L. Torrence
Director
90
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 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).
10.5 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).
10.6 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).
10.7 Registration Rights Agreement (incorporated by reference to Exhibit
10.1 to Form S-3, filed on July 5, 2000).
10.8 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).
10.9 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).
10.10 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).
91
EXHIBIT INDEX (Continued)
-------------
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
92
EXHIBIT INDEX (Continued)
-------------
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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).
10.29 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).
10.30 Termination Agreement dated January 1, 2006 by and between Paragon
Technologies, Inc. and The QTX Group (incorporated by reference to
Exhibit 10.35 to Annual Report on Form 10-K for the year ended December
31, 2005).
10.31 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).
10.32 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).
10.33 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).
10.34 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).
93
EXHIBIT INDEX (Continued)
-------------
10.35 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).
10.36 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).
10.37 Amendment to Lease Agreement between Triple Net Investments XIII,
L.P. and Paragon Technologies, Inc. dated November 14, 2007
(incorporated by reference to Exhibit 10.42 to Annual Report on
Form 10-K for the year ended December 31, 2007).
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.
94