UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
---------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended: Commission file number:
December 31, 2003 1-15729
PARAGON TECHNOLOGIES, INC.
--------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 22-1643428
-------- ----------
(State Or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation)
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:
Name of Exchange
Title of Class on Which Registered
- ----------------------------------------------- -----------------------
Common Stock, Par Value $1.00 Per Share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |_| No |X|
Aggregate market value of common stock held by non-affiliates (based on the
closing price on The American Stock Exchange) on June 30, 2003 was approximately
$20.8 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, 2003 that it is the beneficial owner of 10%
or more of the outstanding common stock of Registrant.
The number of shares outstanding of the Registrant's Common Stock, as of
March 10, 2004 was 4,277,595.
DOCUMENTS INCORPORATED BY REFERENCE None.
1
TABLE OF CONTENTS
-----------------
Part I.........................................................................3
Item 1. Business.......................................................3
Item 2. Properties....................................................10
Item 3. Legal Proceedings.............................................11
Item 4. Submission of Matters to a Vote of Security Holders...........11
Part II.......................................................................12
Item 5. Market For The Registrant's Common Equity and Related
Stockholder Matters.......................................12
Item 6. Selected Financial Data.......................................12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....24
Item 8. Financial Statements and Supplementary Data...................25
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.......................56
Item 9A. Controls and Procedures.......................................56
Part III......................................................................56
Item 10. Directors and Executive Officers Of The Registrant............56
Item 11. Executive Compensation........................................59
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................64
Item 13. Certain Relationships and Related Transactions................66
Item 14. Principal Accountant Fees and Services........................66
Part IV.......................................................................67
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K..................................................67
2
PART I
------
Item 1. Business
- ------- --------
Company Overview
- ----------------
Paragon Technologies, Inc. ("the Company") provides a variety of material
handling solutions, including systems, technologies, products, and services for
material flow applications. The Company has gone to market with a multiple
brand, multiple channel strategy under the SI Systems and Ermanco brands. The
Company's capabilities include horizontal transportation, rapid dispensing,
order fulfillment, computer software, sortation, integrating conveyors and
conveyor systems, and aftermarket services.
The Company was originally incorporated in Pennsylvania in 1958. On
December 7, 2001, upon receiving shareholder approval, the Company changed its
state of incorporation from Pennsylvania to Delaware.
SI Systems
- ----------
The Company's Easton, Pennsylvania operation (hereafter referred to as "SI
Systems"), is a specialized systems integrator supplying branded automated
material handling systems to manufacturing, assembly, order selection, and
distribution operations customers located primarily in North America. Subsequent
to the year ended December 31, 2003, SI Systems will be brought to market as two
individual brands, SI Systems and SI Production & Assembly Systems (hereafter
referred to as "SI-PAS"). Each brand has its own focused sales force, utilizing
the products and services currently available or under development within the
Company.
The SI Systems sales force will focus on providing order picking and order
fulfillment systems to order processing and distribution operations, which may
incorporate the Company's proprietary DISPEN-SI-MATIC(TM) and Automated
Picking/Replenishment solutions, Ermanco branded products, and specialized
software. The SI-PAS sales force will focus on providing automated material
handling systems to manufacturing and assembly operations and the U.S.
government, which may incorporate the Company's proprietary LO-TOW(R) and
CARTRAC(R) horizontal transportation technologies. The automated material
handling systems are marketed, designed, sold, installed and serviced by its own
staff or subcontractors as labor saving devices to improve productivity, quality
and reduce costs. Integrated material handling solutions involve both standard
and specially designed components and include integration of non-proprietary
automated handling technologies so as to provide turnkey solutions for its
customers' unique material handling needs. The engineering staff develops and
designs computer controlled programs required for the efficient operation of the
systems and for optimizing manufacturing, assembly, and fulfillment operations.
Ermanco
- -------
The Company's Spring Lake, Michigan operation (hereafter referred to as
"Ermanco"), is a manufacturer of Ermanco branded light to medium duty unit
handling conveyor products, serving the material handling industry through a
worldwide network of approximately 100 experienced material handling equipment
distributors and licensees. Ermanco also provides complete conveyor systems for
a variety of applications, including distribution and manufacture of computers
and electronic products, utilizing primarily its own manufactured conveyor
products, engineering services by its own staff or subcontractors, and
subcontracted installation services. Ermanco supplies material handling systems
and equipment to both national and international markets. Ermanco offers
services ranging from the delivery of basic transportation conveyors to turnkey
installations of complex, fully automated work-in-process production lines and
distribution centers, utilizing sophisticated, custom-designed controls
software. Many of Ermanco's sales are to distributors who have non-exclusive
agreements with the Company.
3
The Company's systems vary in configuration and capacity. Historically,
system prices across the Company's product lines have ranged from $100,000 to
several million dollars per system. Systems and aftermarket sales by brand
during the years ended December 31, 2003, 2002, and 2001 are as follows (in
thousands):
For the year ended December 31, 2003:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Systems sales...................... $ 9,134 23,533 32,667 87.6%
Aftermarket sales.................. 2,949 1,679 4,628 12.4%
------ ------ ------ -----
Total sales........................ $ 12,083 25,212 37,295 100.0%
====== ====== ====== =====
As a % of total sales.............. 32.4% 67.6% 100.0%
For the year ended December 31, 2002:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Systems sales...................... $ 11,439 21,584 33,023 86.4%
Aftermarket sales.................. 3,467 1,734 5,201 13.6%
------ ------ ------ -----
Total sales........................ $ 14,906 23,318 38,224 100.0%
====== ====== ====== =====
As a % of total sales.............. 39.0% 61.0% 100.0%
For the year ended December 31, 2001:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Systems sales...................... $ 14,390 29,700 44,090 86.9%
Aftermarket sales.................. 4,618 2,044 6,662 13.1%
------ ------ ------ -----
Total sales........................ $ 19,008 31,744 50,752 100.0%
====== ====== ====== =====
As a % of total sales.............. 37.5% 62.5% 100.0%
The Company's products are sold worldwide through its own sales personnel,
along with a network of independent distributors and licensees. Domestic and
international sales by brand during the years ended December 31, 2003, 2002, and
2001 are as follows (in thousands):
For the year ended December 31, 2003:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Domestic sales..................... $ 10,780 23,650 34,430 92.3%
International sales................ 1,303 1,562 2,865 7.7%
------ ------ ------ -----
Total sales........................ $ 12,083 25,212 37,295 100.0%
====== ====== ====== =====
For the year ended December 31, 2002:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Domestic sales..................... $ 14,698 21,844 36,542 95.6%
International sales................ 208 1,474 1,682 4.4%
------ ------ ------ -----
Total sales........................ $ 14,906 23,318 38,224 100.0%
====== ====== ====== =====
4
For the year ended December 31, 2001:
% of Total
SI Systems Ermanco Total Sales
-------------- ------------- -------------- --------------
Domestic sales..................... $ 18,030 27,397 45,427 89.5%
International sales................ 978 4,347 5,325 10.5%
------ ------ ------ -----
Total sales........................ $ 19,008 31,744 50,752 100.0%
====== ====== ====== =====
The Company also engages in sales with the U.S. government, which is one of
the Company's major customers. Sales to the U.S. government during the years
ended December 31, 2003, 2002, and 2001 represented 3.7%, 8.8%, and 10.3% of
total sales, respectively. No individual customer accounted for more than 10% of
total sales.
The Company's backlog of orders at December 31, 2003 was $10,525,000, of
which $0 was associated with U.S. government projects. The Company's backlog of
orders at December 31, 2002 was $6,924,000, of which $926,000 was associated
with U.S. government projects. 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 2004 calendar year, all
of the December 31, 2003 backlog of orders indicated above.
Products
--------
SI Systems' Branded Products -- Automated Material Handling Systems Segment
- ---------------------------------------------------------------------------
SI Systems' branded products encompass the horizontal transport,
manufacturing, assembly, order picking (automated and manual), 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 U.S. government, primarily the United
States Postal Service and the Defense Logistics Agency, automotive, recreational
vehicle, distribution centers, radiation chambers, engine assembly, truck
assembly, construction vehicles, newspaper facilities, and farm machinery. This
simple, yet reliable component design allows for a variety of configurations
well suited for numerous applications. It provides reliable and efficient
transportation for unit loads of all types in progressive assembly or
distribution applications. Because SI Systems' LO-TOW(R) tow chain used with the
system operates at a minimal depth, systems can be installed in existing
one-story and multi-story buildings as well as newly constructed facilities.
Controls sophistication varies depending upon the application. More complex
systems include programmable logic controllers ("PLCs"), personal computers for
data collection and operator interface, radio frequency identification and
communication, bar code identification, and customer host computer communication
interface. The Company believes that SI Systems is the largest supplier of
in-floor towline systems in the United States. A typical LO-TOW(R) system
requires approximately six months to engineer, manufacture, and install.
LO-TOW(R) sales as a percent of total sales were 12.2%, 17.4%, and 18.1% for the
years ended December 31, 2003, 2002, and 2001, respectively.
5
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, 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, as a percent of total sales, were 1.4%, 1.1%, and 0.7%
for the years ended December 31, 2003, 2002, and 2001, respectively.
Order Picking, Fulfillment, and Replenishment Systems
- -----------------------------------------------------
DISPEN-SI-MATIC(TM) and Automated Picking/Replenishment Solutions
-----------------------------------------------------------------
DISPEN-SI-MATIC(TM) offers an ideal solution for reducing inefficiencies,
labor-intensive methods, and long-time deliveries where high volume of small
orders must be picked and fulfilled. Industries served include pharmaceutical,
entertainment, vision, nutritional supplements, health and beauty aids,
cosmetics, and an assortment of various soft goods.
SI Systems' branded products include a variety of DISPEN-SI-MATIC(TM)
models for automated order selection, where volume, speed, accuracy, and
efficiency are of the essence. The Pick-to-Belt, Totes Through, and Buckets
Through are solutions that provide ultra-high throughput for loose-pick
individual items. Additionally, the DISPEN-SI-MATIC(TM) allows a package to be
dispensed directly into a tote, thus achieving a high degree of accuracy in
order picking and 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.
DISPEN-SI-MATIC(TM) controls are high-speed, PC-based systems, utilizing SI
Systems' proprietary software and architecture. Hardware and software
flexibility assures reliable interfacing with the customer's host computer.
SI Systems' branded technologies include automated picking and
replenishment solutions that complement DISPEN-SI-MATIC(TM), thus offering the
Company's customers a comprehensive solution in order picking and fulfillment
where volume of orders are processed with a high degree of accuracy. These
highly sophisticated systems require customization tailored to each individual
customer's requirements.
A typical DISPEN-SI-MATIC(TM) and automated picking and replenishment
system requires approximately six to nine months to engineer, manufacture, and
install.
DISPEN-SI-MATIC(TM) and the related order picking, fulfillment, and
replenishment systems sales (including sales of Automated Pharmacy Systems to
SI/BAKER, INC. ("SI/BAKER")), as a percent of total sales, were 10.0%, 11.5%,
and 9.2% for the years ended December 31, 2003, 2002, and 2001, respectively.
SI/BAKER, INC. (Automated Pharmacy Systems)
-------------------------------------------
On March 1, 1993, the Company and Automated Prescription Systems, Inc.
formed a 50/50 joint venture, SI/BAKER, INC. In 1998, Automated Prescription
Systems, Inc. was renamed McKesson Automation Systems Inc. ("McKesson").
SI/BAKER drew upon the automated material handling systems experience of
the Company and the automated pill counting and dispensing products of McKesson
to provide automated pharmacy systems. SI/BAKER was formed to address the
rapidly evolving automation needs of managed care pharmacy operations which fill
prescriptions by mail for the clients of health care provision plans. The
demographics of the aging
6
population in the United States and the emphasis on reduced health care costs,
of which prescription costs are a major part, was the driving force behind the
automation of mail order and central fill pharmacy operations.
On September 19, 2003, the Company sold its entire ownership interest in
SI/BAKER to McKesson pursuant to the terms of that certain Stock Purchase
Agreement dated September 19, 2003 by and among Paragon, McKesson, and SI/BAKER.
Prior to the sale, the Company received royalty income from SI/BAKER at a
rate of 2% of SI/BAKER gross sales for marketing and sales efforts on behalf of
SI/BAKER. The Company accounted for its investment in the joint venture on the
equity basis by recognizing its proportionate share (50%) of SI/BAKER net
earnings. Information pertaining to the Company's former SI/BAKER joint venture
is included in Note 11 of Notes to Consolidated Financial Statements.
Ermanco Branded Products -- Conveyor Systems Segment
- ----------------------------------------------------
Conveyor Systems
- ----------------
Ermanco branded products encompass the conveyor and sortation systems
segment of the business.
Ermanco supplies material handling systems and equipment to both national
and international markets. Ermanco offers services ranging from the delivery of
basic transportation conveyors to turnkey installations of complex, fully
automated work-in-process production lines and distribution centers, utilizing
sophisticated, custom-designed controls software. Ermanco often combines various
components of its technologies as part of a total system solution.
Ermanco's accumulation technologies encompass XenoROL(R) line-shaft-driven
live roller conveyor, NBA-23(TM) narrow belt accumulation conveyor, AccuROL(R)
belt-driven live roller conveyor, and IntelliROL(R) motorized-roller conveyor.
Ermanco's proven sortation systems include technologies such as urethane belt
transfers (UBTs); ERS(R) right angle sorters; multi-stage, air-operated pushers;
ESA60(R) swing arm diverters; NBS 30(R), NBS 90(R), and NBS 90-SP(R) narrow belt
sorters. Ermanco's Command Systems Software(R), a suite of software routines, is
available to meet the configuration, operation, and specific parameters of
individual systems. Ermanco branded sales as a percent of total sales were
68.1%, 61.0%, and 62.5% for the years ended December 31, 2003, 2002, and 2001,
respectively.
--------------------------------
Product Warranty
----------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements and
the type of system sold, with a typical warranty period of one year.
Sales and Marketing
-------------------
The Company goes to market with a multiple brand, multiple channel strategy
under the SI Systems and Ermanco brands. Each brand has its own focused sales
force, utilizing the products and services currently available or under
development within the Company.
SI Systems
- ----------
SI Systems' sales of SI Systems' branded products are made through SI
Systems' internal sales personnel. The systems are sold on a fixed-price basis.
Generally, contract terms provide for progress payments and a portion of the
purchase price is withheld by the customer until the system has been accepted.
Customers include major manufacturers, technology organizations, and
distributors of a wide variety of products, as well as the U.S. government. A
significant amount of business is derived from existing customers through the
sale of additional systems, additions to existing systems, plus parts and
service. The Company is not substantially dependent upon any one customer,
however, the Company's business is dependent upon a limited number of customers.
7
Ermanco
- -------
Ermanco branded products are sold primarily through a worldwide network of
approximately 100 experienced material handling equipment distributors and
licensees. The distributors locate opportunities that they may fulfill
themselves by purchasing products and/or services from Ermanco and take the
order in their name, acting as the system integrator, or they may elect to have
Ermanco assume the role of system integrator. In the latter case, Ermanco will
negotiate the contract with the end user and assume total system responsibility,
providing the distributor with a "finder's fee." Approximately 85% of Ermanco's
volume is orders processed by distributors, and 15% of the volume is orders
processed with the end user. Depending upon the distribution channel that is
used, the typical number of competitors on any particular project varies.
Licensees are located in Japan and the Republic of South Africa, with global
affiliates in Brazil, Canada, and the United Kingdom. Ermanco branded products
and services are sold on a fixed-price basis. Generally, contract terms are net
30 days for product and parts sales, with progress payments for system-type
projects.
Competition
-----------
The material handling industry includes many products, devices, and systems
competitive with those of the Company. As in the case of other technically
oriented companies, there is a risk that the Company's business may be adversely
affected by technological advances made by its competitors. However, the Company
believes that its competitive advantages include its reputation in the material
handling field and proven capabilities in the markets in which it concentrates.
Its disadvantages include its relatively small size as compared to certain of
its larger competitors.
SI Systems
- ----------
SI Systems' CARTRAC(R) system competes with various alternative material
handling technologies, including automated guided vehicle systems, electrified
monorail and pallet skid systems, power and free conveyor systems, and belt and
roller conveyor systems. Five principal competitors supply equipment similar to
the CARTRAC(R) system. 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.
There are four principal competitors supplying equipment similar to the
LO-TOW(R) system. Competition in this field is primarily in the areas of price,
experience, systems performance, and features. SI Systems is a leading provider
of LO-TOW(R) systems, based on Conveyor Equipment Manufacturers Association
(CEMA) United States market statistics.
The DISPEN-SI-MATIC(TM) system competes primarily with manual picking
methods, and it also competes with similar devices provided by two other system
manufacturers, along with various alternative picking technologies, such as
general purpose "broken case" automated order selection systems that have been
sold for picking items of non-uniform configuration. The Company believes that
the DISPEN-SI-MATIC(TM) system provides greater speed and accuracy than manual
methods of collection and reduces damage, pilferage, and labor costs.
Ermanco
- -------
The 2003-2004 Conveyor Equipment Manufacturers Association yearbook
includes 30 companies in the list of members in the Unit Handling Conveyors
(Light to Medium) classification (SIC 353501). Twenty-two members report
statistics on a monthly basis in this category, with booked sales of $1.26
billion in 2003. Many companies are involved in more than this one category.
Many of these companies pursue opportunities with a direct sales force. Ermanco
branded products are sold primarily through a distributor network of
independently owned and operated companies as its primary channel. There are
approximately 1,000 companies listed under the Conveying and Conveying Equipment
- - Wholesale classification (SIC 508410); however, this includes those companies
involved in bulk material handling and unit conveyor handling.
8
Raw Materials
-------------
The Company has not been adversely affected by energy or raw materials
shortages. Its Spring Lake, Michigan plant uses natural gas for heating and
electricity to operate its machinery. The principal raw material purchased by
the Company is steel, which the Company purchases from various suppliers. 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 approximately 35 patents, of which 24 have been issued in
the United States, with lives that expire through February 2021, and the Company
has 5 pending patent applications. Significant design features of the
CARTRAC(R), LO-TOW(R), Sortation, and DISPEN-SI-MATIC(TM) systems are covered by
patents or patent applications in the United States.
The Company's significant patents pertain mainly to the following areas:
vehicles and carrier design, loading and unloading products, speed and precision
control, track design and assembly, accumulation of vehicles, and simultaneous
order requests processing equipment. CARTRAC(R), ROBOLITE(R), ROBODRIVE(R),
LO-TOW(R), SWITCH-CART(R), MINI-CARTRAC(R), SI ORDERMATIC(R), ACCUPIC(R),
XenoROL(R), EWX100(R), Command Systems Software (CSS)(R), ERS(R), ESA60(R),
LightWORX(R), MCN2000(R), MTN 2000(R), NBS(R), XcelSORT(R), XenoPRESSURE(R),
XenoSORT(R), XenoTRACTION(R), NBS 30(R), NBS 90(R), NBS 90-SP(R), IntelliROL(R),
and AccuROL(R) are registered trademarks of the Company. ROBORAIL(TM),
DISPEN-SI-MATIC(TM), NBA(TM), NBT(TM), CRUZcontrol(TM), and "P4"(TM) are
trademarks of the Company.
Ermanco
- -------
Ermanco currently has license agreements with two foreign companies. These
agreements typically permit the licensee to manufacture conveyors using Ermanco
branded technology. Royalties are received based on sales volume. Royalty income
received from the license agreements in the years ended December 31, 2003, 2002,
and 2001 was $30,000, $17,000, and $66,000, respectively.
Product Development
-------------------
Product development costs, including patent expense, were $400,000,
$358,000, and $456,000 for the years ended December 31, 2003, 2002, and 2001,
respectively.
Development programs in the year ended December 31, 2003 included the
NBA-23(TM) narrow belt accumulation conveyor, computer software for warehousing
and distribution center operations, and improvements to the narrow belt sorter
and the Company's Order Picking, Fulfillment, and Replenishment systems.
Development programs in the year ended December 31, 2002 included the new
NBA-23(TM) narrow belt accumulation conveyor and improvements to the Company's
sortation conveyor technologies and Order Picking, Fulfillment, and
Replenishment systems.
Development programs in the year ended December 31, 2001 included
enhancements to the Company's NBS 30(R), NBS 90(R), and NBS 90-SP(R) narrow belt
sorters and Order Picking, Fulfillment, and Replenishment systems. The NBS
30(R), NBS 90(R), and NBS 90-SP(R) narrow belt sorters contain high-friction
divert wheels that raise between the belts, enabling product to be diverted at a
30 or 90-degree angle.
9
The Company aggressively pursues continual research of new product
development opportunities, with a concentrated effort to improve existing
technologies that improve customer efficiency. The Company also develops new
products and integration capabilities that are financed through customer
projects.
Employees
---------
As of December 31, 2003, the Company employed three executive officers.
The Company provides life insurance, major medical insurance, retirement
programs, and paid vacation and sick leave benefits, and considers its relations
with employees to be satisfactory.
SI Systems
- ----------
As of December 31, 2003, the Company's Easton, Pennsylvania operation
employed 43 office employees, including salespersons, draftspersons, and
engineers. SI Systems also operates as a project manager in connection with the
installation, integration, and service of its products generally utilizing
subcontractors.
Ermanco
- -------
As of December 31, 2003, the Company's Spring Lake, Michigan operation
employed 154 persons, including 60 office employees and 94 manufacturing
employees. All manufacturing employees are collective bargaining personnel. The
current collective bargaining agreement expires on May 31, 2007.
Item 2. Properties
- ------- ----------
SI Systems' principal office is located in a 173,000 square foot concrete,
brick, and steel facility in Easton, Pennsylvania. In February 2003, the Company
sold its Easton, Pennsylvania facility. Significant terms of the agreement of
sale include a leaseback of 25,000 square feet of office space for five years by
the Company. The leasing agreement requires fixed monthly rentals of $17,188
(with annual increases of 3%). The terms of the lease also require the payment
of a proportionate share of the facility's operating expenses. The lease expires
on February 21, 2008.
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement requires fixed
monthly rentals of $33,283 (with annual increases of 2.5%), which includes a
variable portion based on the lessor's borrowing rate and the unpaid mortgage
balance. The terms of the lease require payment by Ermanco of all taxes,
insurance, and other ownership-related costs of the property. The lease expires
on September 30, 2004. The Company is in the process of negotiations to extend
the term of the lease and modify the monthly rental payments.
The Company believes that its Spring Lake, Michigan facility is adequate
for its current operations. Due to the timing and receipt of new orders, the
Company's operations experience fluctuations in workload due to the timing of
customer job completion requirements. Currently, the Company's facilities are
adequate to handle these fluctuations. In the event of an unusual demand in
workload, the Company supplements its internal operations with outside
subcontractors that perform services for the Company in order to complete
contractual requirements for its customers. The Company will continue to utilize
internal personnel and its own facilities and, when necessary and/or cost
effective, outside subcontractors to complete contracts in a timely fashion in
order to address the needs of its customers.
In order to obtain a line of credit, the Company granted its principal bank
a security interest in all personal property, including, without limitation, all
accounts, deposits, documents, equipment, fixtures, general intangibles, goods,
instruments, inventory, letters of credit, money, and securities.
10
Item 3. Legal Proceedings
- ------- -----------------
In July 2003, a competitor filed an action against the Company in the
United States District Court for the District of New Jersey alleging that
certain of the Company's products infringed patents held by the competitor and
also asserting claims for breach of contract, unjust enrichment, unfair
competition, tortious interference with prospective economic advantage, and
violation of New Jersey's consumer fraud act as a result of alleged improper use
of the competitor's trade secrets, technology, and other proprietary
information. Based on these allegations, the competitor was seeking monetary
damages and injunctive relief against the Company.
In February 2004, a settlement was reached between the Company and the
competitor. Under the settlement, the competitor dismissed the action and agreed
that the Company's products involved in the litigation are immune from suit for
infringement of any of the competitor's intellectual property rights. In
exchange, Paragon agreed to dismiss its counterclaims and paid the competitor
$1,125,000.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2003.
11
PART II
-------
Item 5. Market For The Registrant's Common Stock And Related Security Holder
- ------- --------------------------------------------------------------------
Matters
-------
The Company's common stock trades on the American Stock Exchange (Amex)
under the symbol "PTG." The high and low sales prices for the years ended
December 31, 2003 and 2002 are as follows:
For the Year Ended For the Year Ended
December 31, 2003 December 31, 2002
------------------------------ ------------------------------
High Low High Low
------------- ------------- ------------- -------------
First Quarter........................... 8.80 8.00 8.95 7.90
Second Quarter.......................... 10.28 8.40 8.50 7.85
Third Quarter........................... 10.80 9.70 8.30 6.80
Fourth Quarter ......................... 10.70 9.20 8.50 7.63
The Company did not pay any cash dividends during the years ended December
31, 2003 and 2002, and has no present intention to declare cash dividends. In
accordance with the terms and conditions of the Company's line of credit
facility with its principal bank, the Company is restricted from paying
dividends in excess of 15% of net earnings.
The number of beneficial holders of the Company's common stock at December
31, 2003 was approximately 1,036.
The closing market price of the Company's common stock on March 10, 2004
was $10.85.
Item 6. Selected Financial Data
- ------- -----------------------
The following table sets forth the Company's selected consolidated
financial information for the five years in the year ended December 31, 2003. On
September 30, 1999, the Company concluded the acquisition of all of the
outstanding common stock of Ermanco. The results for the years ended December
31, 2003, 2002, 2001, and 2000 include the operating results of Ermanco for the
entire year; however, results for the ten months ended December 31, 1999,
included the operating results of Ermanco from October 1, 1999 through December
31, 1999 only. The selected consolidated financial data presented below should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and our Consolidated Financial Statements
and Notes thereto included in this report. The historical results presented
herein may not be indicative of future results. The information presented below
is in thousands, except per share amounts.
For the
Ten
Months
For the Years Ended Ended
----------------------------------------------------- ------------
12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
------------- ------------ ------------ ------------- ------------
Net sales................... $37,295 38,224 50,752 64,306 41,108
Net earnings (loss)......... 3,785 663 (62) 3,480 (2,780)
Basic earnings (loss)
per share................. .89 .16 (.01) .83 (.72)
Diluted earnings (loss)
per share................. .87 .15 (.01) .82 (.73)
Total assets................ 33,774 36,703 41,343 45,917 45,406
Long-term liabilities....... 2,159 9,402 11,074 13,744 15,670
Cash dividends per
share..................... - - - - .10
12
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and related notes thereto included in this Annual Report on
Form 10-K for the year ended December 31, 2003. The discussion and analysis
contains "forward-looking statements" based on management's current
expectations, assumptions, estimates, and projections. These forward-looking
statements involve risks and uncertainties. The Company's actual results could
differ materially from those included in these "forward-looking statements" as a
result of certain factors, as more fully discussed in Exhibit 99.1.
--------------------------------
Business Overview
- -----------------
Paragon Technologies, Inc. provides a variety of material handling
solutions, including systems, technologies, products, and services for material
flow applications. The Company has gone to market with a multiple brand,
multiple channel strategy under the SI Systems and Ermanco brands.
Founded in 1958, SI Systems material handling solutions are based on core
technologies in horizontal transportation and order fulfillment and are aimed at
improving productivity for manufacturing, assembly, and distribution center
operations. Since 1964, Ermanco conveyor technologies and integrated conveyor
systems are based on core technologies in transportation, accumulation, and
sortation and continue to address the needs of the distribution, assembly, and
manufacturing marketplace. Ermanco is known as the originator of the
line-shaft-driven, live-roller conveyor.
The Company's focus on strengthening its balance sheet and enhancing
shareholder value led to a record level of net earnings for 2003 and the
elimination of all of the outstanding senior and subordinated debt. Some of the
major milestones that contributed to net earnings for 2003 and generated cash
flow to repay the outstanding debt were:
o a pre-tax gain on the sale of the Company's ownership interest in the
SI/BAKER joint venture of $4,901,000; and o a pre-tax gain on the
sale-leaseback of the Company's Easton, Pennsylvania facility of
$1,363,000.
Partially offsetting the favorable impact of the aforementioned items was:
o settlement and legal costs of $1,375,000 associated with an action
against the Company by a competitor relating to the Company's
intellectual property.
--------------------------------
13
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 above
80%, as occurred in fiscal 2000, the Company may see an increase in rate of new
orders, and therefore, an increase in backlog and sales may also occur. The
backlog of orders represents the uncompleted portion of systems contracts along
with the value of parts and services from customer purchase orders related to
goods that have not been shipped or services that have not been rendered.
Backlog is generally indicative of customer demand for the Company's products.
As the demand for the Company's products increases, the backlog of orders, rate
of new orders, and sales also typically increases. The following table depicts
the Company's backlog, orders, sales, and Capacity Utilization for the years
ended December 31, 2003, 2002, 2001, and 2000:
(Dollars in Thousands) 2003 2002 2001 2000
----------- ---------- ----------- ------------
Backlog of orders - beginning of year......... $ 6,924 13,342 22,913 23,685
Add: orders................................. 40,896 31,806 41,181 63,534
Less: sales................................. 37,295 38,224 50,752 64,306
------ ------ ------ ------
Backlog of orders - end of year............... $10,525 6,924 13,342 22,913
====== ===== ====== ======
Capacity Utilization.......................... 74.8% 75.6% 77.7% 82.6%
Current Ratio
-------------
The Company's current ratio, which is the ratio of current assets to
current liabilities, has been relatively consistent during the four years ended
December 31, 2003. 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, 2003, 2002, 2001, and 2000:
(Dollars in Thousands) 2003 2002 2001 2000
----------- ----------- ------------ ------------
Current assets................... $14,691 15,444 19,200 22,850
------ ------ ------ ------
Current liabilities.............. $9,646 9,472 13,388 15,193
Current ratio.................... 1.52 1.63 1.43 1.50
14
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Key Performance Metrics Relevant to the Company (Continued)
- -----------------------------------------------
Debt to Equity Ratio
--------------------
With an emphasis over the past several years on generating cash flows to
eliminate the Company's senior and subordinated debt, the Company has reduced
its financial leverage as evidenced by its debt to equity ratio, which is the
ratio of total debt to stockholders' equity. Management believes the lower debt
to equity ratio provides greater protection for its shareholders and enhances
the Company's ability to obtain additional financing, if required. The following
table illustrates the calculation of the debt to equity ratio for the years
ended December 31, 2003, 2002, 2001, and 2000:
(Dollars in Thousands) 2003 2002 2001 2000
------------ ------------ ------------ ------------
Current installments of long-term debt...... $ - 1,437 2,305 1,521
Long-term debt.............................. - 7,263 9,900 12,780
------ ------ ------ ------
Total debt.................................. - 8,700 12,205 14,301
------ ------ ------ ------
Total stockholders' equity.................. $ 21,969 17,829 16,881 16,980
====== ====== ====== ======
Debt to equity ratio........................ - .49 .72 .84
--------------------------------
Critical Accounting Policies and Estimates
- ------------------------------------------
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and other financial information, including
the related disclosure of commitments and contingencies at the date of our
financial statements. Actual results may, under different assumptions and
conditions, differ significantly from our estimates.
We believe that our accounting policies related to revenue recognition on
system sales, warranty, inventories, allowance for doubtful accounts, and asset
impairments as described below, are our "critical accounting policies" as
contemplated by the Securities and Exchange Commission. 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, 2003, there are no contracts that are anticipated to result in a
loss.
The Company believes that it has the ability to reasonably estimate the
total costs and applicable gross profit margins at the inception of the contract
for all of its systems contracts. However, where cost estimates change, there
could be a significant impact on the amount of revenue recognized. The Company's
failure to estimate accurately can result in cost overruns which will result in
the loss of profits if the Company determines that it has significantly
underestimated the costs involved in completing contracts. The Company has not
had any significant cost overruns resulting in loss of profits during the past
three years.
15
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Critical Accounting Policies and Estimates (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, ranging from one to
two percent depending on the type of system sold, and a detailed review of
products still in the warranty period. Historically, the level of warranty
reserve has been appropriate based on management's assessment of estimated
future warranty claims. However, if unanticipated warranty issues arise in the
future, there could be a significant impact on the recorded warranty reserve.
The recorded warranty reserve as of December 31, 2003 is $925,000.
Inventories
-----------
Inventories are valued at the lower of average cost or market. The Company
provides an inventory reserve determined by a specific identification of
individual slow moving items and other inventory items based on historical
experience. The reserve is considered to be a write-down of inventory to a new
cost basis. Upon disposal of inventory, the cost and related inventory reserve
are removed from the accounts. Historically, the level of inventory reserve has
been appropriate based on management's assessment of estimated future inventory
disposals.
Allowance for Doubtful Accounts
-------------------------------
The Company provides an allowance for doubtful accounts determined by a
specific identification of individual accounts and other accounts based on
historical experience. The Company writes off receivables upon determination
that no further collections are probable. Historically, receivable write offs
have not had a material impact on the Company's financial statements.
Asset Impairments
-----------------
On January 1, 2002, the Company adopted SFAS No. 142, analyzed its goodwill
for impairment, and will make similar evaluations on a periodic basis in the
future. During 2003, the Company performed the required annual impairment test
of goodwill and determined that there was no impairment. In assessing the
recoverability of the Company's goodwill, the Company must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective asset. If these estimates or their related assumptions
change the fair value of the asset in the future, the Company may be required to
record impairment charges. The book value of goodwill as of December 31, 2003,
is $17,657,000.
--------------------------------
16
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results of Operations - Year Ended December 31, 2003 Compared to the Year
- -------------------------------------------------------------------------
Ended December 31, 2002
- -----------------------
Earnings Summary
- ----------------
The Company's had net earnings of $3,785,000 (or $0.89 basic earnings per
share) for the year ended December 31, 2003, compared to net earnings of
$663,000 (or $0.16 basic earnings per share) for the year ended December 31,
2002. The increase in net earnings was primarily due to:
o a pre-tax gain on the sale of the Company's ownership interest in the
SI/BAKER joint venture of $4,901,000; o a pre-tax gain on the
sale-leaseback of the Company's Easton, Pennsylvania facility of
$1,363,000; o a reduction in selling, general and administrative
expenses of $497,000, exclusive of settlement and legal costs
mentioned below; and
o a reduction in interest expense of $370,000.
Partially offsetting the favorable impact of the aforementioned items was:
o settlement and legal costs of $1,375,000 associated with an action
against the Company by a competitor relating to the Company's
intellectual property; and
o a restructuring credit of $264,000 in 2003 pertaining to the final
settlement of the remaining pension obligations associated with the
Company's terminated pension plan and the reversal of a previously
established severance accrual that was no longer required versus a
restructuring credit of $859,000 in 2002 pertaining to the partial
settlement of the remaining pension obligations associated with the
Company's terminated pension plan.
Net Sales and Gross Profit on Sales
- -----------------------------------
2003 2002
--------------------- --------------------
Net sales............................................. $37,295,000 $38,224,000
Cost of sales......................................... 27,847,000 28,951,000
---------- ----------
Gross profit on sales................................. $ 9,448,000 $ 9,273,000
========== ==========
Gross profit as a percentage of sales................. 25.3% 24.3%
==== ====
The net sales decrease was attributable to a decreased volume of SI
Systems' branded sales of $2,823,000 associated with the current economic
slowdown and competitive pricing pressures, offset by an increase in Ermanco
branded sales of $1,894,000.
The increase in Ermanco branded sales was primarily due to an equivalent
increase in sales to health and beauty aids and mail processing related
customers as a result of a slight recovery in these industry sectors in 2003 as
compared to 2002.
Gross profit, as a percentage of sales, for the year ended December 31,
2003 was favorably impacted by approximately 2.1% due to a reduction in overhead
costs and approximately .5% due to the favorable performance on the Company's
contracts and product mix during 2003 as compared to 2002. Gross profit, as a
percentage of sales, for 2002 was favorably impacted by approximately 1.5% as a
result of the reversal of previously established contract accruals due to
changes in cost estimates.
17
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results of Operations - Year Ended December 31, 2003 Compared to the Year
- -------------------------------------------------------------------------
Ended December 31, 2002 (Continued)
- -----------------------
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses of $9,436,000 were higher by
$878,000 for the year ended December 31, 2003 than for the year ended December
31, 2002. The increase of $878,000 was comprised of:
o settlement and legal costs of $1,375,000 associated with an action
against the Company by a competitor relating to the Company's
intellectual property; and
o severance charges of $387,000 in 2003 versus $154,000 in 2002.
Partially offsetting the aforementioned unfavorable variance were cost
savings of approximately $700,000 attributable to headcount reductions in the
prior fiscal year and an emphasis on cost reduction, including reduced facility
operating costs as a result of the Company's sale of its Easton, Pennsylvania
facility.
Restructuring Charges (Credits)
- ------------------------------
In 2001, the Company restructured its business operations, including
curtailment of a detailed benefit plan, and recorded a charge of $1,538,000 for
restructuring costs. In December 2002, the Company partially settled its
obligations by making lump-sum distributions to those participants who elected
that payment option and correspondingly recorded a restructuring credit of
$859,000 during 2002. In February 2003, the Company settled its remaining
obligations by purchasing annuities for those participants who elected that
payment option and correspondingly recorded a restructuring credit of $170,000
during 2003. In addition, during 2003 the Company recorded a restructuring
credit of $94,000 associated with the reversal of a previously established
severance accrual that was no longer required.
Interest Expense
- ----------------
Interest expense of $676,000 was lower by $370,000 for the year ended
December 31, 2003 than for the year ended December 31, 2002. The decrease in
interest expense was attributable to the reduced level of long-term debt due to
principal payments and lower interest rates and the reversal of approximately
$174,000 of previously accrued interest on subordinated notes payable and the
impact of the change in the fair value of the interest rate swap agreement.
Partially offsetting the favorable variance were non-cash interest charges of
$306,000 associated with the settlement of the interest rate swap contract.
Equity in Income of Joint Ventures
- ----------------------------------
Equity in income of joint venture represents the Company's proportionate
share (50%) of its investment in the SI/BAKER joint venture that was being
accounted for under the equity method until the September 19, 2003 Closing Date
of the Sale of the Company's ownership interest in the SI/BAKER joint venture.
The favorable variance of $198,000 for the year ended December 31, 2003 in the
equity in income of the SI/BAKER joint venture was due to increased operating
results of SI/BAKER in 2003 as compared to 2002.
Gain on Sale of SI/BAKER Joint Venture
- --------------------------------------
In September 2003, the Company sold its entire ownership interest in
SI/BAKER, INC. The sale resulted in a gain of $4,901,000 in 2003.
18
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results of Operations - Year Ended December 31, 2003 Compared to the Year
- -------------------------------------------------------------------------
Ended December 31, 2002 (Continued)
- -----------------------
Loss (Gain) on Disposition of Property, Plant and Equipment
- -----------------------------------------------------------
The gain on the disposition of property, plant and equipment of $1,354,000
was higher by $1,260,000 for 2003 as compared to 2002. In 2003, the disposition
of property, plant and equipment was primarily attributable to the
sale-leaseback on the Company's Easton, Pennsylvania facility. The
sale-leaseback resulted in a total gain of $2,189,000, of which $1,363,000 was
recorded in 2003. The remaining gain of $826,000 was deferred and is being
recognized as a reduction in rent expense over the five-year term of the lease.
In 2002, the Company sold fixed assets that resulted in a gain of $94,000 in
2002.
Other Income, Net
- -----------------
The unfavorable variance of $74,000 in other income, net for the year ended
December 31, 2003 as compared to the year ended December 31, 2002 was primarily
attributable to 2002 containing $300,000 of short-term rental income relating to
certain real property of the Company's Easton, Pennsylvania facility. Partially
offsetting the unfavorable variance was an increase of $206,000 in revenue-based
royalty income from the Company's SI/BAKER joint venture and license agreements
related to material handling system sales during the year ended December 31,
2003.
Income Tax Expense
- ------------------
The Company recognized income tax expense of $2,424,000 during the year
ended December 31, 2003, compared to income tax expense of $267,000 during the
year ended December 31, 2002. Income tax expense was generally recorded at
statutory federal and state tax rates. Income tax expense for the year ended
December 31, 2002 was lower than the statutory federal and state tax rates
primarily as a result of tax benefit of approximately $109,000 for a dividend
received deduction for distributions from the Company's former SI/BAKER joint
venture.
--------------------------------
Results of Operations - Year Ended December 31, 2002 Compared to the Year
- -------------------------------------------------------------------------
Ended December 31, 2001
- -----------------------
The Company had net earnings of $663,000 (or $0.16 basic earnings per
share) for the year ended December 31, 2002, compared to a net loss of $62,000
(or $.01 basic loss per share) for the year ended December 31, 2001. The
increase in net earnings was primarily due to:
o other income from the short-term rental of certain real property of
$300,000;
o a reduction of $1,603,000 in selling, general and administrative
expenses, primarily resulting from costs savings attributable to the
Company's restructuring efforts;
o a restructuring credit of $859,000 in 2002 pertaining to the partial
settlement of pension obligations associated with the Company's
terminated pension plan versus restructuring charges of $1,538,000 in
2001; and
o the application of the non-amortization provision of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," whereby goodwill is no longer amortized thereby resulting in
an increase to pre-tax income of $468,000.
Partially offsetting the favorable impact of the aforementioned items was a
decrease in total revenues and gross profit of $12,528,000 and $3,152,000,
respectively, as described below, and a reduction of $571,000 in the equity in
income of the SI/BAKER joint venture as a result of a decline in sales and net
earnings at SI/BAKER.
Contributing to the net loss for the year ended December 31, 2001 were
$310,000 of charges related to a strategic transaction that was not completed.
19
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results of Operations - Year Ended December 31, 2002 Compared to the Year
- -------------------------------------------------------------------------
Ended December 31, 2001 (Continued)
- -----------------------
Net Sales and Gross Profit on Sales
- -----------------------------------
2002 2001
--------------------- --------------------
Net sales............................................. $38,224,000 $50,752,000
Cost of sales......................................... 28,951,000 38,327,000
---------- ----------
Gross profit on sales................................. $ 9,273,000 $12,425,000
========== ==========
Gross profit as a percentage of sales................. 24.3% 24.5%
==== ====
The net sales decrease was primarily attributable to a lower volume of
orders associated with the current economic slowdown and competitive pricing
pressures. The net sales decrease was comprised of a decrease in Ermanco's
branded sales of approximately $8,426,000 and a decrease in SI Systems' branded
sales of approximately $4,102,000. The decline in Ermanco branded sales was
primarily due to the prior year comparable period containing a greater amount of
sales related to distributors and companies in the technology sector. The
decline in SI Systems' branded sales was primarily due to the prior year
comparable period containing a greater amount of sales related to the U.S.
Postal Service.
Gross profit, as a percentage of sales, for the year ended December 31,
2002 was unfavorably impacted by approximately 1.0% due to the lower sales
volume to cover fixed overhead costs. Partially offsetting the aforementioned
unfavorable variance by approximately 0.7% was the favorable performance on the
Company's contracts in the year ended December 31, 2002, as compared to the year
ended December 31, 2001.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses of $8,558,000 were lower by
$1,603,000 for the year ended December 31, 2002 than for the year ended December
31, 2001. The decrease of $1,603,000 was primarily attributable to:
o cost savings of approximately $860,000 attributable to the Company's
restructuring of its business operations in the prior fiscal year and
emphasis on cost reduction;
o a reduction of approximately $295,000 in marketing expenses associated
with marketing research and the Company's participation in a biannual
industry trade show in the first quarter of the prior fiscal year; and
o $310,000 of expenses in 2001 related to a strategic transaction that
was not completed.
Amortization of Goodwill
- ------------------------
Due to the application of the non-amortization provision of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
goodwill is no longer amortized after December 31, 2001 as compared to
amortization expense of $468,000 for the year ended December 31, 2001.
Restructuring Charges (Credits)
- ------------------------------
The Company received approval from the Pension Benefit Guaranty Corporation
during the second quarter of 2002 to terminate the defined benefit plan for the
Company's former Easton, Pennsylvania production employees and distribute all
the plan's assets. In December 2002, the Company partially settled its
obligations by making lump-sum distributions to those participants who elected
that payment option and correspondingly recorded a restructuring credit of
$859,000.
During the second quarter of 2001, the Company restructured its business
operations and recorded a charge of $1,538,000 for restructuring costs.
20
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results of Operations - Year Ended December 31, 2002 Compared to the Year
- -------------------------------------------------------------------------
Ended December 31, 2001 (Continued)
- -----------------------
Interest Expense
- ----------------
Interest expense of $1,046,000 was lower by $252,000 for the year ended
December 31, 2002 than for the year ended December 31, 2001. The decrease in
interest expense was attributable to the reduced level of term debt due to
principal payments and lower interest rates.
Equity in Income of Joint Ventures
- ----------------------------------
Equity in income of joint ventures represents the Company's proportionate
share (50%) of its investment in the SI/BAKER joint venture and prior to January
1, 2002 its investment in the SI-Egemin joint venture, that were accounted for
under the equity method. The net unfavorable variance of $484,000 in the equity
in income of joint ventures for the year ended December 31, 2002 as compared to
the year ended December 31, 2001 was comprised of decreased earnings of
approximately $571,000 attributable to the SI/BAKER joint venture and decreased
losses of approximately $87,000 attributable to the SI-Egemin joint venture.
The unfavorable variance of $571,000 for the year ended December 31, 2002
in the equity in income of the SI/BAKER joint venture as compared to the year
ended December 31, 2001 was attributable to a decrease in earnings due to a
decline in sales at SI/BAKER. The sales decrease was primarily attributable to a
larger backlog of orders at the beginning of the prior fiscal year and a lower
volume of orders received during the year ended December 31, 2002, associated
with the current economic slowdown.
The Company divested of its investment in the SI-Egemin joint venture at
the end of calendar year 2001. The favorable variance of $87,000 for the year
ended December 31, 2002 in the equity in income of the SI-Egemin joint venture
was attributable to the prior fiscal year containing operating losses of the
joint venture.
Other Income, Net
- -----------------
The favorable variance of $61,000 in other income, net for the year ended
December 31, 2002 as compared to the year ended December 31, 2001 was primarily
attributable to $300,000 of short-term rental income received during 2002
relating to certain real property of the Company's Easton, Pennsylvania
facility. Partially offsetting the favorable variance in other income, net was a
reduction of (1) $126,000 in revenue-based royalty income from the Company's
SI/BAKER joint venture and license agreements related to international conveyor
system sales, and (2) fiscal 2001 containing income of $70,000 primarily
attributable to the reversal of previously established miscellaneous taxes and
license fee accruals that were no longer required.
Income Tax Expense (Benefit)
- ---------------------------
The Company recognized income tax expense of $267,000 during the year ended
December 31, 2002, compared to the recognition of an income tax benefit of
$257,000 during the year ended December 31, 2001. Income tax expense for the
year ended December 31, 2002 was lower than the statutory federal and state tax
rates primarily as a result of a tax benefit of approximately $109,000 for a
dividend received deduction for distributions from the SI/BAKER joint venture.
The income tax benefit recognized for the year ended December 31, 2001
represented the carryback of losses experienced during the year ended December
31, 2001 against prior year income plus the recognition of a tax benefit of
approximately $140,000 associated with the divestment of the SI-Egemin joint
venture.
--------------------------------
21
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 increased to $5,591,000 at December
31, 2003 from $5,385,000 at December 31, 2002. The increase resulted primarily
from:
o cash provided by operating activities totaling $329,000;
o proceeds of $5,482,000, net of advisory fees, from the sale of the
Company's ownership interest in the SI/BAKER joint venture;
o proceeds of $2,738,000 from the disposition of property, plant and
equipment; and o a decrease of $865,000 in restricted cash.
Partially offsetting the increase in cash and cash equivalents from these
sources was:
o the repayment of long-term debt of $8,700,000;
o the settlement of the interest rate swap contract of $283,000; and
o purchases of capital equipment of $237,000.
Cash provided by operating activities of $329,000 during the year ended
December 31, 2003 as compared to cash provided by operating activities of
$3,555,000 during the year ended December 31, 2002 decreased primarily due to
lower net earnings from operations experienced by the Company during the year
ended December 31, 2003, and a reduction in net working capital.
In 2003, the Company repaid all of its outstanding term debt and
subordinated debt.
The Company's line of credit facility may not exceed $1,000,000 and is to
be used primarily for working capital purposes. As of December 31, 2003, the
Company did not have any borrowings under the line of credit facility, and the
line of credit facility expires effective June 30, 2004.
To obtain the line of credit, the Company granted the bank a security
interest in all personal property, including, without limitation, all accounts,
deposits, documents, equipment, fixtures, general intangibles, goods,
instruments, inventory, letters of credit, money, and securities.
The Company anticipates that its financial resources, consisting of cash
generated from operations, 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 plans to consider all strategic alternatives to increase
shareholder value, including expansion opportunities as they arise, although the
ongoing operating results of the Company, the economics of the expansion, and
the circumstances justifying the expansion will be key factors in determining
the amount of resources the Company will devote to further expansion.
--------------------------------
22
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Contractual Obligations
- -----------------------
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement requires fixed
monthly rentals of $33,283 (with annual increases of 2.5%), which includes a
variable portion based on the lessor's borrowing rate and the unpaid mortgage
balance. The terms of the lease require the payment by Ermanco of all taxes,
insurance, and other ownership related costs of the property. The lease expires
on September 30, 2004. The Company is in the process of negotiations to extend
the term of the lease and modify the monthly rental payments. No monthly rental
payments beyond September 30, 2004 are included in the table below.
In connection with the February 2003 sale of the Company's Easton,
Pennsylvania facility, the Company entered into a leaseback arrangement for
25,000 square feet of office space for five years. The leasing agreement
requires fixed monthly rentals of $17,188 (with annual increases of 3%). The
terms of the lease also require the payment of a proportionate share of the
facility's operating expenses. The lease expires on February 21, 2008.
The Company also leases certain automobiles and office equipment, computer
equipment, and software under various operating leases with terms extending
through September 2007.
Future contractual obligations and commercial commitments at December 31,
2003 as noted above are as follows:
Payments Due by Period
---------------------------------------------------------------------------------
Less Than
Total 1 Year 2 Years 3 Years 4 Years 5 Years
----- --------- ------- ------- ------- -------
Contractual
obligations:
Operating
leases........ $ 1,409,000 631,000 282,000 228,000 234,000 34,000
--------- ------- -------- ------- ------- -------
Total......... $ 1,409,000 631,000 282,000 228,000 234,000 34,000
========= ======= ======== ======= ======= =======
Amount of Commitment
Expiration Per Period
-----------------------------------------------------------------
Total Amounts Less Than
Committed 1 Year 2 Years 3 Years 4 Years 5 Years
--------- ------ ------- ------- ------- -------
Other
commercial
commitments:
Letters of
credit........ $200,000 200,000 - - - -
Line of
credit........ - - - - - -
Off-Balance Sheet Arrangements
- ------------------------------
As of December 31, 2003, the Company had no off-balance sheet arrangements
in the nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity, or market risk support to unconsolidated entities for any
such assets), or obligations (including contingent obligations) arising out of
variable interests in unconsolidated entities providing financing, liquidity,
market risk, or credit risk support to the Company, or that engage in leasing,
hedging, or research and development services with the Company.
--------------------------------
23
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Recently Issued Accounting Pronouncements
- -----------------------------------------
The adoption of SFAS No. 132 (revised), SFAS No. 146, SFAS No. 148, SFAS
No. 150, FASB Interpretation No. 45, and FASB Interpretation No. 46 did not have
a material impact on the Company's 2003 financial statements.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risk, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments are material
to its results of operations.
24
Item 8. Consolidated Financial Statements and Supplementary Data
- ------- --------------------------------------------------------
I N D E X
o Independent Auditors' Report.
o Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2003 and 2002.
Consolidated Statements of Operations for the years ended December 31,
2003, 2002, and 2001.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002, and 2001.
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002, and 2001.
Notes to Consolidated Financial Statements.
o Financial Statement Schedule for the years ended December 31, 2003, 2002,
and 2001:
II - Valuation and qualifying accounts
o All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
25
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Paragon Technologies, Inc.
We have audited the consolidated financial statements of Paragon Technologies,
Inc. and subsidiary as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Paragon
Technologies, Inc. and subsidiary as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, Paragon
Technologies, Inc. changed its method of accounting for goodwill and other
intangible assets in 2002.
/s/ KPMG LLP
Philadelphia, PA
March 8, 2004
26
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2003 and 2002
(In Thousands, Except Share Data)
December 31, December 31,
2003 2002
------------------- ------------------
Assets
- ------
Current assets:
Cash and cash equivalents.......................... $ 5,591 5,385
Restricted cash.................................... - 865
Receivables:
Trade (net of allowance for doubtful
accounts of $265 as of December 31,
2003 and $221 as of December 31,
2002).......................................... 5,277 4,285
Notes and other receivables...................... 38 940
------ ------
Total receivables.............................. 5,315 5,225
------ ------
Costs and estimated earnings in excess of billings. 521 128
Inventories:
Raw materials.................................... 926 975
Work-in-process.................................. 106 109
Finished goods................................... 159 291
------ ------
Total inventories.............................. 1,191 1,375
------ ------
Deferred income tax benefits....................... 1,444 1,771
Prepaid expenses and other current assets.......... 629 695
------ ------
Total current assets............................. 14,691 15,444
------ ------
Property, plant and equipment, at cost:
Land............................................... - 27
Buildings and improvements......................... 228 3,768
Machinery and equipment............................ 3,643 4,291
------ ------
3,871 8,086
Less: accumulated depreciation.................... 2,455 5,877
------ ------
Net property, plant and equipment................ 1,416 2,209
------ ------
Investment in joint venture........................... - 1,325
Goodwill.............................................. 17,657 17,657
Other assets.......................................... 10 68
------ ------
Total assets..................................... $ 33,774 36,703
====== ======
See accompanying notes to consolidated financial statements.
27
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2003 and 2002
(In Thousands, Except Share Data)
December 31, December 31,
2003 2002
------------------- ------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current installments of long-term debt................ $ - 1,437
Accounts payable...................................... 2,671 2,403
Customers' deposits and billings in excess of
costs and estimated earnings........................ 2,180 2,271
Accrued salaries, wages, and commissions.............. 304 544
Income taxes payable.................................. 894 154
Accrued product warranty.............................. 925 894
Deferred gain on sale-leaseback....................... 165 -
Accrued other liabilities............................. 2,507 1,769
------ ------
Total current liabilities......................... 9,646 9,472
------ ------
Long-term liabilities:
Long-term debt, excluding current installments:
Term loan........................................... - 4,263
Subordinated notes payable.......................... - 3,000
------ ------
Total long-term debt.............................. - 7,263
Other long-term liability............................. - 401
Deferred gain on sale-leaseback....................... 523 -
Deferred income taxes payable......................... 1,594 1,713
Deferred compensation................................. 42 25
------ ------
Total long-term liabilities....................... 2,159 9,402
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and outstanding
4,277,595 shares as of December 31, 2003
and 4,256,098 shares as of December 31,
2002................................................ 4,278 4,256
Additional paid-in capital............................ 7,586 7,313
Retained earnings..................................... 10,105 6,504
Accumulated other comprehensive loss.................. - (244)
------ ------
Total stockholders' equity........................ 21,969 17,829
------ ------
Total liabilities and stockholders' equity........ $ 33,774 36,703
====== ======
See accompanying notes to consolidated financial statements.
28
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements Of Operations
For the Years Ended December 31, 2003, 2002, and 2001
(In Thousands, Except Share and Per Share Data)
December 31, December 31, December 31,
2003 2002 2001
---------------- ---------------- ----------------
Net sales................................. $ 37,295 38,224 50,752
Cost of sales............................. 27,847 28,951 38,327
------ ------ ------
Gross profit on sales.................. 9,448 9,273 12,425
------ ------ ------
Selling, general and administrative
expenses............................... 9,436 8,558 10,161
Product development costs................. 400 358 456
Amortization of goodwill.................. - - 468
Restructuring charges (credits)........... (264) (859) 1,538
Interest expense.......................... 676 1,046 1,298
Interest income........................... (76) (112) (252)
Equity in income of joint ventures........ (256) (58) (542)
Loss (gain) on sale of SI/BAKER
joint venture.......................... (4,901) - -
Loss (gain) on disposition of
property, plant and equipment.......... (1,354) (94) 52
Other income, net......................... (422) (496) (435)
------ ------ ------
3,239 8,343 12,744
------ ------ ------
Earnings (loss) before income
taxes.................................. 6,209 930 (319)
Income tax expense (benefit).............. 2,424 267 (257)
------ ------ ------
Net earnings (loss).................... $ 3,785 663 (62)
====== ====== ======
Basic earnings (loss) per share........... $ .89 .16 (.01)
====== ====== ======
Diluted earnings (loss) per share......... $ .87 .15 (.01)
====== ====== ======
Weighted average shares
outstanding............................ 4,269,274 4,231,878 4,210,819
Dilutive effect of stock options.......... 95,438 64,706 -
Dilutive effect of phantom stock
units.................................. - 3,609 -
--------- --------- ---------
Weighted average shares
outstanding assuming dilution.......... 4,364,712 4,300,193 4,210,819
========== ========== =========
See accompanying notes to consolidated financial statements.
29
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements Of Stockholders' Equity
For the Years Ended December 31, 2003, 2002, and 2001
(In Thousands)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Loss Equity Income (Loss)
------- ---------- -------- ------------- ------------- -------------
Balance at December 31, 2000................. $ 4,195 6,882 5,903 - 16,980
Net loss..................................... - - (62) - (62) (62)
Cumulative impact of adoption of
FAS 133, net of tax of $69................ - - - (96) (96)
Loss reclassified from other
comprehensive income, net of tax of $51... - - - 89 89
Change in fair value of derivative,
net of tax of $141........................ - - - (246) (246) (246)
-----
Comprehensive loss........................... (308)
=====
Stock options and awards exercised........... 17 124 - - 141
Issuance of common shares as interest
payment on subordinated notes............. 10 65 - - 75
----- ------ ------ --- ------
Balance at December 31, 2001................. 4,222 7,071 5,841 (253) 16,881
Net earnings................................. - - 663 - 663 663
Loss reclassified from other comprehensive
income, net of tax of $49................. - - - 197 197
Change in fair value of derivative,
net of tax of $47......................... - - - (188) (188) (188)
-----
Comprehensive income......................... - - - - - 475
=====
Stock options exercised...................... 5 31 - - 36
Issuance of common shares as interest
payment on subordinated notes.............. 29 211 - - 240
------ ------ ------ --- ------
Balance at December 31, 2002................. 4,256 7,313 6,504 (244) 17,829
Net earnings................................. - - 3,785 - 3,785 3,785
Loss reclassified from other comprehensive
income, net of tax of $62................. - - - 98 98
Amortization of other comprehensive
income, net of tax of $138................ - - - 219 219
Change in fair value of derivative,
net of tax of $43......................... - - - (73) (73) (73)
-----
Comprehensive income......................... - - - - - 3,712
=====
Stock options exercised...................... 12 153 (184) - (19)
Tax benefit of stock option exercises........ - 40 - - 40
Issuance of common shares as interest
payment on subordinated notes............. 10 80 - - 90
------ ------ ------ ---
Balance at December 31, 2003................. $ 4,278 7,586 10,105 - 21,969
====== ====== ====== === ======
See accompanying notes to consolidated financial statements.
30
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements Of Cash Flows
For the Years Ended December 31, 2003, 2002, and 2001
(In thousands)
December 31, December 31, December 31,
2003 2002 2001
--------------------- ------------------ ------------------
Cash flows from operating activities:
Net earnings (loss).......................... $ 3,785 663 (62)
Adjustments to reconcile net
earnings (loss) to net cash provided
by operating activities:
Depreciation of plant and
equipment............................ 472 661 706
Amortization of intangibles............ 57 49 508
Loss (gain) on disposition of
property, plant and equipment........ (1,354) (94) 52
Gain on sale of SI/BAKER joint
venture.............................. (4,901) - -
Amortization of deferred gain on
sale-leaseback....................... (138) - -
Equity in income of joint ventures..... (256) (58) (542)
Cash dividends received from
joint venture........................ 1,000 400 750
Issuance of common shares
as interest payment on
subordinated notes................... 90 240 75
Issuance of common shares
as payment of employee's bonus....... - - 111
Noncash interest charges
associated with settlement of
interest rate swap contract.......... 292 - -
Change in operating assets and
liabilities:
Receivables....................... (90) 2,373 (257)
Costs and estimated earnings
in excess of billings........... (393) 116 1,421
Inventories....................... 184 1,018 653
Deferred tax expenses............. 51 1,389 213
Prepaid expenses and other
current assets.................. 66 (46) (102)
Other noncurrent assets........... 1 1 4
Accounts payable.................. 268 (916) (1,093)
Customers' deposits and
billings in excess of costs
and estimated earnings
for completed and
uncompleted contracts........... (91) (1,074) (1,101)
Accrued salaries, wages,
and commissions................. (240) (132) (1,454)
31
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements Of Cash Flows (Continued)
For the Years Ended December 31, 2003, 2002, and 2001
(In thousands)
December 31, December 31, December 31,
2003 2002 2001
--------------------- ------------------ ------------------
Cash flows from operating activities
(Continued):
Income taxes payable.............. 740 108 (323)
Accrued product warranties........ 31 31 6
Accrued other liabilities......... 738 (1,065) 1,376
Deferred compensation............. 17 (109) (7)
----- ----- -----
Net cash provided by operating
activities................................ 329 3,555 934
------ ----- -----
Cash flows from investing activities:
Proceeds from the disposition of
property, plant and equipment............. 2,738 200 13
Proceeds from the divestment of
joint ventures, net of advisory fees...... 5,482 125 -
Additions to property, plant and
equipment................................. (237) (275) (692)
------ ----- -----
Net cash provided (used) by investing
activities................................ 7,983 50 (679)
------ ----- -----
Cash flows from financing activities:
Sale of common shares in connection
with employee incentive stock
option plan............................... 12 36 30
Decrease (increase) in restricted cash....... 865 (865) -
Repayment of long-term debt.................. (8,700) (3,505) (2,096)
Settlement of interest rate swap
contract.................................. (283) - -
------ ----- -----
Net cash used by
financing activities...................... (8,106) (4,334) (2,066)
------ ----- -----
Increase (decrease) in cash
and cash equivalents...................... 206 (729) (1,811)
Cash and cash equivalents,
beginning of period....................... 5,385 6,114 7,925
------ ----- -----
Cash and cash equivalents,
end of period............................. $ 5,591 5,385 6,114
===== ===== =====
See accompanying notes to consolidated financial statements.
32
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(1) Description of Business and Summary of Significant Accounting Policies
- --- ----------------------------------------------------------------------
Description of Business and Concentration of Credit Risk
- --------------------------------------------------------
The Company's Easton, Pennsylvania operation (hereafter referred to as "SI
Systems") is a specialized systems integrator supplying SI Systems' branded
automated material handling systems to manufacturing, assembly, order selection,
and distribution operations customers located primarily in North America,
including the U.S. government. The automated material handling systems are
marketed, designed, sold, installed, and serviced by its own staff or
subcontractors, as labor-saving devices to improve productivity, quality, and
reduce costs. SI Systems' branded products are utilized to automate the movement
or selection of products and are often integrated with other automated equipment
such as conveyors and robots. Integrated material handling solutions involve
both standard and specially designed components and include integration of
non-proprietary automated handling technologies so as to provide turnkey
solutions for its customers' unique material handling needs. The engineering
staff develops and designs computer control programs required for the efficient
operation of its systems and for optimizing manufacturing, assembly, and
fulfillment operations.
The Company's Spring Lake, Michigan operation (hereafter referred to as
"Ermanco"), is a manufacturer of Ermanco branded light to medium duty unit
handling conveyor products, serving the material handling industry through a
worldwide network of approximately 100 experienced material handling equipment
distributors and licensees. Ermanco also provides complete conveyor systems for
a variety of applications, including distribution and manufacture of computers
and electronic products, utilizing primarily its own manufactured conveyor
products, engineering services by its own staff or subcontractors, and
subcontracted installation services. Ermanco supplies material handling systems
and equipment to both national and international markets. Ermanco offers
services ranging from the delivery of basic transportation conveyors to turnkey
installations of complex, fully automated work-in-process production lines and
distribution centers, utilizing sophisticated, custom-designed controls
software.
In the years ended December 31, 2003, 2002, and 2001, no customer accounted
for over 10% of sales. In the year ended December 31, 2001, various agencies of
the U.S. government accounted for 10.3% of total sales.
The Company's products are sold on a fixed-price basis. Generally, contract
terms provide for progress payments and a portion of the purchase price is
withheld by the buyer until the system has been accepted. Generally, contract
terms are net 30 days for product and parts sales, with progress payments for
system-type projects. Many of Ermanco's sales are to distributors who have
non-exclusive agreements with the Company. As of December 31, 2003, one customer
owed the Company $585,000 in trade receivables. No other customer owed the
Company in excess of 10% in trade receivables. The Company believes that the
concentration of credit risk in its trade receivables is substantially mitigated
by the Company's ongoing credit evaluation process as well as the general
creditworthiness of its customer base.
Reclassification
- ----------------
Certain amounts reported for prior years have been reclassified to conform
to the current year's presentation.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of SI Systems
and Ermanco, a wholly-owned subsidiary, after elimination of intercompany
balances and transactions.
33
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
Use of Estimates
- ----------------
The preparation of the financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. The judgments made in assessing the appropriateness of the estimates
and assumptions utilized by management in the preparation of the financial
statements are based on historical and empirical data and other factors germane
to the nature of the risk being analyzed. Materially different results may occur
if different assumptions or conditions were to prevail. Estimates and
assumptions are mainly utilized to establish the appropriateness of the
allowance for doubtful accounts, inventory reserve, warranty reserve, revenue
recognition, and impairment of long-lived assets.
Financial Instruments
- ---------------------
The Company believes the market values of its short-term assets and
liabilities, which are financial instruments, approximate their carrying values
due to the short-term nature of the instruments.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash on deposit, amounts invested on an overnight basis with a
bank, and other highly liquid investments purchased with an original maturity of
three months or less. The Company does not believe it is exposed to any
significant credit risk on cash and cash equivalents.
Allowance for Doubtful Accounts
- -------------------------------
The Company provides an allowance for doubtful accounts determined by a
specific identification of individual accounts and other accounts based on
historical experience. The Company writes off receivables upon determination
that no further collections are probable.
Inventories
- -----------
Inventories are valued at the lower of average cost or market. Inventories
primarily consist of materials purchased or manufactured for stock.
Property, Plant and Equipment
- -----------------------------
Plant and equipment generally are depreciated on the straight-line method
over the estimated useful lives of individual assets. The ranges of lives used
in determining depreciation rates for machinery and equipment is 3 - 10 years.
Maintenance and repairs are charged to operations; betterments and renewals are
capitalized. Upon sale or retirement of plant and equipment, the cost and
related accumulated depreciation are removed from the accounts and the resultant
gain or loss, if any, is credited or charged to earnings.
Investments in Joint Ventures
- -----------------------------
On March 1, 1993, the Company and Automated Prescription Systems, Inc.
formed a 50/50 joint venture, SI/BAKER, INC. ("SI/BAKER"). In 1998, Automated
Prescription Systems, Inc. was renamed McKesson Automation Systems Inc.
("McKesson"). On September 19, 2003, the Company sold its entire ownership
interest in SI/BAKER to McKesson and received cash proceeds of $5,600,000. Prior
to the sale, the Company accounted for its investment in the joint venture on
the equity basis. The sale resulted in a gain of $4,901,000.
34
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Investments in Joint Ventures (Continued)
- -----------------------------
On July 15, 1999, the Company and Egemin N.V. ("Egemin") of Schoten,
Belgium formed a joint venture, SI-Egemin N.V. ("SI-Egemin"). The Company
accounted for its investment in the joint venture on the equity basis. The
Company divested of its investment in the SI-Egemin joint venture at the end of
calendar year 2001. The divestment of the Company's investment in the SI-Egemin
joint venture did not result in a material gain or loss.
Intangibles
- -----------
Goodwill
- --------
On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," ("FAS 142") which establishes guidelines for the financial
accounting and reporting of acquired goodwill and other intangible assets. On
January 1, 2002, the Company adopted FAS 142, which requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. Impairment losses, if any,
will be measured as of January 1, 2002 and recognized as the cumulative effect
of a change in accounting principle in 2002. FAS 142 also requires that
intangible assets with determinable useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121"). The Company had no acquisitions of goodwill or other intangible
assets during 2001, 2002, and 2003.
As of January 1, 2002, the Company had unamortized goodwill of $17,657,000,
all of which was attributable to Ermanco. FAS 142 requires that the Company
completes a first phase of the impairment review for goodwill by June 30, 2002.
The required review was completed during the second quarter of 2002 and did not
indicate any impairment. Also, the Company completed an impairment review for
goodwill as of December 31, 2002 and 2003, and those reviews did not indicate
any impairment. During the years ended December 31, 2003, 2002 and 2001,
goodwill and other intangible amortization was $57,000, $49,000, and $508,000,
respectively.
35
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Intangibles (Continued)
- -----------
Comparison to Prior Year "As Adjusted"
- --------------------------------------
The following table presents prior year reported amounts adjusted to
eliminate the effect of goodwill amortization in accordance with FAS 142.
Years Ended
December 31,
-------------------------------------------------
2003 2002 2001
---------------- ------------- --------------
Reported net earnings (loss).................. $ 3,785,000 663,000 (62,000)
Add back: goodwill amortization,
net of tax.................................. - - 281,000
--------- ------- -------
Adjusted net earnings ................... $ 3,785,000 663,000 219,000
========= ======= =======
Basic net earnings (loss) per share:
Reported net earnings (loss)
per share................................ $ .89 .16 (.01)
Add back: goodwill amortization,
net of tax............................... - - .06
--------- ------- -------
Adjusted net earnings
per share........................... $ .89 .16 .05
========= ======= =======
Diluted net earnings (loss) per share:
Reported net earnings (loss)
per share................................ $ .87 .15 (.01)
Add back: goodwill amortization,
net of tax............................... - - .06
--------- ------- -------
Adjusted net earnings
per share.............................. $ .87 .15 .05
========= ======= =======
Deferred Debt Issuance Cost
- ---------------------------
Deferred debt issuance costs incurred in connection with the line of credit
and term loan are amortized over the period of the related facility.
During 2003, the Company prepaid its outstanding term loan with its
principal bank and fully expensed the related unamortized debt issuance costs.
Asset Impairments
- -----------------
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.
36
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
Revenue Recognition
- -------------------
Revenues on systems contracts, accounted for in accordance with SOP 81-1 of
the American Institute of Certified Public Accountants, are recorded on the
basis of the Company's estimates of the percentage of completion of individual
contracts. Gross margin is recognized on the basis of the ratio of aggregate
costs incurred to date to the most recent estimate of total costs. As contracts
may extend over one or more years, revisions in cost and profit estimates during
the course of the work are reflected in the accounting periods in which the
facts requiring revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued.
Revenues on other sales of parts or equipment are recognized when title
transfers pursuant to shipping terms. There are no installation or customer
acceptance aspects of these sales.
Product Development Costs
- -------------------------
The Company expenses product development costs as incurred.
Restructuring
- -------------
In 2001, the Company restructured its business operations, including
curtailment of a defined benefit plan, and recorded a charge of $1,538,000 for
restructuring costs
In December 2002, the Company partially settled its obligations by making
lump-sum distributions to those participants who elected that payment option and
correspondingly recorded a restructuring credit of $859,000 during 2002. In
February 2003, the Company settled its remaining obligations by purchasing
annuities for those participants who elected that payment option and
correspondingly recorded a restructuring credit of $170,000 during 2003.
A roll-forward of restructuring activities is as follows (in thousands):
Beginning Charge/ Cash Reversal/ Ending
Balance (Credit) Spending Reclassification Balance
------------ ------------- ------------ ------------------- ------------
2003............. $ 216 (264) (54) 170 68
2002............. $ 494 (859) (278) 859 216
2001............. $ - 1,538 (482) (562) 494
The $68,000 restructuring accrual at December 31, 2003 relates to
professional fees for the 2001 restructuring that are still expected to be paid
and is included in accrued other liabilities.
During 2003, the Company recorded a restructuring credit of $94,000
associated with the reversal of a previously established severance accrual that
was no longer required.
The amounts reclassified out of the restructuring accrual and included in
accrued pension and retirement savings plan liabilities for the years ended
December 31, 2003, 2002, and 2001 were $170,000, $859,000, and $(562,000),
respectively.
Accrued Product Warranty
- ------------------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements and
the type of system sold, with a typical warranty period of one year. The Company
provides an accrual for estimated future warranty costs and potential product
liability claims based upon a percentage of cost of sales, ranging from one to
two percent depending on the type of system sold, and a detailed review of
products still in the warranty period.
37
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Accrued Product Warranty (Continued)
- ------------------------
A roll-forward of warranty activities is as follows (in thousands):
Additions
Charged to
Beginning Costs and Ending
Balance Expenses Deductions Balance
------------ ----------------- ------------------ --------------
2003.................... $ 894 215 (184) 925
2002.................... $ 863 245 (214) 894
2001.................... $ 857 295 (289) 863
Income Taxes
- ------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock-Based Compensation
- ------------------------
The Company grants stock options for a fixed number of shares to employees
and non-employee directors with an exercise price equal to the fair value of the
shares at the date of grant. The Company has elected to continue to account for
its stock-based compensation plans under the guidelines of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense on options granted to employees
for the stock option grants. The Company recognizes compensation expense on
options granted to non-employee directors. To date, the effect of options
granted to non-employee directors has been immaterial. Additional disclosure as
required under the guidelines of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), as amended by FAS 148, is included below. If the
Company had elected to recognize stock-based compensation expense for options
granted to employees based on the fair value of granted options at the grant
date (as determined under FAS 123), net earnings (loss) (in thousands) and basic
earnings (loss) per share for the years ended December 31, 2003, 2002, and 2001
would have been as follows:
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2003 2002 2001
----------------- ----------------- ----------------
Net earnings (loss), as reported.......... $ 3,785 663 (62)
Deduct: total stock-based employee
compensation determined under
fair value method, net of related
tax effects............................ (80) (280) (150)
----- --- ---
Pro forma net earnings (loss)............. $ 3,705 383 (212)
===== === ====
38
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Stock-Based Compensation (Continued)
- ------------------------
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2003 2002 2001
----------------- ----------------- ----------------
Earnings (loss) per share:
Basic-- as reported.................... $ .89 .16 (.01)
=== === ===
Basic-- pro forma...................... $ .87 .09 (.05)
=== === ===
Diluted-- as reported.................. $ .87 .15 (.01)
=== === ===
Diluted-- pro forma.................... $ .85 .09 (.05)
=== === ===
The above pro forma net earnings (loss) and basic and diluted earnings
(loss) per share were computed using the fair value of granted options at the
date of grant as calculated by the Black-Scholes option pricing method. No
options were granted to employees during the years ended December 31, 2003 and
2002. In order to perform this calculation, the following assumptions were made
for the year ended December 31, 2001: dividend yield of 0%; risk-free interest
rate of 3.92%; expected volatility of 34.7%, and an expected holding period of
four years.
The Company also grants phantom stock units to its directors as deferred
compensation. Such awards are redeemable in cash or the Company's common stock
at the director's option and are accounted for in accordance with APB Opinion
No. 25 as stock appreciation rights. Expense (Income associated with the
reversal of previously recognized expense) for the phantom stock unit plan was
$0, $2,000, and $8,000 for the years ended December 31, 2003, 2002, and 2001,
respectively.
Earnings (Loss) Per Share
- -------------------------
Basic and diluted earnings (loss) per share for the years ended December
31, 2003, 2002, and 2001 are based on the weighted average number of shares
outstanding. In addition, diluted earnings (loss) per share reflect the effect
of dilutive securities which include phantom stock units, and the shares that
would be outstanding assuming the exercise of dilutive stock options. The number
of shares that would be issued from the exercise has been reduced by the number
of shares that could have been purchased from the proceeds at the average market
price of the Company's common stock.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
Basic Earnings Effect of Dilutive Diluted Earnings
(Loss) Per Share Securities (Loss)Per Share
--------------- ---------- --------------
For the year ended
December 31, 2003
- -----------------
Income numerator................ $ 3,785,000 - 3,785,000
Shares denominator.............. 4,269,274 95,438 4,364,712
--------- ---------
Per share amount................ $ .89 .87
========= =========
For the year ended
December 31, 2002
- -----------------
Income numerator................ $ 663,000 1,000 664,000
Shares denominator.............. 4,231,878 68,315 4,300,193
--------- ---------
Per share amount................ $ .16 .15
========= =========
For the year ended
December 31, 2001
- -----------------
Income (loss) numerator......... $ (62,000) - (62,000)
Shares denominator.............. 4,210,819 - 4,210,819
--------- ---------
Per share amount................ $ (.01) (.01)
========= =========
39
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
Cash Flow Hedge
- ---------------
In accordance with the provisions of SFAS No. 133, as amended, the Company
recognizes all derivatives on the balance sheet at fair value. On the date the
derivative instrument is entered into, the Company generally designates the
derivative as a hedge of a forecasted transaction (cash flow hedge) or of the
variability of cash flows to be received or paid related to a recognized asset
or liability. The Company records in accumulated other comprehensive income or
loss changes in the fair value of derivatives that are designated as and meet
all the required criteria for a cash flow hedge. The Company then reclassifies
these amounts into earnings as the underlying hedged item affects earnings. The
Company records immediately in earnings changes in the fair value of derivatives
that are not designated as hedges.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146") which addresses
financial accounting and reporting for costs associated with exit or disposal
activities. This Statement nullifies Emerging Issues Task Force Issue 94-3.
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and establishes that fair
value is the objective for initial measurement of the liability. The Statement
is effective for exit or disposal activities that are initiated after December
31, 2002. The application of FAS 146 did not have an effect on the Company's
financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and did not
have an effect on the Company's financial statements. The disclosure
requirements were effective for the Company's 2002 financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("FAS 148"), which amends SFAS No.
123, to provide alternative methods of accounting for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In
addition, FAS 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements. The
disclosure requirements are included in the 2003 financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("FAS 150"). FAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
applies specifically to a number of financial instruments that companies have
historically presented within their financial statements either as equity or
between the liabilities section and the equity section, rather than as
liabilities. FAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The application of FAS 150
did not have an effect on the Company's financial statements.
In December 2003, the Company adopted SFAS No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("FAS 132") as
amended. This standard retains the existing disclosures and requires additional
disclosures to provide details about pension plan assets, benefit obligations,
cash flows, benefit costs, and related information. The disclosure requirements
are included in the 2003 financial statements.
40
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
Recently Issued Accounting Pronouncements (Continued)
- -----------------------------------------
In December 2003, the FASB issued Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities" ("FIN 46R"), which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces Interpretation No.
46, "Consolidation of Variable Interest Entities," which was issued in January
2003. The Company will be required to apply FIN 46R to variable interest
entities ("VIE") created after December 31, 2003. For variable interest in VIEs
created before January 1, 2004, FIN 46R will be applied beginning January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities, and noncontrolling interests of
the VIEs initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, then fair value
at the date FIN 46R first applies may be used to measure the assets,
liabilities, and noncontrolling interest of the VIEs. The application of FIN 46R
is not expected to have a material effect on the Company's financial statements.
(2) Uncompleted Contracts
- --- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows (in
thousands):
December 31, December 31,
2003 2002
-------------------- --------------------
Costs and estimated earnings on
uncompleted contracts............................ $ 13,584 19,655
Less: billings to date............................. 15,243 21,798
------ ------
$ (1,659) (2,143)
====== ======
Included in accompanying balance sheets under the
following captions:
Costs and estimated earnings
in excess of billings.......................... $ 521 128
Customers' deposits and billings in
excess of costs and estimated
earnings....................................... (2,180) (2,271)
------ ------
$ (1,659) (2,143)
====== ======
(3) Line of Credit
- --- --------------
The Company has a line of credit facility which may not exceed $1,000,000
and is to be used primarily for working capital purposes. Interest on the line
of credit facility is at the bank's prime rate of interest or LIBOR Market Index
Rate plus 2%.
To obtain the line of credit, the Company granted the bank a security
interest in all personal property, including, without limitation, all accounts,
deposits, documents, equipment, fixtures, general intangibles, goods,
instruments, inventory, letters of credit, money, and securities. The line of
credit facility contains various restrictive covenants relating to additional
indebtedness, asset acquisitions or dispositions, investments, and guarantees.
In addition, the Company is restricted from paying dividends in excess of 15% of
its net earnings. The Company was in compliance with all covenants as of
December 31, 2003. As of December 31, 2003, the Company did not have any
borrowings under the line of credit facility, and the line of credit facility
expires effective June 30, 2004.
41
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(4) Long-Term Debt
- --- --------------
A summary of long-term debt follows (in thousands):
December 31, December 31,
2003 2002
----------------- ----------------
Term loan................................................ $ - 5,700
Subordinated notes payable............................... - 3,000
Capital lease obligations................................ - -
------ ------
Total.................................................... - 8,700
Less: current installments of long-term debt............ - 1,437
------ ------
Long-term debt........................................... $ - 7,263
====== ======
The Company received $14,000,000 in the form of a seven-year term loan from
its principal bank to finance the acquisition of Ermanco on September 30, 1999.
The interest rate on the term loan was variable at a rate equal to the
three-month LIBOR Market Index Rate plus 2.65%.
On September 30, 1999, the Company also issued promissory notes to fourteen
stockholders of Ermanco, two of which are directors of the Company (Messrs.
Shulman and Kirschner), in the original aggregate principal amount of
$3,000,000. The notes, with an original term of seven years, bore interest at an
annual rate of 10% through September 30, 2002, 12% from October 1, 2002 through
September 30, 2004, and 14% from October 1, 2004 through September 30, 2006.
Interest on the promissory notes was payable quarterly, in cash or under certain
conditions, in the Company's common stock upon approval of the Company's Board
of Directors.
In 2003, the Company prepaid all of its outstanding term and subordinated
debt. The settlement of the subordinated debt resulted in a gain of $150,000,
which is included in interest expense.
42
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(5) Capital Stock Options
- --- ---------------------
The following is a summary of options available for grant and changes in
options outstanding under the Company's 1992 Incentive Stock Option Plan
("ISOP") and 1997 Equity Compensation Plan ("ECP") for the years ended December
31, 2003, 2002, and 2001:
2003 2002 2001
--------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Stock Options Price Stock Options Price Stock Options Price
Outstanding Per Share Outstanding Per Share Outstanding Per Share
------------- --------- ------------- --------- ------------- ---------
Total of 1992 ISOP and 1997 ECP:
Balance as of January 1........ 525,516 $ 7.78 556,771 $ 7.81 536,337 $ 8.13
Granted........................ - - 20,000 8.20 142,000 7.50
Exercised...................... (39,706) 6.67 (5,563) 6.69 (4,450) 6.62
Lapsed......................... (146,688) 8.95 (45,692) 8.47 (117,116) 8.94
-------- ----- ------- ----- ------- -----
Balance as of December 31...... 339,122 $ 7.40 525,516 $ 7.78 556,771 $ 7.81
======= ===== ======= ===== ======= =====
43
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(5) Capital Stock Options (Continued)
- --- ---------------------
The following table summarizes information about stock options outstanding
as of December 31, 2003:
Options Outstanding Options Exercisable
- ----------------------------------------------------- --------------------------------
Number of Remaining Number of
Exercise Stock Options Life Exercise Stock Options
Price Outstanding (Years) Price Exercisable
- ------------- ----------------- -------------- ----------- ----------------
$10.00 22,100 .55 10.00 22,100
8.25 39,000 .75 8.25 39,000
7.06 39,000 1.11 7.06 29,250
5.88 4,922 1.35 5.88 2,422
6.63 122,600 1.84 6.63 91,950
7.50 91,500 2.61 7.50 45,750
8.12 10,000 3.47 8.12 2,500
8.27 10,000 3.27 8.27 2,500
------ -------- ---- ----- -------
$ 7.40 339,122 1.87 $ 7.46 235,472
====== ======= ==== ===== =======
Under the Company's 1992 Incentive Stock Option Plan, officers and key
employees were granted options to purchase shares of common stock at the market
price at the date of grant. Options became exercisable in increments of 25% on
the anniversary date of the grant; thus, at the end of four years, the options
were fully exercisable. There are no options outstanding under the 1992 ISOP.
The Plan expired in July 2002.
In July 1997, the stockholders adopted the 1997 Equity Compensation Plan
("ECP"), which will expire in July 2007. The ECP provides for grants of stock
options, restricted stock, and stock appreciation rights to selected employees,
key advisors who perform valuable services, and directors of the Company. In
addition, the ECP provides for grants of performance units to employees and key
advisors. The ECP, as amended by shareholders in August 2000 and June 2001,
authorizes up to 1,012,500 shares of common stock for issuance pursuant to the
terms of the plan. Under the Company's ECP, officers, directors, and key
employees have been granted options to purchase shares of common stock at the
market price at the date of grant. The Company recognizes compensation expense
on options granted to non-employee directors. To date, the effect of options
granted to non-employee directors has been immaterial. Options become
exercisable in increments of 25% on the anniversary date of the grant; thus, at
the end of four years, the options are fully exercisable. As of December 31,
2003, 339,122 options are outstanding under the plan, and all options have a
term of five years.
44
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(6) Employee Benefit Plans
- --- ----------------------
The Company maintains a defined benefit plan for employees covered by its
collective bargaining agreement. Retirement benefits are based on the employee's
years of service multiplied by the appropriate monthly benefit amount. Employee
compensation does not impact pension benefits. The Company's policy is to fund
plans in compliance with applicable laws and regulations. Assets of the
Company's defined benefit plans are primarily invested in publicly traded common
stocks, corporate and government debt securities, mutual funds, and cash or cash
equivalents
The benefit obligations for the Company's defined benefit plans were (in
thousands):
2003 2002
-------------------- ---------------------
Change in benefit obligations:
Benefit obligation at beginning of year............. $ 1,526 3,193
Service cost (excluding administrative expenses).... 88 71
Interest cost....................................... 60 216
Actuarial loss...................................... 197 756
Benefits and expenses paid.......................... (1,179) (2,710)
----- ------
Benefit obligation at end of year................... $ 692 1,526
===== =====
The fair value of the plan assets of the Company's defined benefit plans
follows (in thousands):
2003 2002
-------------------- ---------------------
Change in plan assets:
Fair value of plan assets at beginning of year...... $ 1,730 4,045
Actual return on plan assets........................ 49 328
Employer contribution............................... 112 67
Expenses............................................ (35) -
Benefits paid....................................... (1,144) (2,710)
----- -----
Fair value of plan assets at end of year............ $ 712 1,730
===== =====
Prepaid pension asset (accrued pension liability) included in the Company's
balance sheets were (in thousands):
2003 2002
-------------------- ---------------------
Reconciliation to balance sheets:
Funded status:
Plan assets in excess of benefit obligation......... $ 20 204
Unrecognized net actuarial loss (gain).............. 152 (233)
Unrecognized net obligation......................... (11) (13)
Unrecognized prior service costs.................... 5 6
----- -----
Prepaid pension asset (accrued pension
liability) recognized in the Company's
balance sheets.................................... $ 166 (36)
===== =====
45
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(6) Employee Benefit Plans (Continued)
- --- ----------------------
Amounts recognized in the Company's balance sheets were (in thousands):
2003 2002
-------------------- ---------------------
Prepaid (accrued) pension cost...................... $ 166 (36)
Accrued benefit liability........................... - -
Accumulated other comprehensive income.............. - -
--- ---
Net amount recognized............................... $ 166 (36)
=== ===
The Company uses the projected unit credit actuarial method to compute
pension expense, which includes amortization of past service costs over 30
years. The net periodic pension expense (benefit) and total pension expense
(benefit) for the years ended December 31, 2003, 2002, and 2001 includes the
following components (in thousands):
2003 2002 2001
---------------- ----------------- -----------------
Service cost-benefits earned during
the period............................. $ 88 71 182
Interest cost on projected benefit
obligation............................ 60 216 216
Expected return on plan assets -
increase.............................. (91) (302) (277)
Amortization of net asset................ - - (1)
Amortization of prior service cost....... - - 60
Recognized net actuarial gain............ (2) (86) (187)
----- ----- -----
Net periodic pension expense
(benefit)............................. 55 (101) (7)
Curtailment cost (settlement credit)..... (144) (859) 562
----- ----- -----
Total pension expense (benefit).......... $ (89) (960) 555
===== ===== =====
The weighted average rates and actuarial assumptions used to develop the
net periodic pension expense (benefit) and the projected benefit obligation for
the plans were:
2003 2002 2001
-------------------- ------------------- --------------------
Discount rate.................... 6.5% 5.32% and 7.0% 7.0% and 7.25%
Expected long-term rate of
return on plan assets......... 8.0% 8.0% and 8.50% 8.0% and 8.50%
The expected long-term rate of return on assets was developed through
analysis of historical market returns, current market conditions, the plans past
experience, and the general mix of assets held by the plans.
46
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(6) Employee Benefit Plans (Continued)
- --------------------------
The plans weighted-average target allocation and asset allocations by asset
category are as follows (in thousands):
Target
Allocations 2003 2002
------------------ ------------------ ------------------
Asset Category:
Equity securities................ 60% 48% 11%
Fixed income securities.......... 35% 42% 8%
Cash and equivalents............. 5% 10% 81%
--- --- ---
Total......................... 100% 100% 100%
=== === ===
The primary investment objective of the plans is to ensure, over the
long-term life of the plans, an adequate pool of assets to support the benefit
obligations to participants, retirees, and beneficiaries. A secondary objective
of the plans is to achieve a level of investment return consistent with a
prudent level of portfolio risk that will minimize the financial impact of the
plans on the Company.
The Company operates a number of defined contribution plans for employees.
The plans contain a Company match feature and one plan also contains provisions
for profit sharing contributions in the form of cash as determined annually by
the Board of Directors. Total expense for these plans was $151,000, $157,000,
and $199,000 for the years ended December 31, 2003, 2002, and 2001,
respectively.
(7) Income Taxes
- --- ------------
The provision for income tax expense (benefit) consists of the following
(in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2003 2002 2001
------------------ ------------------ ------------------
Federal - current.................. $ 1,982 (1,146) (510)
- deferred................. (214) 1,326 322
----- ----- -----
1,768 180 (188)
----- ----- -----
State - current.................. 388 22 32
- deferred................. 265 63 (109)
----- ----- -----
653 85 (77)
----- ----- -----
Foreign - current.................. 3 2 8
----- ----- -----
$ 2,424 267 (257)
===== ===== =====
47
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(7) Income Taxes (Continued)
- --- ------------
The reconciliation between the U.S. federal statutory rate and the
Company's effective income tax rate is (in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2003 2002 2001
------------------ ----------------- ------------------
Computed tax expense (benefit)
at statutory rate of 34%......... $ 2,111 316 (108)
Increase (reduction) in taxes
resulting from:
State income taxes, net of
federal benefit.............. 431 56 (51)
Equity in income of joint
venture and dividend
received deduction from
joint venture distribution... (272) (109) (139)
Miscellaneous items............ 154 4 41
----- ----- -----
$ 2,424 267 (257)
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2003 and
2002 are presented below (in thousands):
December 31, December 31,
2003 2002
----------------- -----------------
Deferred tax assets:
Net operating and built-in loss carryforward
(federal loss of $173 expires through 2007).......... $ 188 529
Capital loss carryforward.............................. - 168
Inventories............................................ 298 363
Accrued restructuring costs............................ 26 73
Accrued warranty costs................................. 355 343
Accrued pension costs.................................. - 20
Accrued settlement costs............................... 420 -
Accruals for other expenses, not yet deductible for
tax purposes......................................... 741 536
Interest rate swap..................................... - 157
----- -----
Total gross deferred tax assets.................... 2,028 2,189
----- -----
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation......................................... (159) (190)
Amortization........................................... (1,854) (1,305)
Investment in SI/BAKER joint venture................... - (472)
Other.................................................. (165) (164)
------ -----
Total gross deferred tax liabilities............... (2,178) (2,131)
------ -----
Net deferred tax assets (liabilities).............. $ (150) 58
====== =====
48
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements )
(7) Income Taxes (Continued)
- --- ------------
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences at December 31, 2003.
(8) Contingencies
- --- -------------
In July 2003, a competitor filed an action against the Company in the
United States District Court for the District of New Jersey alleging that
certain of the Company's products infringed patents held by the competitor and
also asserting claims for breach of contract, unjust enrichment, unfair
competition, tortious interference with prospective economic advantage, and
violation of New Jersey's consumer fraud act as a result of alleged improper use
of the competitor's trade secrets, technology, and other proprietary
information. Based on these allegations, the competitor was seeking monetary
damages and injunctive relief against the Company.
In February 2004, a settlement was reached between the Company and the
competitor. Under the settlement, the competitor dismissed the action and agreed
that the Company's products involved in the litigation are immune from suit for
infringement of any of the competitor's intellectual property rights. In
exchange, Paragon agreed to dismiss its counterclaims and paid the competitor
$1,125,000. Total costs associated with the litigation recognized during 2003,
inclusive of settlement costs and legal costs, were $1,375,000.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
(9) Commitments and Related Party Transactions
- --- ------------------------------------------
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement requires fixed
monthly rentals of $33,283 (with annual increases of 2.5%), which includes a
variable portion based on the lessor's borrowing rate and the unpaid mortgage
balance. The terms of the lease require the payment by Ermanco of all taxes,
insurance, and other ownership related costs of the property. The lease expires
on September 30, 2004. The Company is in the process of negotiations to extend
the term of the lease and modify the monthly rental payments. The Company paid
$395,000, $394,000, and $394,000 in the years ended December 31, 2003, 2002, and
2001, respectively, under this leasing arrangement.
49
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(9) Commitments and Related Party Transactions (Continued)
- --- ------------------------------------------
In connection with the February 2003 sale of the Company's Easton,
Pennsylvania facility, the Company entered into a leaseback arrangement for
25,000 square feet of office space for five years. The leasing agreement
requires fixed monthly rentals of $17,188 (with annual increases of 3%). The
terms of the lease also require the payment of a proportionate share of the
facility's operating expenses. The lease expires on February 21, 2008. The
sales-leaseback resulted in a total gain of $2,189,000, of which $1,363,000 was
recorded as a gain in 2003. The remaining gain of $826,000 was deferred and is
being recognized as a reduction in rent expense over the term of the lease.
During 2003, $138,000 of the deferred gain was recognized.
The Company also leases certain automobiles and office equipment, computer
equipment, and software under various operating leases with terms extending
through September 2007.
Total rental expense, including short-term leases, in the years ended
December 31, 2003, 2002, and 2001 approximated $718,000, $555,000, and $584,000,
respectively.
Future minimum rental commitments at December 31, 2003 are as follows (in
thousands):
Operating Leases
--------------------
2004............................................ $ 631
2005............................................ 282
2006............................................ 228
2007............................................ 234
2008............................................ 34
-----
Total ........................................ $ 1,409
=====
The Company has an employment agreement with Leon C. Kirschner, a director
of the Company and President of Ermanco Incorporated. The employment agreement
entitles Mr. Kirschner to receive annual compensation during the term of the
employment agreement, participate in a bonus plan, plus usual and customary
fringe benefits associated with being an employee of the Company. Under certain
circumstances, the employment agreement provides for post termination severance
payments.
See Note 11 of Notes to Consolidated Financial Statements for transactions
related to the Company's former SI/BAKER joint venture.
50
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(10) Cash Flow Information
- ---- ---------------------
Supplemental disclosures of cash flow information for the years ended
December 31, 2003, 2002, and 2001, are as follows (in thousands):
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
2003 2002 2001
--------------- --------------- ----------------
Supplemental disclosures of cash
flow information:
Cash paid (received) for:
Interest.......................... $ 456 761 1,030
===== ===== =====
Income taxes...................... $ 720 (667) 195
===== ===== =====
Supplemental disclosures of
noncash investing and financing
activities:
Equity impact from exercise of
non-qualified stock options....... $ 40 - -
===== ===== =====
Withholding of common shares
for income tax withholding
obligations arising from
exercise of non-qualified
stock options..................... $ (31) - -
===== ===== =====
Receivable associated with the
divestment of a joint venture..... $ - - 125
===== ===== =====
51
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(11) Joint Ventures
- ---- --------------
On September 19, 2003, the Company sold its entire ownership interest in its
SI/BAKER joint venture. Prior to the sale, the Company had entered into various
transactions with its former SI/BAKER joint venture as follows:
December 31,
2002
------------------
SI/BAKER, INC., 50% owned by the Company:
Balance Sheets data (in thousands):
Amount included in notes and other receivables............................... $ 69
Amount included in costs and estimated earnings in
excess of billings......................................................... 1
Investment in the Company's former SI/BAKER
joint venture.............................................................. 1,325
2003 2002 2001
---------------- ----------------- ----------------
Statements of Operations Data (in thousands):
Systems and services sold under
various subcontracts................ $ 62 $ 194 876
Reimbursement for administrative and
other services provided............. 9 24 55
Royalty income........................ 226 167 243
Information pertaining to the Company's former investment in its SI/BAKER
joint venture is as follows (in thousands):
Balance at December 31, 2001......................................................... $ 1,667
Equity in net earnings............................................................... 58
Cash dividends....................................................................... (400)
-----
Balance at December 31, 2002......................................................... 1,325
Equity in net earnings............................................................... 256
Cash dividends....................................................................... (1,000)
Sale of the Company's 50% investment in the
SI/BAKER joint venture............................................................ (581)
-----
Balance at December 31, 2003......................................................... $ -
=====
Summary financial information and operating results prior to the sale of the
Company's former SI/BAKER joint venture are set forth in the following table (in
thousands):
December 31,
2002
-----------------
Current assets.................................................................. $ 3,969
Property, plant and equipment, net.............................................. 240
Current liabilities............................................................. 1,532
Long-term liabilities........................................................... 28
------
Net assets...................................................................... $ 2,649
======
2003 2002 2001
----------------- ---------------- ------------------
Net sales.............................. $ 11,279 8,329 12,139
====== ===== ======
Net earnings........................... $ 513 116 1,257
====== ===== ======
52
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(11) Joint Ventures (Continued)
- ---- --------------
Operations of the SI-Egemin joint venture were not material to the Company
during the year ended December 31, 2001. The Company divested of its investment
in the SI-Egemin joint venture at the end of calendar year 2001.
(12) Major Segments of Business
- ---- --------------------------
Operating segments are defined as components of an enterprise in which
separate financial information is available and evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company identified such segments based on both management
responsibility and types of products offered for sale.
The Company operates in two major market segments, and products are sold
worldwide as follows (in thousands):
For the year ended
December 31, 2003: SI Systems Ermanco Total
- ----------------- ------------------------ ------------- -----------
Sales........................................ $ 12,083 25,212 37,295
Earnings before interest expense,
interest income, equity in income of
joint venture, gain on sale of
SI/BAKER joint venture, gain on
disposition of property, plant and
equipment, and income taxes................ 120 178 298
Gain on sale of SI/BAKER joint venture....... 4,901 - 4,901
Gain on disposition of property, plant
and equipment.............................. 1,354 - 1,354
Total assets................................. 5,263 28,511 33,774
Capital expenditures......................... 76 161 237
Depreciation and amortization expense........ 139 333 472
For the year ended
December 31, 2002: SI Systems Ermanco Total
- ----------------- ------------------------ ------------- -----------
Sales........................................ $ 14,906 23,318 38,224
Earnings (loss) before interest expense,
interest income, equity in income of joint
venture, and income taxes.................. 2,248 (442) 1,806
Total assets................................. 9,046 27,657 36,703
Capital expenditures......................... 64 211 275
Depreciation and amortization expense........ 233 428 661
For the year ended
December 31, 2001: SI Systems Ermanco Total
- ----------------- ------------------------ ------------- -----------
Sales........................................ $ 19,008 31,744 50,752
Earnings (loss) before interest expense,
interest income, equity in income of joint
ventures, and income taxes................. (750) 935 185
Total assets................................. 10,660 30,683 41,343
Capital expenditures......................... 128 564 692
Depreciation and amortization expense........ 323 851 1,174
All of the Company's sales originate in the United States, and there are no
long-lived assets existing outside the United States. International sales were
$2,865,000, $1,682,000, and $5,325,000 for the years ended December 31, 2003,
2002, and 2001, respectively.
53
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(13) Quarterly Financial Information (Unaudited)
- ---- ------------------------------------------
Selected Quarterly Financial Data
---------------------------------
(In thousands, except per share amounts)
For the Year Ended First Second Third Fourth
December 31, 2003 Quarter Quarter Quarter Quarter
----------------- ------- ------- ------- -------
Net sales................................. $ 8,564 10,983 8,742 9,006
Gross profit on sales..................... $ 2,204 2,924 2,234 2,086
Net earnings (loss)....................... $ 1,011 617 2,412 (255)
Basic earnings (loss) per share........... $ .24 .14 .56 (.06)
Diluted earnings (loss) per share......... $ .23 .14 .55 (.06)
For the Year Ended First Second Third Fourth
December 31, 2002 Quarter Quarter Quarter Quarter
----------------- ------- ------- ------- -------
Net sales................................. $ 10,752 9,908 9,010 8,554
Gross profit on sales..................... $ 2,889 2,486 1,891 2,007
Net earnings (loss)....................... $ 343 123 (402) 599
Basic earnings (loss) per share........... $ .08 .03 (.09) .14
Diluted earnings (loss) per share......... $ .08 .03 (.09) .13
For the Year Ended First Second Third Fourth
December 31, 2001 Quarter Quarter Quarter Quarter
----------------- ------- ------- ------- -------
Net sales................................. $ 13,930 12,221 12,796 11,805
Gross profit on sales..................... $ 3,593 3,063 3,297 2,472
Net earnings (loss)....................... $ 126 (808) 469 151
Basic earnings (loss) per share........... $ .03 (.19) .11 .04
Diluted earnings (loss) per share......... $ .03 (.19) .11 .04
54
PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Schedule II
-----------
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2003, 2002, and 2001
(In thousands)
Additions
Balance Charged to
at Costs Balance
Beginning and at End
of Year Expenses Deductions of Year
---------- ----------- ---------- -------
Allowance for doubtful
accounts:
Year ended
December 31, 2003............... $ 221 44 - 265
=== === === ===
Year ended
December 31, 2002............... $ 54 171 4 221
=== === === ===
Year ended
December 31, 2001............... $ 54 20 20 54
=== === === ===
55
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
- -------- -----------------------
(a) An evaluation was performed under the supervision and with the
participation of the Company's management, including its Chief Executive
Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of
the Company's disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of December 31, 2003. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act, is recorded, processed, summarized, and reported as
specified in Securities and Exchange Commission rules and forms.
(b) There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation of such controls that
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Information concerning the Company's directors is as follows:
Name, Other Positions or Offices With The Company Director
and Principal Occupation for Past Five Years Since Age
- -------------------------------------------------------------------------------- ---------- -----
L. Jack Bradt.................................................................. 1958 76
L. Jack Bradt was the founder in 1958 and for 30 years President and CEO of SI
Handling Systems, Inc., renamed Paragon Technologies, Inc. shortly after the
Company acquired Ermanco Incorporated. Mr. Bradt has continued as a
director of the Company since its inception. He is active as a director in
a number of local, state, and national organizations involved in business,
education, human services, and government.
Leon C. Kirschner.............................................................. 1999 63
Leon C. Kirschner is the Chief Operating Officer of the Company and President
of Ermanco Incorporated since 1983.
Theodore W. Myers.............................................................. 2002 60
Theodore W. Myers is the Chairman of the Board of the Company. Mr. Myers
retired from Tucker Anthony Sutro, an investment banking firm, where he was
First Vice President and Branch Manager of the Phillipsburg, New Jersey
satellite office, where he served from 1991 to 2000.
56
Item 10. Directors and Executive Officers of the Registrant (Continued)
- -------- --------------------------------------------------
Name, Other Positions or Offices With The Company Director
and Principal Occupation for Past Five Years Since Age
- -------------------------------------------------------------------------------- ---------- -----
Anthony W. Schweiger........................................................... 2001 62
Anthony W. Schweiger is President and CEO of The Tomorrow Group, LLC, a
governance and management consultancy. He is also a principal of
e-brilliance, LLC, a software and IT education consultancy. Mr. Schweiger's
business experience includes governance oversight, capital market management,
risk management, technology, and strategic planning. Since 1992, he has been
a director and Governance Chair of Radian Group Inc., a NYSE traded global
provider of credit enhancement products. He also serves on Radian's Audit and
Executive Committees. He has also been an investor and director of Input
Technologies, LLC, a supplier of human-to-machine interface products and
services since February 1998. In his capacity as a consultant, Mr. Schweiger
advises various service and technology businesses on governance, operational,
and strategic issues.
Steven Shulman................................................................. 1999 63
Steven Shulman has been an investment banker through his wholly-owned company,
The Hampton Group, and Latona Associates, Inc. where he serves as Managing
Director. Currently, Mr. Shulman is a shareholder and director in a
diversified group of companies, including Transportation Technologies,
Inc., TNP Enterprises, Inc., Terrace Food Group, Inc., PlasmaSol Corp., The
General Chemical Group Inc., C3i Inc., Beacon Capital Partners, Inc., and
Ark Restaurants Corp. In addition, he serves as Chairman of Terrace Food
Group, Inc. Mr. Shulman serves as Vice Chairman of the Board of Stevens
Institute of Technology. Mr. Shulman was also a director of Ermanco
Incorporated at the time of its acquisition by the Company on September 30,
1999.
Leonard S. Yurkovic............................................................ 2002 66
Leonard S. Yurkovic returned to the Company as President and CEO in October
2003 and is also the Vice Chairman of the Board of the Company. Mr. Yurkovic
started with the Company in 1979 as Vice President - Finance. Throughout the
1980s, Mr. Yurkovic was appointed to several executive-level positions at the
Company, having been named President and Chief Operating Officer in 1985,
Managing Director of European Operations in 1987, and then President and
Chief Executive Officer in 1988. Mr. Yurkovic originally retired from the
Company as CEO and a member of the Board of Directors in 1999.
57
Item 10. Directors and Executive Officers of the Registrant (Continued)
- -------- --------------------------------------------------
The names, ages, and offices with the Company of its executive officers are
as follows:
Name Age Office
---- --- ------
Leonard S. Yurkovic 66 President and Chief Executive Officer, Director
Leon C. Kirschner 63 Chief Operating Officer, President - Ermanco, Director
Ronald J. Semanick 42 Vice President - Finance, Chief Financial Officer,
Treasurer and Secretary
Gordon A. Hellberg 50 Vice President - Sales, Vice President - Sales of Ermanco
Incorporated
Information regarding Messrs. Yurkovic and Kirschner is provided above.
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 by the Board of Directors on July 13, 1994. Previously,
Mr. Semanick held the positions of Controller, Manager of Financial Accounting,
Senior Financial Accountant, and Financial Accountant. Prior to joining the
Company in 1985, Mr. Semanick was employed as a Certified Public Accountant by
Arthur Andersen & Company of Philadelphia, Pennsylvania. Mr. Semanick received a
Bachelor's Degree in Accounting from Moravian College and his MBA in Finance
from Wilkes University.
Mr. Hellberg was appointed Vice President - Sales of the Company on March
10, 2004, and has served Ermanco in various management positions since 1987,
including Vice President - Sales. Mr. Hellberg received his B.S. in Engineering
from Western Michigan University.
SECTION 16(a) -- BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
----------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and persons who beneficially own more than 10% of our
common stock (collectively, the "reporting persons") to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish us with copies of these reports. Based solely on our review of
those documents received by us, and written representations, if any, received
from reporting persons with respect to the filing of reports on Forms 3, 4, and
5, we believe that all filings required to be made by the reporting persons for
the year ended December 31, 2003 were made on a timely basis.
--------------------------------
Audit Committee
- ---------------
The Audit Committee consists of three directors, Messrs. Bradt, Myers, and
Schweiger, all of whom are "independent" as defined by the rules of the
Securities and Exchange Commission and American Stock Exchange. The Board of
Directors has determined that the Audit Committee does not currently have a
member who qualifies as an "audit committee financial expert" as defined in
regulations of the Securities and Exchange Commission under the Sarbanes-Oxley
Act of 2002. Although no one member of the Audit Committee appears to meet all
of the requirements of the definition of "audit committee financial expert", the
Board of Directors believes that the members of the Audit Committee collectively
possess the required attributes concerning the understanding of accounting
principles generally accepted in the United States and financial statements, the
application of such principles in connection with accounting for estimates,
accruals and reserves, the understanding of internal control over financial
reporting and the understanding of Audit Committee functions.
58
Item 10. Directors and Executive Officers of the Registrant (Continued)
- -------- --------------------------------------------------
Code of Conduct
- ---------------
The Company has a Code of Business Conduct and Ethics, which is attached as
Exhibit 14 to this annual report and can be viewed on the Company's website at
www.ptgamex.com. The Company requires all employees, officers, and directors to
adhere to this Code in addressing the legal and ethical issues encountered in
conducting their work. The Code of Business Conduct and Ethics requires that the
Company's employees avoid conflicts of interest, comply with all laws and other
legal requirements, conduct business in an honest and ethical manner, and
otherwise act with integrity and in the Company's best interest. The Company's
Code of Business Conduct and Ethics is intended to comply with Item 406 of the
SEC's Regulation S-K and the rules of the American Stock Exchange.
The Code of Business Conduct and Ethics includes procedures for reporting
violations of the Code, which are applicable to all employees. The
Sarbanes-Oxley Act of 2002 requires companies to have procedures to receive,
retain, and treat complaints received regarding accounting, internal accounting
controls, or auditing matters and to allow for the confidential and anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters. The Code of Business Conduct and Ethics also includes these
required procedures.
--------------------------------
Item 11. Executive Compensation
- -------- ----------------------
Set forth below is certain information relating to compensation received by
the Company's Chief Executive Officer and other executive officers (the "Named
Executive Officers") of the Company.
Summary Compensation Table
--------------------------
Long
Term
Comp.
Awards
Fiscal Other Annual Stock All Other
Year Salary Bonus Compensation Options Compensation
Name and Position Ended ($)(1) ($) ($)(2) (#)(3) ($)(4)
- -------------------- -------- --------- ------- ------------ ------- ------------
Leonard S. Yurkovic 12/31/03 $ 48,960 $ - $2,215 - $ 7,894
President and 12/31/02 - - - 10,000 -
Chief Executive 12/31/01 - - - - -
Officer (5)
William R. Johnson 12/31/03 197,880 - 7,754 - 364,489
President and 12/31/02 265,200 - 9,600 - 9,021
Chief Executive 12/31/01 265,200 - 6,788 40,000 9,980
Officer (6)
Leon C. Kirschner 12/31/03 260,545 - 9,600 - 2,000
Chief Operating 12/31/02 272,328 - 8,800 - 2,000
Officer and 12/31/01 265,277 3,928 8,063 25,000 54,209
President of
Ermanco
Incorporated
Ronald J. Semanick 12/31/03 112,236 - 9,969 - 4,843
Vice President - 12/31/02 115,000 - 9,600 - 4,452
Finance, Chief 12/31/01 105,000 27,247 6,788 5,000 4,185
Financial Officer,
and Treasurer
59
Item 11. Executive Compensation (Continued)
- -------- ----------------------------------
Summary Compensation Table (Continued)
- --------------------------
(1) This column includes employee pre-tax contributions to the Company's 401
(k) Retirement Savings Plans.
(2) This column consists of an auto allowance for the business usage of
personal automobiles for Messrs. Yurkovic, Johnson, and Semanick, and
also automobile benefits for Mr. Kirschner. Effective September 14, 2001,
the monthly auto allowance for Messrs. Johnson and Semanick is $800.
Prior to September 14, 2001, the monthly auto allowance for Messrs.
Johnson and Semanick was $410.
(3) Options become exercisable in increments of 25% on the anniversary
date of the grant. Thus at the end of four years the
options are fully exercisable. All options have a term of five years.
(4) This column includes the amounts expensed for financial reporting
purposes for Company contributions to the Company's 401(k) Retirement
Savings Plans pertaining to basic, matching, and profit sharing
contributions for all Named Executive Officers. This column includes
meals and lodging expenses of $6,262 for Mr. Yurkovic while away from his
Maryland residence and working at the Company's headquarters in Easton,
Pennsylvania. This column includes compensation in accordance with Mr.
Johnson's Separation Agreement and Release as discussed below. This
column includes the cost of supplemental health insurance and
supplemental disability insurance plans for Mr. Kirschner. Pursuant to
the supplemental health insurance and disability insurance plans, Mr.
Kirschner received benefits in the amounts of $0, $0, and $52,509 for the
years ended December 31, 2003, 2002, and 2001, respectively.
(5) Mr. Yurkovic became President and Chief Executive Officer of the
Company in October 2003. His fiscal year 2003 compensation
represents compensation from October 2003 through December 2003.
(6) The Company entered into a Separation Agreement and Release (the
"Agreement") with Mr. Johnson whereby the Company agreed to provide Mr.
Johnson with compensation and other contractual benefits pursuant to the
terms of Mr. Johnson's Amended and Restated Executive Employment
Agreement (the "Employment Agreement") dated October 1, 2001. In
consideration for entering into the Agreement, Mr. Johnson received a
payment of $356,203 less applicable tax withholdings.
60
Item 11. Executive Compensation (Continued)
- -------- ----------------------
Stock Options Granted to Named Executive Officers During The Year Ended
December 31, 2003.
There were no options for the purchase of the Company's common stock awarded to
the Named Executive Officers during the year ended December 31, 2003.
Stock Options Exercised During The Year Ended December 31, 2003 and Held by
Named Executive Officers as of December 31, 2003.
The following table sets forth certain information regarding options for
the purchase of the Company's common stock that were exercised and/or held by
the Company's Named Executive Officers during the year ended December 31, 2003.
Aggregated Option Exercises in the Year Ended December 31, 2003
and Year-End Option Values
--------------------------
Number of Value of
Shares Covered Unexercised
# of By Unexercised In-The-Money
Shares Options at Options at
Acquired December 31, 2003 December 31, 2003
On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ------------------- ----------- -------- ----------------- -----------------
Leonard S. Yurkovic - $ - 2,500/7,500 $ 3,950/11,850
William R. Johnson 29,769 (1) 104,672 - / - - / -
Leon C. Kirschner - - 75,000/25,000 170,859/63,203
Ronald J. Semanick 5,078 (2) 20,845 18,172/8,750 49,358/26,594
(1) On June 16, 2003, Mr. Johnson acquired 29,769 shares of common stock,
net of 3,109 shares withheld for the payment of applicable
taxes, by exercising 32,878 options to obtain the shares.
(2) On June 16, 2003, Mr. Semanick acquired 5,078 shares of common stock by
exercising 5,078 options to obtain the shares.
Employment Agreement with Leon C. Kirschner
- -------------------------------------------
The Company entered into an employment agreement with Leon C. Kirschner, a
former stockholder of Ermanco Incorporated, on October 1, 1999. In accordance
with the employment agreement, Mr. Kirschner was appointed as Corporate Vice
President and a director of the Company and President of Ermanco Incorporated.
On June 25, 2001, Mr. Kirschner was appointed Chief Operating Officer of the
Company. The employment agreement was amended and restated effective August 28,
2002. Terms of the employment agreement include a base salary of $272,328 per
year. The employment agreement entitles Mr. Kirschner to participate in the
Company's Management Incentive Plan that provides for the opportunity to receive
a bonus based upon the achievement of goals as defined for each fiscal year by
the Board of Directors. Effective January 6, 2003, Mr. Kirschner's salary was
temporarily reduced by 10% to $245,095 per last year as part of a cost reduction
initiative. Effective June 30, 2003, Mr. Kirschner's annual salary was adjusted
to $258,712 and, effective October 13, 2003, Mr. Kirschner's annual salary was
restored to $272,328.
Under the terms of the employment agreement, Mr. Kirschner shall perform
his duties and responsibilities at the Company's Spring Lake, Michigan facility
or at such other location in western Michigan as may be established from time to
time by the President and CEO of the Company.
61
Item 11. Executive Compensation
- -------- ----------------------
Employment Agreement with Leon C. Kirschner (Continued)
- -------------------------------------------
The Company has the right to terminate Mr. Kirschner's employment with or
without cause. Cause is defined as any material breach of the employment
agreement, disloyalty to the Company, willful misconduct, and conviction of a
felony or other criminal act. Mr. Kirschner has the right to terminate the
employment agreement voluntarily by giving the Company written notice of such
termination no less than 180 days prior to the effective date of the
termination. The employment agreement may also be terminated upon a change in
control of the Company. The employment agreement provides for severance benefits
that allow Mr. Kirschner to receive his salary for a period of 18 months plus a
lump sum payment in an amount equal to one and one-half times the average of the
bonus paid for the two (2) fiscal years preceding the year in which the
termination becomes effective in the event of termination upon a change of
control. In the event of termination without cause, the employment agreement
also provides for severance benefits that allow Mr. Kirschner to receive his
salary and health insurance coverage for a period of one year following
effective date of the termination.
Other benefits normally made available by the Company to executive
officers, including participation in a health plan, retirement savings plan, and
receipt of automobile benefits are also made available to Mr. Kirschner under
the employment agreement.
Separation Agreement and Release with William R. Johnson
- --------------------------------------------------------
The Company entered into a Separation Agreement and Release (the
"Agreement") with Mr. Johnson whereby the Company agreed to provide Mr. Johnson
with compensation and other contractual benefits pursuant to the terms of Mr.
Johnson's Amended and Restated Executive Employment Agreement (the "Employment
Agreement") dated October 1, 2001. As part of the Agreement, Mr. Johnson and the
Company mutually agreed that the Employment Agreement terminated effective
October 1, 2003 thereby terminating Mr. Johnson's employment relationship and
all other positions with the Company, and Mr. Johnson also released the Company
from any and all claims for wages and benefits including, without limitation,
salary, stock options, severance pay, vacation pay, bonuses, and other
employment-related claims. In consideration for entering into the Agreement, Mr.
Johnson received a payment of $356,203 less applicable tax withholdings. In the
event Mr. Johnson elects continuing COBRA health coverage, the Company shall
reimburse Mr. Johnson for his premiums for COBRA continued health benefits
coverage through October 1, 2004. In addition, in the event the Company wishes
to consult with Mr. Johnson concerning his former areas of responsibility within
the Company, the Company shall pay Mr. Johnson $1,250 per day for such
consultancy plus actual travel expenses.
--------------------------------
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company receive no additional
remuneration for their services as directors. Prior to November 6, 2002, the
Chairman of the Board of Directors and other non-employee directors received an
annual retainer of $12,000 and $6,000, respectively; a fee of $2,500 for each
Board meeting attended; a fee of $600 per day for all Company-related activities
undertaken at the request of the Chairman of the Board or the Chief Executive
Officer of the Company; a fee of $300 per interview for all Company-related
activities undertaken in connection with interviewing qualified candidates to
fill vacancies in key positions within the Company; and a fee of $200 for each
Board Meeting held by telephone conference. Effective November 6, 2002, the
annual retainer and meeting fees were temporarily reduced by 20%. As part of
this cost reduction initiative, the Chairman of the Board of Directors and other
non-employee directors receives an annual retainer of $9,600 and $4,800,
respectively, and a fee of $2,000 for each Board Meeting attended.
62
Item 11. Executive Compensation
- -------- ----------------------
Compensation of Directors (Continued)
- -------------------------
Effective May 6, 2003, the Chairman of the Audit Committee receives an
annual retainer of $5,000, and directors are paid for serving on Committees of
the Board of Directors. Committee members receive a fee of $250 for each
Committee Meeting held by telephone conference, a fee of $250 for each Committee
Meeting held in conjunction with a Board Meeting, and a fee of $1,500 for each
Committee Meeting except those held in conjunction with a Board Meeting.
Effective July 1, 2003, the Chairman of the Board of Directors receives an
annual retainer of $24,000. Effective October 13, 2003, non-employee directors
receive an annual retainer of $12,000, a fee of $1,500 for each Board Meeting
attended, and a fee of $250 for each Board meeting held by teleconference.
Directors will continue to receive 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. Directors are
also reimbursed for their customary and usual expenses incurred in attending
Board and Committee Meetings including those for travel, food, and lodging.
The Company permits its directors, at their election, to defer receipt of
payment of directors' fees. During the year ended December 31, 2003, $15,650 of
directors' fees was deferred. Deferred directors' fees accrue interest at the
prime rate of interest charged by the Company's principal bank or may be
invested in units equivalent to shares of common stock of the Company. During
the year ended December 31, 2003, there were no distributions under the
Directors' Deferred Compensation Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently comprised of Mr. Shulman, Chairman,
and Messrs. Bradt and Schweiger. Mr. Bradt was formerly the CEO of the Company.
No executive officer of the Company serves as a member of the Board of Directors
or Compensation Committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee. Mr. Shulman is a party to certain transactions with the Company as
described in Item 13. Certain Relationships and Related Transactions.
63
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
and Related Stockholder Matters
-------------------------------
The following table sets forth certain information as of March 10, 2004
(unless otherwise noted) regarding the ownership of common stock (i) by each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding common stock, (ii) by each director or nominee of the Company, (iii)
by the executive officers of the Company named in the Summary Compensation
Table, and (iv) by all current executive officers and directors of the Company
as a group. Unless otherwise stated, the beneficial owners exercise sole voting
and/or investment power over their shares.
Right to
Number of Acquire Under
Shares Options Percentage
Beneficially Exercisable of Class
Beneficial Owner Owned Within 60 Days (1)
- ---------------- ------------- ---------------- ------------
Emerald Advisers, Inc. (2)................ 1,199,510 - 28.04%
1703 Oregon Pike
Suite 101
Lancaster, PA 17601
L. Jack Bradt (3)......................... 312,324 7,500 7.46%
10 Ivy Court
Easton, PA 18045
Leon C. Kirschner......................... 180,387 81,250 6.00%
Theodore W. Myers (4)..................... 26,200 5,000 *
Anthony W. Schweiger ..................... 30,000 5,000 *
Steven Shulman............................ 169,109 7,500 4.12%
Leonard S. Yurkovic....................... 58,000 5,000 1.47%
Ronald J. Semanick........................ 5,078 20,672 *
All current directors and
executive officers as a group
(8 persons) (3) (4) ................... 782,618 153,672 21.13%
- -------------------------------------------
*Less than 1%.
(1) The percentage for each individual, entity or group is based on the
aggregate number of shares outstanding as of March 10, 2004 (4,277,595) 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 10, 2004.
(2) This information is presented in reliance on information disclosed in a
Schedule 13G/A filed with the Securities and Exchange Commission on
February 10, 2004.
(3) Includes 45,883 shares held by members of Mr. Bradt's immediate family. Mr.
Bradt disclaims beneficial ownership of such shares.
(4) Includes 2,800 shares held by members of Mr. Myers' immediate family. Mr.
Myers disclaims beneficial ownership of such shares.
64
Item 12. Security Ownership of Management and Certain Beneficial Owners
- -------- --------------------------------------------------------------
(Continued)
Equity Compensation Plan Information
- ------------------------------------
The Company maintains the 1997 Equity Compensation Plan (the "1997 Plan")
pursuant to which it may grant equity awards to eligible persons. The Company
also maintains a deferred compensation plan for directors (the "Directors'
Plan") which is described in more detail below.
The following table gives information about equity awards under the
Company's 1997 Plan and the Directors' Plan.
(a) (b) (c)
-------------------- -------------------- -----------------------
Number of
securities
remaining
Number of Weighted- available for future
securities to be average issuance under
issued upon exercise equity
exercise of price of compensation
outstanding outstanding plans
options, options, (excluding
warrants warrants securities reflected
Plan Category and rights and rights in column (a))
- ------------------------------- -------------------- -------------------- -----------------------
Equity compensation
plans approved by
security holders.......... 339,122 $ 7.40 607,797
Equity compensation
plans not approved by
security holders.......... - - 2,239
------- ---- -------
Total........................ 339,122 $ 7.40 610,036
======= ==== =======
Directors' Plan
- ---------------
Directors may elect to defer receipt of payment of directors' fees.
Deferred directors' fees accrue interest at the prime rate of interest charged
by the Company's principal bank or may be invested in phantom units equivalent
to shares of common stock of the Company. There are currently no phantom units
outstanding.
65
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
To complete the acquisition of Ermanco on September 30, 1999, the Company
issued $3,000,000 in subordinated promissory notes to the stockholders of
Ermanco, including notes in the original principal amounts of $1,382,861 and
$1,001,382 to Steven Shulman and Leon C. Kirschner, respectively. During 2003,
the Company prepaid all of its outstanding subordinated debt. Both Mr. Shulman
and Mr. Kirschner are directors of the Company, and Mr. Kirschner also serves as
the president of Ermanco and Chief Operating Officer of the Company. Note 4 of
the Notes to Consolidated Financial Statements provides additional information
regarding the promissory notes issued to the fourteen stockholders of Ermanco,
nine of whom continue to be employees of the Company.
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement requires fixed
monthly rentals of $33,283 (with annual increases of 2.5%), which includes a
variable portion based on the lessor's borrowing rate and the unpaid mortgage
balance. The terms of the lease require the payment by Ermanco of all taxes,
insurance, and other ownership related costs of the property. The lease expires
on September 30, 2004. The Company is in the process of negotiations to extend
the term of the lease and modify the monthly rental payments.
The Company has an employment agreement with Leon C. Kirschner, a director
of the Company and President of Ermanco Incorporated. The employment agreement
entitles Mr. Kirschner to receive annual compensation during the term of the
employment agreement, participate in a bonus plan, plus usual and customary
fringe benefits associated with being an employee of the Company. Under certain
circumstances, the employment agreement provides for post termination severance
payments.
Item 14. Principal Accountant Fees and Services
- -------- --------------------------------------
KPMG LLP ("KPMG") served as the Company's independent auditors for 2003 and
2002.
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 $159,800 for 2003 and $132,800 for 2002.
Audit-Related Fees
- ------------------
KPMG's fees for audit-related services were $10,000 for 2003 and $9,000 for
2002. These services were rendered in connection with audits of the Company's
employee benefit plans.
Tax Fees
- --------
KPMG's fees for tax compliance and tax consultation services related to our
annual federal and state tax returns with $80,850 for 2003 and $76,800 for 2002.
All Other Fees
- --------------
No other fees were charged by KPMG to the Company other than those
referenced above.
In accordance with our Audit Committee Charter, the Audit Committee
approves in advance any and all audit services, including audit engagement fees
and terms, and non-audit services provided to us by our independent auditors
(subject to the de minimus exception for non-audit services contained in Section
10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended), all as
required by applicable law or listing standards. The independent auditors and
our management are required to periodically report to the Audit Committee the
extent of services provided by the independent auditors and the fees associated
with these services.
66
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) 1. Index to Consolidated Financial Statements Independent Auditors'
Report Consolidated Financial Statements Consolidated Balance Sheets,
December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December
31, 2003, 2002, and 2001
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
2. Index to Financial Statement Schedule
II Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
3. Exhibits:
2.1 Stock Purchase Agreement dated as of August 6, 1999 among SI
Handling Systems, Inc., Ermanco Incorporated, and the
stockholders of Ermanco Incorporated (incorporated by
reference to Exhibit 2.1 to Form 10-Q for the quarterly period
ended August 29, 1999).
2.2 Stock Purchase Agreement by and among McKesson Automation
Systems, Inc., Paragon Technologies, Inc., and SI/BAKER,
INC. dated September 19, 2003 (incorporated by reference to
Exhibit 2.2 on Form 8-K, filed on October 1, 2003).
3.1 Articles of Incorporation of Paragon Technologies, Inc.,
a Delaware corporation (incorporated by reference to
Exhibit 3.1 on Form 8-K, filed on December 11, 2001).
3.2 Bylaws of Paragon Technologies, Inc., a Delaware corporation
(incorporated by reference to Exhibit 3.2 on Form 8-K,
filed on December 11, 2001).
10.1 Executive Officer Incentive Plan* (incorporated by
reference to Exhibit 10.5 to Annual Report on Form 10-K for
the fiscal year ended February 26, 1995).
10.2 Directors' Deferred Compensation Plan* (incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-8 [No. 333-10181]).
10.3 1997 Equity Compensation Plan* (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on
Form S-8 [No. 333-36397]).
10.4 Executive Employment Agreement with William R. Johnson
dated March 29, 1999* (incorporated by reference to Exhibit
10.10 to Form 10-Q for the quarterly period ended May 30,
1999).
10.5 Employment Agreement with Leon C. Kirschner* (incorporated
by reference to Exhibit 10.11 to Form 8-K filed on
October 15, 1999).
10.6 Line of Credit Loan Agreement entered into September 30, 1999
by and between SI Handling Systems, Inc., Ermanco
Incorporated, and First Union National Bank (incorporated by
reference to Exhibit 10.12 to Form 8-K filed on October 15,
1999).
67
PART IV (Continued)
-------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(Continued)
10.7 Promissory Note related to the Line of Credit Loan Agreement
entered into September 30, 1999 by and between SI Handling
Systems, Inc., Ermanco Incorporated, and First Union National
Bank (incorporated by reference to Exhibit 10.13 to Form 8-K
filed on October 15, 1999).
10.8 First Amendment to Term Note and Loan Agreement dated March
30, 2000 (incorporated by reference to Exhibit 10.17 to
Form 10-Q, filed on May 15, 2000).
10.9 Registration Rights Agreement (incorporated by reference to
Exhibit 10.1 to Form S-3, filed on July 5, 2000). 10.10
Amended and Restated Executive Employment Agreement with
William R. Johnson dated October 1, 2001* (incorporated by
reference to Exhibit 10.22 to Amendment No. 1 to Annual Report
on Form 10-K for the year ended December 31, 2001).
10.11 Amended and Restated Executive Employment Agreement with
Leon C. Kirschner dated August 28, 2002* (incorporated by
reference to Exhibit 10.23 to Form 10-Q, filed on November
14, 2002).
10.12 Sixth Amendment to Line of Credit Note and Loan Agreement
dated August 9, 2002 (incorporated by reference to Exhibit
10.24 to Form 10-Q, filed on November 14, 2002).
10.13 Sixth Amendment to Promissory Note and Loan Agreement (Term
Loan) dated November 13, 2002 (incorporated by reference to
Exhibit 10.25 to Annual Report on Form 10-K for the year ended
December 31, 2002).
10.14 Seventh Amendment to Line of Credit Note and Loan Agreement
(Line of Credit) dated November 13, 2002 (incorporated by
reference to Exhibit 10.26 to Annual Report on Form 10-K for
the year ended December 31, 2002).
10.15 Agreement of Sale between J. G. Petrucci Company, Inc. or its
Assigns and Paragon Technologies, Inc. dated November
8, 2002 (incorporated by reference to Exhibit 10.27 to Form
10-Q, filed on May 14, 2003).
10.16 Amendment I to Agreement of Sale between J. G. Petrucci
Company, Inc. and Paragon Technologies, Inc. dated January
2, 2003 (incorporated by reference to Exhibit 10.28 to Form
10-Q, filed on May 14, 2003).
10.17 Amendment II to Agreement of Sale between Triple Net
Investments XIII, L.P. and Paragon Technologies, Inc.
dated January 13, 2003 (incorporated by reference to Exhibit
10.29 to Form 10-Q, filed on May 14, 2003).
10.18 Amendment III to Agreement of Sale between Triple Net
Investments, XIII, L.P. and Paragon Technologies, Inc.
dated January 17, 2003 (incorporated by reference to Exhibit
10.30 to Form 10-Q, filed on May 14, 2003).
10.19 Lease Agreement between Triple Net Investments XIII, L.P.
and Paragon Technologies, Inc. dated February 21, 2003
(incorporated by reference to Exhibit 10.31 to Form 10-Q,
filed on May 14, 2003).
10.20 Eighth Amendment to Line of Credit Note and Loan Agreement
(Line of Credit) dated June 5, 2003 (incorporated by
reference to Exhibit 10.32 to Form 10-Q, filed on August 14,
2003).
10.21 Loan Agreement (Term Loan A and Term Loan B) entered into June
5, 2003 by and between Paragon Technologies, Inc., Ermanco
Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.33 to Form 10-Q,
filed on August 14, 2003).
68
PART IV (Continued)
-------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(Continued)
10.22 Promissory Note related to Term Loan A entered into June 5,
2003 by and between Paragon Technologies, Inc., Ermanco
Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.34 to Form 10-Q,
filed on August 14, 2003).
10.23 Promissory Note related to Term Loan B entered into June 5,
2003 by and between Paragon Technologies, Inc., Ermanco
Incorporated, and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.35 to Form 10-Q,
filed on August 14, 2003).
10.24 Security Agreement related to Term Loan A dated June 5, 2003
by and between Paragon Technologies, Inc. and Wachovia Bank,
National Association (incorporated by reference to Exhibit
10.36 to Form 10-Q, filed on August 14, 2003).
10.25 First Amendment to Term Loan A and B Agreement dated August 4,
2003 by and between Paragon Technologies, Inc. and Wachovia
Bank, National Association (incorporated by reference to
Exhibit 10.37 to Form 10-Q, filed on November 13, 2003).
10.26 Ninth Amendment to Line of Credit Note and Loan Agreement
dated August 4, 2003 by and between Paragon Technologies, Inc.
and Wachovia Bank, National Association (incorporated by
reference to Exhibit 10.38 to Form 10-Q, filed on November 13,
2003).
14 Code of Business Conduct and Ethics (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Independent Auditors (filed herewith).
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 signed by Leonard S. Yurkovic,
President and CEO (filed herewith).
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 signed by Ronald J. Semanick,
Chief Financial Officer and Vice President - Finance and
Treasurer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Leonard S. Yurkovic, President and CEO, and Ronald
J. Semanick, Chief Financial Officer and Vice President -
Finance and Treasurer (filed herewith).
99.1 Cautionary Statement (filed herewith).
* Management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 15(c) of this report.
(b) Reports on Form 8-K.
On September 19, 2003, Paragon Technologies, Inc. sold (the "Sale") its
entire ownership interest in SI/BAKER, INC. ("SI/BAKER") to McKesson
pursuant to the terms of that certain Stock Purchase Agreement dated
September 19, 2003 by and among Paragon, McKesson, and SI/BAKER (the
"Agreement"). Pursuant to the Agreement, Paragon (a) sold 100 shares of
common stock of SI/BAKER to McKesson and (b) made certain other
covenants, in consideration for (x) the payment by McKesson to Paragon
of $5,600,000 in cash and (y) certain other covenants of McKesson and
SI/BAKER. The terms of the Sale did not provide for any contingent
consideration payable to Paragon. The Sale resulted in a gain of
$4,901,000 in 2003. A Form 8-K was filed on October 1, 2003 regarding
this sale transaction.
(c) Exhibits 14, 21, 23.1, 31.1, 31.2, 32.1, and 99.1 are filed with this
report.
69
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 29, 2004 By /s/ Theodore W. Myers
--------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 29, 2004 By /s/ Leonard S. Yurkovic
--------------------------------------
Leonard S. Yurkovic
President and Chief Executive Officer
70
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 29, 2004 /s/ Theodore W. Myers
-------------------------------------------------
Theodore W. Myers
Chairman of the Board of Directors
Dated: March 29, 2004 /s/ Leonard S. Yurkovic
-------------------------------------------------
Leonard S. Yurkovic
President & Chief Executive Officer, Director
Dated: March 29, 2004 /s/ Ronald J. Semanick
-------------------------------------------------
Ronald J. Semanick
Vice President-Finance, Chief Financial
Officer, Treasurer, and Secretary
(Principal Accounting and Financial Officer)
Dated: March 29, 2004 /s/ Leon C. Kirschner
-------------------------------------------------
Leon C. Kirschner
Chief Operating Officer,
President of Ermanco Incorporated, Director
Dated: March 29, 2004 /s/ L. Jack Bradt
-------------------------------------------------
L. Jack Bradt
Director
Dated: March 29, 2004 /s/ Anthony W. Schweiger
-------------------------------------------------
Anthony W. Schweiger
Director
Dated: March 29, 2004 /s/ Steven Shulman
-------------------------------------------------
Steven Shulman
Director
71
EXHIBIT INDEX
2.1 Stock Purchase Agreement dated as of August 6, 1999 among SI Handling
Systems, Inc., Ermanco Incorporated, and the stockholders of Ermanco
Incorporated (incorporated by reference to Exhibit 2.1 to Form 10-Q for
the quarterly period ended August 29, 1999).
2.2 Stock Purchase Agreement by and among McKesson Automation Systems,
Inc., Paragon Technologies, Inc., and SI/BAKER, INC.
dated September 19, 2003 (incorporated by reference to Exhibit 2.2 on
Form 8-K, filed on October 1, 2003).
3.1 Articles of Incorporation of Paragon Technologies, Inc., a Delaware
corporation (incorporated by reference to Exhibit 3.1 on
Form 8-K, filed on December 11, 2001).
3.2 Bylaws of Paragon Technologies, Inc., a Delaware corporation
(incorporated by reference to Exhibit 3.2 on Form 8-K, filed on
December 11, 2001).
10.1 Executive Officer Incentive Plan* (incorporated by reference to
Exhibit 10.5 to Annual Report on Form 10-K for the fiscal
year ended February 26, 1995).
10.2 Directors' Deferred Compensation Plan* (incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on
Form S-8 [No. 333-10181]).
10.3 1997 Equity Compensation Plan* (incorporated by reference to Exhibit
10.7 to the Company's Registration Statement on Form
S-8 [No. 333-36397]).
10.4 Executive Employment Agreement with William R. Johnson dated March
29, 1999* (incorporated by reference to Exhibit 10.10 to
Form 10-Q for the quarterly period ended May 30, 1999).
10.5 Employment Agreement with Leon C. Kirschner* (incorporated by
reference to Exhibit 10.11 to Form 8-K filed on October 15,
1999).
10.6 Line of Credit Loan Agreement entered into September 30, 1999 by and
between SI Handling Systems, Inc., Ermanco Incorporated, and First
Union National Bank (incorporated by reference to Exhibit 10.12 to Form
8-K filed on October 15, 1999).
10.7 Promissory Note related to the Line of Credit Loan Agreement entered
into September 30, 1999 by and between SI Handling Systems, Inc.,
Ermanco Incorporated, and First Union National Bank (incorporated by
reference to Exhibit 10.13 to Form 8-K filed on October 15, 1999).
10.8 First Amendment to Term Note and Loan Agreement dated March 30, 2000
(incorporated by reference to Exhibit 10.17 to Form
10-Q, filed on May 15, 2000).
10.9 Registration Rights Agreement (incorporated by reference to Exhibit
10.1 to Form S-3, filed on July 5, 2000).
10.10 Amended and Restated Executive Employment Agreement with William
R. Johnson dated October 1, 2001* (incorporated by
reference to Exhibit 10.22 to Amendment No. 1 to Annual Report on Form
10-K for the year ended December 31, 2001).
10.11 Amended and Restated Executive Employment Agreement with Leon C.
Kirschner dated August 28, 2002* (incorporated by reference
to Exhibit 10.23 to Form 10-Q, filed on November 14, 2002).
10.12 Sixth Amendment to Line of Credit Note and Loan Agreement dated
August 9, 2002 (incorporated by reference to Exhibit 10.24
to Form 10-Q, filed on November 14, 2002).
10.13 Sixth Amendment to Promissory Note and Loan Agreement (Term Loan)
dated November 13, 2002 (incorporated by reference to
Exhibit 10.25 to Annual Report on Form 10-K for the year ended
December 31, 2002).
10.14 Seventh Amendment to Line of Credit Note and Loan Agreement
(Line of Credit) dated November 13, 2002 (incorporated by
reference to Exhibit 10.26 to Annual Report on Form 10-K for the year
ended December 31, 2002).
10.15 Agreement of Sale between J. G. Petrucci Company, Inc. or its Assigns
and Paragon Technologies, Inc. dated November 8, 2002
(incorporated by reference to Exhibit 10.27 to Form 10-Q, filed on
May 14, 2003).
10.16 Amendment I to Agreement of Sale between J. G. Petrucci Company, Inc.
and Paragon Technologies, Inc. dated January 2, 2003
(incorporated by reference to Exhibit 10.28 to Form 10-Q, filed on
May 14, 2003).
72
EXHIBIT INDEX (Continued)
10.17 Amendment II to Agreement of Sale between Triple Net Investments XIII,
L.P. and Paragon Technologies, Inc. dated January 13,
2003 (incorporated by reference to Exhibit 10.29 to Form 10-Q, filed
on May 14, 2003).
10.18 Amendment III to Agreement of Sale between Triple Net Investments,
XIII, L.P. and Paragon Technologies, Inc. dated January
17, 2003 (incorporated by reference to Exhibit 10.30 to Form 10-Q,
filed on May 14, 2003).
10.19 Lease Agreement between Triple Net Investments XIII, L.P. and
Paragon Technologies, Inc. dated February 21, 2003
(incorporated by reference to Exhibit 10.31 to Form 10-Q, filed on
May 14, 2003).
10.20 Eighth Amendment to Line of Credit Note and Loan Agreement (Line of
Credit) dated June 5, 2003 (incorporated by reference to
Exhibit 10.32 to Form 10-Q, filed on August 14, 2003).
10.21 Loan Agreement (Term Loan A and Term Loan B) entered into June 5, 2003
by and between Paragon Technologies, Inc., Ermanco Incorporated, and
Wachovia Bank, National Association (incorporated by reference to
Exhibit 10.33 to Form 10-Q, filed on August 14, 2003).
10.22 Promissory Note related to Term Loan A entered into June 5, 2003 by and
between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia
Bank, National Association (incorporated by reference to Exhibit 10.34
to Form 10-Q, filed on August 14, 2003).
10.23 Promissory Note related to Term Loan B entered into June 5, 2003 by and
between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia
Bank, National Association (incorporated by reference to Exhibit 10.35
to Form 10-Q, filed on August 14, 2003).
10.24 Security Agreement related to Term Loan A dated June 5, 2003 by and
between Paragon Technologies, Inc. and Wachovia Bank, National
Association (incorporated by reference to Exhibit 10.36 to Form 10-Q,
filed on August 14, 2003).
10.25 First Amendment to Term Loan A and B Agreement dated August 4, 2003 by
and between Paragon Technologies, Inc. and Wachovia Bank, National
Association (incorporated by reference to Exhibit 10.37 to Form 10-Q,
filed on November 13, 2003).
10.26 Ninth Amendment to Line of Credit Note and Loan Agreement dated August
4, 2003 by and between Paragon Technologies, Inc. and Wachovia Bank,
National Association (incorporated by reference to Exhibit 10.38 to
Form 10-Q, filed on November 13, 2003).
14 Code of Business Conduct and Ethics (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Independent Auditors (filed herewith).
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, signed by Leonard S. Yurkovic, President
and CEO (filed herewith).
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, signed by Ronald J. Semanick, Chief Financial Officer and Vice
President - Finance and Treasurer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Leonard S.
Yurkovic, President and CEO, and Ronald J. Semanick, Chief Financial
Officer and Vice President - Finance and Treasurer (filed herewith).
99.1 Cautionary Statement (filed herewith).
*Management contract or compensatory plan or arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this report.
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