10-K/A 1 f10ka.txt AMENDMENT NO. 1 TO FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 AMENDMENT NO. 1 TO 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, 2001 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/ Aggregate market value of common stock held by non-affiliates (based on the closing price on the New York Stock Exchange) on March 13, 2002 was approximately $19.9 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 March 13, 2002 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 13, 2002 was 4,221,635. DOCUMENTS INCORPORATED BY REFERENCE None. 1 TABLE OF CONTENTS Part I.........................................................................3 Item 1. Business.....................................................3 Item 2. Properties..................................................11 Item 3. Legal Proceedings...........................................11 Item 4. Submission of Matters to a Vote of Security Holders.........12 Part II.......................................................................13 Item 5. Market For The Registrant's Common Equity and Related Stockholder Matters.....................................13 Item 6. Selected Financial Data.....................................13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................26 Item 8. Financial Statements and Supplementary Data.................27 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure....................N/A Part III......................................................................59 Item 10. Directors and Executive Officers Of The Registrant..........59 Item 11. Executive Compensation......................................62 Item 12. Security Ownership of Management and Certain Beneficial Owners.......................................68 Item 13. Certain Relationships and Related Transactions..............69 Part IV.......................................................................70 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................70 2 This annual report on Form 10-K amends the annual report on Form 10-K previously filed by Paragon Technologies, Inc. on April 1, 2002 to include required disclosures pertaining to Item 10, Item 11, Item 12, and Item 13 and exhibits related thereto. PART I ------ Item 1. Business ------- -------- Company Overview ---------------- Paragon Technologies, Inc. ("the Company") provides a variety of materials handling solutions, including systems, technologies, products, and services for material flow applications. The Company has one sales and marketing operation and goes to market with a multiple brand, multiple channel strategy under the SI Systems, Ermanco, and Paragon brands. The Company markets the SI Systems and Ermanco brands and may utilize the Paragon brand to offer synergistic materials handling solutions to its customers. The Company's capabilities include horizontal transportation, rapid dispensing, order fulfillment, sortation, and integrating conveyors and conveyor systems. The Company was originally incorporated in Pennsylvania in 1958. On December 7, 2001, upon receiving shareholder approval, the Company changed its state of incorporation from Pennsylvania to Delaware. The Company's Easton, Pennsylvania operations, (hereafter referred to as "SI Systems"), is a specialized systems integrator supplying SI Systems branded automated materials handling systems to manufacturing, order selection, and distribution operations. The systems are marketed, designed, sold, installed, and serviced by its own staff or agents, generally as labor-saving devices to improve productivity, quality, and reduce costs. SI Systems also operates as a project manager in connection with the installation, integration, and service of its products generally utilizing subcontractors. 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. SI Systems' branded integrated materials 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 materials handling needs. SI Systems' staff develops and designs computer control programs required for the efficient operation of the systems. SI Systems' branded products are sold to customers located primarily in North America, including the U.S. government. On September 30, 1999, the Company purchased all of the outstanding common stock of Ermanco. The Company's Spring Lake, Michigan operations (hereafter referred to as "Ermanco"), is a manufacturer of Ermanco branded light to medium duty unit handling conveyor products, serving the materials handling industry through local independent distributors in North America. 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 materials 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. The systems product line of Ermanco accounted for approximately 43% of Ermanco's total revenues in the year ended December 31, 2001, and the balance is from resale distribution. 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, 2001 and December 31, 2000, and during the ten months ended December 31, 1999 are as follows (in thousands): 3 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%
For the year ended December 31, 2000:
% of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Systems sales...................... $ 24,887 32,857 57,744 89.8% Aftermarket sales.................. 4,762 1,800 6,562 10.2% ------ ------ ------ ----- Total sales........................ $ 29,649 34,657 64,306 100.0% ====== ====== ====== ===== As a % of total sales.............. 46.1% 53.9% 100.0%
For the ten months ended December 31, 1999:
% of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Systems sales...................... $ 29,288 7,287 36,575 89.0% Aftermarket sales.................. 4,156 377 4,533 11.0% ------ ------ ------ ----- Total sales........................ $ 33,444 7,664 41,108 100.0% ====== ======= ====== ===== As a % of total sales.............. 81.4% 18.6% 100.0%
The Company's products are sold worldwide through its own sales personnel, along with a network of distributors and licensees. Domestic and international sales by brand during the years ended December 31, 2001 and December 31, 2000, and during the ten months ended December 31, 1999 are as follows (in thousands): 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% ====== ====== ====== =====
For the year ended December 31, 2000:
% of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Domestic sales..................... $ 28,910 29,627 58,537 91.0% International sales................ 739 5,030 5,769 9.0% ------ ------ ------ ----- Total sales........................ $ 29,649 34,657 64,306 100.0% ====== ====== ====== =====
For the ten months ended December 31, 1999:
% of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Domestic sales..................... $ 32,324 7,250 39,574 96.3% International sales................ 1,120 414 1,534 3.7% ------ ------ ------ ----- Total sales........................ $ 33,444 7,664 41,108 100.0% ====== ======= ====== =====
4 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, 2001 and December 31, 2000, and during the ten months ended December 31, 1999 are as follows (in thousands):
As a % of Total Sales -------------- For the year ended December 31, 2001........................ $ 5,219 10.3% For the year ended December 31, 2000........................ 8,157 12.7% For the ten months ended December 31, 1999.................. 11,565 28.1%
The Company's backlog of orders at December 31, 2001 was $13,342,000, of which $2,910,000 was associated with projects with the U.S. government. The Company's backlog of orders at December 31, 2000 was $22,913,000, of which $7,795,000 was associated with projects with the U.S. government. The Company's business is 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. Fluctuations in the Company's sales and earnings occur with increases or decreases in major installations, since the Company recognizes sales on a percentage of completion basis for its systems contracts. The Company expects to fill, within its 2002 calendar year, all of the December 31, 2001 backlog of orders indicated above. Fiscal Year Change ------------------ On September 30, 1999, the Board of Directors of the Company approved an amendment to the Company's Bylaws to change the fiscal year end of the Company from the Sunday nearest to the last day of February to December 31. For the year ended December 31, 1999, the fiscal year consisted of ten months. Products -------- SI Systems' Branded Products -- Automated Materials Handling Systems Segment ---------------------------------------------------------------------------- SI Systems' branded products encompass the horizontal transport and order picking, fulfillment, and replenishment families of products. Horizontal Transport -------------------- Lo-Tow(R). Lo-Tow(R) is an in-floor towline conveyor. It is the platform of ------ the towline conveyor systems utilized in the automation of manufacturing, unit load handling, and large roll delivery systems. This simple, tough 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 depth of approximately three inches, systems can be installed in existing one-story and multi-story buildings as well as newly constructed facilities. The Company believes that SI Systems is the world's largest supplier of in-floor towline systems. 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 18.1%, 22.3%, and 37.3% for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. 5 Cartrac(R). Cartrac(R) spinning tube conveyor systems are used in the ------- automation of production, manufacturing, and assembly operations throughout various industries. Some of these industries 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 capabilities that are well suited for the manufacturing environment where high volume product rate and short cycle time are critical. Cartrac(R) sales, as a percent of total sales, were 0.7%, 3.4%, and 4.6% for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. SI-Egemin --------- On July 15, 1999, the Company and Egemin N.V. ("Egemin") of Schoten, Belgium formed a joint venture, SI-Egemin N.V. ("SI-Egemin"). SI-Egemin drew upon the automated materials handling systems experience of the Company and Egemin to provide automated materials handling systems worldwide. Since inception, each member company contributed $494,000 in capital to fund the joint venture. 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 and received $125,000 as a return of capital for its investment in the joint venture. Order Picking, Fulfillment, and Replenishment Systems ----------------------------------------------------- Dispen-SI-matic(TM) and Automated Picking/Replenishment Solutions ----------------------------------------------------------------- Automation of the order selection process to pick customers' orders with accuracy, speed, and minimum human interface has been a challenge facing the materials handling industry for quite some time. 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. 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 accuracy of order picking and fulfillment every time. The "P4"(TM) automated, single unit order picking system, is an additional product offering. An advantage of P4(TM) is its ability to pick and convey products in a single file with consistent orientation to a downstream secondary process. The system can be configured for different package sizes. SI Systems' capabilities also include gantry picking, which involves the fulfillment of orders utilizing automated gantry technology. Certain customer applications are well suited for this solution. SI Systems' branded technologies include automated picking and replenishment solutions that complement Dispen-SI-matic(TM), thus offering the Company's customers a comprehensive solution in order 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. SI Systems personnel are well known for their creativity, innovation, and understanding customers' needs in order to achieve the ultimate solution. 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 the SI/BAKER, INC. ("SI/BAKER") joint venture), as a percent of total sales, were 9.2%, 12.4%, and 27.0%, for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. 6 SI/BAKER, INC. (Automated Pharmacy Systems) ------------------------------------------ On March 1, 1993, the Company and Automated Prescription Systems, Inc. of Pineville, Louisiana formed a joint venture, SI/BAKER, INC. On September 29, 1998, McKesson HBOC, Inc. [NYSE:MCK], a healthcare supply management company, announced the completion of its acquisition of Automated Prescription Systems, Inc. Automated Prescription Systems, Inc. was renamed McKesson Automation Systems Inc. ("McKesson Automation"). SI/BAKER draws upon the automated materials handling systems experience of the Company and the automated pill counting and dispensing products of McKesson Automation 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 population in the United States and the emphasis on reduced health care costs, of which prescription costs are a major part, is the driving force behind the automation of mail order and the growing, central fill pharmacy operations. SI/BAKER focuses on providing technologically advanced, automated prescription filling systems to this growing market. Information pertaining to the SI/BAKER joint venture is included in Note 11 of Notes to Consolidated Financial Statements. See also Contingencies in Note 8 of Notes to Consolidated Financial Statements. See also Schedule A for SI/BAKER's Financial Statements and Independent Auditors' Report thereon. Sortation --------- SI Systems' branded robotic Gantry Sorter allows companies with large volumes of mailings to take advantage of substantial postal savings by automating their small parcel and letter sorting capability. The Gantry Sorter has a PC-based control system, accommodates weighing and manifesting, can be expanded with additional sorting modules, and is flexible in design. A typical sortation system requires approximately six to nine months to engineer, manufacture, and install. Sortation sales, as a percent of total sales, were 0.3%, 0.5%, and 1.7% for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. Ermanco Branded Products -- Conveyor Systems Segment ---------------------------------------------------- Conveyor Systems ---------------- Ermanco branded products encompass the conveyor systems segment of the business. The results of the Company for the years ended December 31, 2001 and December 31, 2000 include the operations 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. Ermanco supplies materials 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 distributions centers, utilizing sophisticated, custom-designed controls software. Ermanco often combines various components of its technologies as part of a total system solution. Ermanco branded technologies and expertise encompass products in two main families: line shaft-driven live roller conveyor known as XenoROL(R) and belt-driven live roller conveyor known as AccuROL(R). Within each of these drive concepts, there are conveyors, accessories, and options of varying capacities to satisfy a wide range of applications for transportation, accumulation, and sortation products. Ermanco also offers conveyor technology outside these two product lines, including belt and gravity conveyors, sortation, and special equipment. Since its introduction in 1980, Ermanco's XenoPRESSURE technology has provided true non-contact zero-pressure accumulation to the materials handling industry. IntelliROL(TM), a self-powered roller technology, is a very popular offering for unique applications. Ermanco branded sales as a percent of total sales were 62.5%, 53.9%, and 18.6% for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. 7 Product Warranty ---------------- The Company's products are warranted against defects in materials and workmanship for a specified period. The Company provides an accrual for estimated future warranty costs and potential product liability claims based upon a percentage of cost of sales and warranty experience. Sales and Marketing ------------------- The Company has one sales and marketing operation and goes to market with a multiple brand, multiple channel strategy under the SI Systems, Ermanco, and Paragon brands. The Company markets the SI Systems and Ermanco brands, and may utilize the Paragon brand to offer synergistic materials handling solutions to its customers. Sales of SI Systems' branded products in the United States and Canada 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. In the year ended December 31, 2001, the U.S. government accounted for revenues of $5,219,000 or 10.3%, of which the U.S. Postal Service accounted for revenues of $5,038,000 or 9.9%. In the year ended December 31, 2000, Brandt & Hill Inc. accounted for revenues of $10,979,000 or 17.1%, and the U.S. government accounted for revenues of $8,157,000 or 12.7%, of which the U.S. Postal Service accounted for revenues of $7,425,000 or 11.5%. A significant amount of business is derived from existing customers through the sale of additional systems, additions to existing systems, plus parts and service. The Company is not substantially dependent upon any one customer, however, the Company's business is dependent upon a limited number of customers. Ermanco branded products are sold primarily through a worldwide network of approximately 100 experienced materials 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 ninety percent of Ermanco's volume is orders processed by distributors, and ten percent 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. As Ermanco branded products and services expand, the quality and size of the distributors that pursue opportunities on behalf of Ermanco is increasing, bringing better and larger opportunities to the Company's attention. Licensees are located in India, Japan, and the Republic of South Africa, with global affiliates in Brazil, Canada, Ireland, Netherlands, and United Kingdom. Ermanco branded products and services are sold on a fixed-price basis. In the year ended December 31, 2001, no one Ermanco branded customer accounted for revenues in excess of 10% of total revenues. Generally, contract terms are net 30 days for product and parts sales, with progress payments for system-type projects. Competition ----------- The materials handling industry includes many products, devices, and systems competitive with those of the Company. SI Systems' Cartrac(R) system competes with various alternative materials handling technologies, including automated guided vehicle systems, automatic dispatch cart, electrified monorail and pallet skid systems, power and free conveyor systems, and belt and roller conveyor systems. Two 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 the automatic dispatch cart field is primarily in the areas of price, experience, and product performance. 8 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. The 2001-2002 Conveyor Equipment Manufacturers Association yearbook includes 32 companies in the list of members in the Unit Handling Conveyors (Light to Medium) classification (SIC 353501). Thirty members report statistics on a monthly basis in this category, with booked sales of $1.46 billion in 2001. 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. 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 materials 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. Raw Materials ------------- The Company has not been adversely affected by energy or raw materials shortages. Its plants use 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 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 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. 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 holds approximately 46 patents, of which 36 have been issued in the United States, with lives that expire through May 2019, and the Company has 4 pending patent applications. The 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), Ordermatic(R), Accupic(R), Roborail(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), and AccuROL(R) are registered trademarks of the Company. Roborail(TM), IntelliROL(TM), Dispen-SI-matic(TM), NBS 90-SP(TM), and "P4"(TM) are trademarks of the Company. During the fiscal year ended March 3, 1991, the Company entered into a 10-year licensing agreement with Robotrac, Inc. (a subsidiary of Heico, Inc.) of Lisle, Illinois whereby SI Systems markets and manufactures Robotrac products, systems, and services along with the Company's complete line of materials handling solutions. Under the terms of the licensing agreement, the Company paid royalties to Robotrac, Inc. based on net sales of Cartrac(R) products and services. Prior to termination of the license agreement on November 1, 2000, SI Systems exercised its option to purchase the assets licensed and is no longer required to pay royalties to Robotrac on future sales of Cartrac(R) 9 products and services. Royalty expense relating to the licensing agreements for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, was $0, $185,000, and $146,000, respectively. During the fiscal year ended February 25, 1990, the Company entered into a renewable five-year licensing agreement with Knapp to acquire the exclusive right to sell, engineer, manufacture, and install the Dispen-SI-matic(TM) product throughout North America. The licensing agreement was amended on April 29, 1997. The amendment, also with a term of five years and automatically renewable for additional one-year terms, retains many of the salient features of the original licensing agreement with the exception of a change from an exclusive right to a non-exclusive right and a reduction in royalties due Knapp for sales of the Dispen-SI-matic(TM) product by the Company. Under terms of the licensing agreement, which was automatically renewed through April 29, 2003, the Company pays royalties to Knapp based on the number of dispensers per system with a minimum payment applicable to each system. Royalty expense relating to the Knapp licensing agreement for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, was $16,000, $47,000, and $8,000, respectively. Ermanco currently has license agreements with three 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, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, was approximately $66,000, $108,000, and $33,000, respectively. 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. Product Development ------------------- Product development costs, including patent expense, were $456,000, $175,000, and $301,000 for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. 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(TM) narrow belt sorters and to the Order Picking, Fulfillment, and Replenishment product line. Development programs in the year ended December 31, 2000 included enhancements to the Company's Order Picking, Fulfillment, and Replenishment product line and new products which were introduced in February 2001. The new products, NBS 30(R) and NBS 90(R), are narrow belt sorters that contain high-friction divert wheels that raise between the belts, enabling product to be diverted at a 30 or 90 degree angle. Development programs in the ten months ended December 31, 1999 included enhancements to the Lo-Tow(R) and Order Picking, Fulfillment, and Replenishment product lines. 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. 10 Employees --------- As of December 31, 2001, the Company's Easton, Pennsylvania operation employed 45 office employees, including salespersons, draftspersons, and engineers. During the second quarter of 2001, the Company restructured its business operations. In conjunction with the restructuring plan, the Company reduced the number of office employees and discontinued production operations at its Easton, Pennsylvania facility. All production employees working in the Easton, Pennsylvania manufacturing plant were laid off by the end of November 2001. Prior to the restructuring, the Company employed approximately twenty production employees, with an additional 27 individuals on an extended layoff. SI Systems also operates as a project manager in connection with the installation, integration, and service of its products generally utilizing subcontractors. As of December 31, 2001, the Company's Spring Lake, Michigan operation employed 175 persons, including 72 office employees and 103 manufacturing employees. All manufacturing employees are collective bargaining personnel. The current collective bargaining agreement expires on May 31, 2003. The Company currently employs five 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. Item 2. Properties and Leases ------- --------------------- SI Systems' principal office is located in a 173,000 square foot concrete, brick, and steel facility in Easton, Pennsylvania. The Company holds the deed to its Easton, Pennsylvania facility and the 20-acre site on which it is located. The Company's Easton, Pennsylvania facility was designed to operate at a higher capacity than is currently being experienced, and the Company is currently marketing the property for sale. Ermanco's principal office and manufacturing facility are located in a 113,000 square foot steel building in Spring Lake, Michigan. The building is leased from an organization 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 $32,858 (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. This operating lease expires on September 30, 2004. 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 and term loan to complete the acquisition of Ermanco, 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, securities, and a first mortgage on all real estate owned. Item 3. Legal Proceedings ------- ----------------- The Company is from time to time a party to litigation arising in the ordinary course of its business. The Company is not currently party to any material litigation. 11 Item 4. Submission of Matters to a Vote of Security Holders ------- --------------------------------------------------- The Company held a Special Meeting of Shareholders on December 6, 2001 to approve and adopt an Agreement and Plan of Merger providing for the merger of the Company into a wholly-owned subsidiary formed under the laws of the state of Delaware for the purpose of changing the state of incorporation of the Company from Pennsylvania to Delaware. Details of the proposal were provided to shareholders in the form of a Notice of Special Meeting and Proxy Statement dated November 7, 2001 and mailed on November 8, 2001, with such solicitation being in accordance with Section 14 of the Securities and Exchange Act of 1934, as amended, and the regulations promulgated thereunder. The proposal was duly approved by the shareholders of the Company. The Company completed the reincorporation from Pennsylvania to Delaware on December 7, 2001. The voting results on the proposal were as follows:
Votes For Votes Against Abstentions Non-Voting --------- ------------- ----------- ---------- 3,322,727 96,283 14,398 778,301
12 PART II ------- Item 5. Market For The Registrant's Common Stock And Related Security ------- ------------------------------------------------------------- Holder Matters -------------- On March 9, 2000, the Company's common stock began trading on the American Stock Exchange (Amex) under the symbol "PTG." Prior to this date, the Company's common stock was traded on The Nasdaq Stock MarketSM under the symbol "SIHS." The high and low sales prices for the years ended December 31, 2001 and December 31, 2000 are as follows:
For the Year Ended For the Year Ended December 31, 2001 December 31, 2000 ------------------------------ ------------------------------ High Low High Low -------------- -------------- -------------- -------------- First Quarter........................... 10.00 7.45 10.13 4.63 Second Quarter.......................... 8.05 7.00 7.75 5.38 Third Quarter........................... 7.60 7.10 7.63 6.13 Fourth Quarter ......................... 8.75 7.35 8.00 6.38
The Company did not pay any cash dividends during the years ended December 31, 2001 and December 31, 2000, and the Company has no present intention to declare cash dividends. In accordance with the terms and conditions of the Company's line of credit and term loan 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, 2001 was approximately 1,113. The closing market price of the Company's common stock on March 13, 2002 was $8.65. 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, 2001. 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 For the Fiscal For the Years Ended Months Ended Years Ended ---------------------------- ------------------------- ------------------------- 12/31/98 12/31/01 12/31/00 12/31/99 (Unaudited) 2/28/99 3/01/98 -------------- ------------- ------------ ------------ ----------- -------------- Net sales................ $ 50,752 64,306 41,108 31,603 39,573 47,631 Net earnings (loss)...... (62) 3,480 (2,780) 779 1,378 2,612 Basic earnings (loss) per share............. (.01) .83 (.72) .21 .37 .70 Diluted earnings (loss) per share............. (.01) .82 (.73) .21 .36 .70 Total assets............. 41,343 45,917 45,406 23,941 23,580 22,219 Long-term liabilities.... 11,074 13,744 15,670 233 228 216 Cash dividends per share................. - - .10 .10 .10 .07
13 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Liquidity And Capital Resources ------------------------------- The Company's cash and cash equivalents decreased to $6,114,000 at December 31, 2001 from $7,925,000 at December 31, 2000. The decrease resulted from the repayment of long-term debt of $2,096,000 and purchases of capital equipment of $692,000. Partially offsetting the decrease in cash and cash equivalents from these uses was cash provided by operating activities totaling $934,000. Funds provided by operating activities during the year ended December 31, 2000 were $5,071,000. Funds provided by operating activities during the year ended December 31, 2001 as compared to funds provided by operating activities during the year ended December 31, 2000 declined primarily due to the net loss experienced by the Company during the year ended December 31, 2001 and a reduction in current liabilities. Funds provided by operating activities during the ten months ended December 31, 1999 were $8,369,000. Acquisition of Modular Automation Corp. -------------------------------------- On April 13, 1999, the Company acquired all of the outstanding common stock of Modular Automation Corp. ("MAC") of Greene, New York for $1,957,000. The acquisition required a net cash outlay of $928,000. The purchase price of the acquisition was allocated to the assets acquired based on fair value with the remainder representing goodwill. The acquired Automated Guided Vehicle ("AGV") products and personnel were integrated into the SI Systems operation. However, as of December 31, 1999, the AGV product line associated with the MAC acquisition was abandoned. The write-off of certain long-lived assets, including goodwill, totaling $561,000 has been recognized in the Consolidated Statement of Operations for the ten months ended December 31, 1999 in accordance with the criteria set forth by SFAS No. 121. Acquisition of Ermanco Incorporated ----------------------------------- On September 30, 1999, the Company acquired of all of the outstanding common stock of Ermanco. Under the terms of the Stock Purchase Agreement, the Company acquired all of the outstanding common stock of Ermanco for a purchase price of $22,801,000 consisting of $15,301,000 in cash, of which $1,551,000 was held in escrow ($801,000 was released in January 2000 and $750,000 was released in March 2001), $3,000,000 in promissory notes payable to the fourteen stockholders of Ermanco, and 481,284 shares of the Company's common stock with a value of $4,500,000 based on the average closing price of $9.35 of the Company's common stock for the five trading days immediately preceding the date of the Stock Purchase Agreement, August 6, 1999. In 2000, the Company paid additional costs of $45,000 in connection with the acquisition, and $186,000 to satisfy a purchase price adjustment contingency. There are no remaining contingent arrangements that may result in additional payments by the Company under the Stock Purchase Agreement. The acquisition required a net cash outlay of $2,264,000. In connection with the acquisition of Ermanco, the Company entered into employment agreements with four employees of Ermanco. Leon C. Kirschner and Steven Shulman, both principal stockholders of Ermanco, joined the Board of Directors of the Company. In order to complete the Ermanco acquisition, the Company obtained financing from its principal bank. The Company entered into a three-year line of credit facility which may not exceed the lesser of $6,000,000 or an amount based on a borrowing base formula tied principally to accounts receivable, inventory, fair market value of the Company's property and plant, and liquidation value of equipment. This amount will be reduced by the unpaid principal balance of the term loan described below. The line of credit facility is to be used primarily for working capital purposes. As of December 31, 2001, the Company did not have any borrowings under the line of credit facility. 14 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Acquisition of Ermanco Incorporated (Continued) ----------------------------------- The Company financed $14,000,000 of the acquisition through a seven-year term loan from its bank. During the first two years of the term loan, the Company was obligated to repay equal quarterly payments of $312,500 plus accrued interest. After September 30, 2001, the Company commenced making equal quarterly payments of $575,000, plus interest continuing until the loan is fully repaid. The interest rate on the term loan is variable at a rate equal to the three-month LIBOR Market Index Rate plus three percent (4.90% as of December 31, 2001). The Company also entered into an interest rate swap agreement for a portion of the term loan to hedge the floating interest rate. The seven-year interest rate swap for $5,462,000 is at a fixed rate of 9.38%. As of December 31, 2001, the liability associated with the fair value of the cash flow hedge was approximately $412,000. During the second quarter of fiscal 2001, the Company prepaid, without penalty, $575,000 of the term loan. Also, during the third quarter of fiscal 2000, the Company prepaid, without penalty, $1,150,000 of the term loan. Therefore, since the inception of the term loan, the Company prepaid, without penalty, $1,725,000 of the term loan. To obtain the line of credit and term loan, 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, securities, and a first mortgage on all real estate. The line of credit facility and term loan contain various restrictive covenants relating to additional indebtedness, asset acquisitions or dispositions, investments, guarantees, payment of dividends, and maintenance of certain financial ratios. As of December 31, 2001, the Company was in compliance with all covenants, as amended (see Note 3 of Notes to Consolidated Financial Statements). On September 30, 1999, the Company also issued promissory notes to fourteen stockholders of Ermanco, two of which are directors of the Company, in the aggregate principal amount of $3,000,000. The notes have a term of seven years and bear interest at an annual rate of ten percent through September 30, 2002, twelve percent from October 1, 2002 through September 30, 2004, and fourteen percent from October 1, 2004 through September 30, 2006. The weighted average interest rate on the promissory notes is 11.714% over the term of the notes. Interest shall be payable quarterly, in cash, or under certain conditions, in the Company's common stock upon approval of the Company's Board of Directors. The promissory notes may be prepaid prior to the end of the seven-year term provided that there is no debt outstanding under the Company's line of credit facility and term loan. Since July 1, 2001, the Company has been and will be prohibited from making any cash payments of subordinated debt and interest until the Company is in full compliance with all the financial covenants as originally set forth in the term loan agreement with the Company's principal bank. However, the bank waived the restriction from paying interest on the subordinated debt in the form of cash for the fourth quarter ended December 31, 2001 and the first quarter ended March 31, 2002. The Company intends to satisfy its quarterly interest obligations with the issuance of the Company's common stock in the event the Company's principal bank does not grant waivers regarding the making of cash payments of interest on subordinated debt. Commitments and Contingencies ----------------------------- Ermanco's operations are located in an 113,000 square foot steel building in Spring Lake, Michigan. The building is leased from an organization 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 $32,858 (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 of all taxes, insurance, and other ownership related costs of the property. The lease expires on September 30, 2004. 15 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Liquidity And Capital Resources ------------------------------- Commitments and Contingencies (Continued) ----------------------------- The Company also leases certain automobiles and office equipment, office space, computer equipment, and software under various operating leases with terms extending through July 2005. Financing agreements related to the lease of computer software have been recorded as capital leases. These agreements had a total initial contract value of $36,000. As of December 31, 2001, the contract value of the agreements is approximately $5,000. On March 4, 1996, SI/BAKER established a $3,000,000 line of credit facility (the "Facility") with its principal bank (the "bank"). Under the terms of the Facility, SI/BAKER's parent companies, Paragon Technologies, Inc. and McKesson Automation Systems Inc., have each provided a limited guarantee and surety in an amount not to exceed $1,000,000 for a combined guarantee of $2,000,000 to the bank for the payment and performance of the related note, including any further renewals or modifications of the facility. As of December 31, 2001, SI/BAKER did not have any borrowings under the Facility, and the Facility expires effective August 31, 2002. Future contractual obligations and commercial commitments at December 31, 2001 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: Term loan...... 9,200,000 2,300,000 2,300,000 2,300,000 1,438,000 862,000 Cash flow hedge......... 412,000 - - - - 412,000 Subordinated notes payable....... 3,000,000 - - - - 3,000,000 Capital lease obligations... 5,000 5,000 - - - - Operating leases........ 1,567,000 558,000 537,000 412,000 60,000 - ---------- --------- --------- --------- --------- --------- Total......... $ 14,184,000 2,863,000 2,837,000 2,712,000 1,498,000 4,274,000 ========== ========= ========= ========= ========= =========
Amount of Commitment Expiration Per Period ---------------------------------------------------------------- Total Amounts Less Than Committed 1 Year 2 Years 3 Years 4 Years 5 Years --------- ------- ------- ------- ------- ------- Other commercial commitments: Guarantees..... $ 1,000,000 1,000,000 - - - - Line of credit. - - - - - -
16 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Other Liquidity and Capital Resource Matters -------------------------------------------- On June 7, 1999, the Board of Directors of the Company authorized management to purchase up to 10,000 shares of the Company's common stock through open market transactions or negotiated transactions at prices not to exceed prevailing market prices. During the second quarter ended August 29, 1999, the Company expended $105,000 on purchases of 10,000 shares of common stock through open market transactions. The Company anticipates that its financial resources, consisting of borrowings under its credit facility and cash generated from operations will be adequate to satisfy its future cash requirements through the next fiscal year. Due to the unpredictability of future contract sales, the dependence upon a limited number of large contracts with a limited number of customers, sales volume, as well as cash liquidity, may experience fluctuations. For these reasons, cash liquidity beyond a twelve-month period is difficult for the Company to forecast with reasonable accuracy. 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 restrictive covenants associated with the financing obtained from the Company's principal bank, 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. Results of Operations - For The Year Ended December 31, 2001 Compared To The ---------------------------------------------------------------------------- Year Ended December 31, 2000 ---------------------------- The Company's net loss for the year ended December 31, 2001 was $62,000 compared to net earnings of $3,480,000 for the year ended December 31, 2000. Contributing to the net loss for the year ended December 31, 2001 was a reduction in sales volume, restructuring charges of $1,538,000, severance charges of $259,000, and $310,000 of charges related to a strategic transaction that was not completed. Net Sales and Gross Profit on Sales ----------------------------------- Net sales of $50,752,000 for the year ended December 31, 2001 decreased 21.1% compared to net sales of $64,306,000 for the year ended December 31, 2000. The sales decrease of $13,554,000 was primarily attributable to a lower volume of orders associated with the current economic slowdown and competitive pricing pressures. The sales decrease for the year ended December 31, 2001 was primarily experienced by the Company's SI Systems' brand, which encountered an equivalent reduction in sales among all of its product lines, when compared to the year ended December 31, 2000. The Company's business is dependent upon a limited number of large contracts with a limited number of customers. This dependence can cause unexpected fluctuations in sales volume. Along with sales recognized on the percentage of completion accounting method, the monthly rate of new orders can also vary substantially, causing fluctuations in the current backlog of orders and future revenue recognition. Various external factors affect the customers' decision-making process on expanding and 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. Gross profit as a percentage of sales was 24.5% for the year ended December 31, 2001 compared to 28.1% for the year ended December 31, 2000. Gross profit on sales for the year ended December 31, 2001 was favorably impacted by approximately 1.9% as a result of the reversal of $960,000 in previously established contract accruals due to changes in cost estimates. Approximately 3.5% of the decrease in the gross profit percentage for the year ended December 31, 2001 was primarily attributable to the prior year gross profit percentage being impacted by the favorable performance on several contracts. Also contributing to the decrease in the gross profit percentage for the year ended December 31, 2001 was an underabsorption of overhead costs due to a decline in sales volume that accounted for a 1.6% reduction in the gross profit percentage. Gross profit on sales for the year ended December 31, 2000 was impacted by the favorable 17 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Results of Operations - For The Year Ended December 31, 2001 Compared To The ---------------------------------------------------------------------------- Year Ended December 31, 2000 ---------------------------- Net Sales and Gross Profit on Sales (Continued) ----------------------------------- performance on several contracts, from principally the Company's higher margin proprietary product lines, initiated in the prior fiscal year that were completed or nearing completion during the year ended December 31, 2000. Partially offsetting the impact of the favorable performances on several contracts was the recognition of additional losses, primarily during the second quarter of fiscal 2000, on a major contract where significant cost overruns, resulting in losses, were experienced. Selling, General, and Administrative Expenses --------------------------------------------- Selling, general and administrative expenses of $10,161,000 were lower by $740,000 for the year ended December 31, 2001 than in the year ended December 31, 2000. The decrease of $740,000 was comprised of a reduction in compensation expense of $999,000 based on revenue and profit performance, and costs savings of $316,000 attributable to the Company's restructuring of its business operations and continued emphasis on cost reduction. Partially offsetting the aforementioned decline in expenses were charges of approximately $310,000 related to a strategic transaction that was not completed, and $259,000 of expenses pertaining to the reduction of associates due to the economic slowdown. Product Development Costs ------------------------- Product development costs, including patent expense, of $456,000 were higher by $281,000 for the year ended December 31, 2001 than in the year ended December 31, 2000. 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(TM) narrow belt sorters and to the Order Picking, Fulfillment, and Replenishment product line. Development programs in the year ended December 31, 2000 included enhancements to the Company's Order Picking, Fulfillment, and Replenishment product line, and new products which were introduced in February 2001. The new products, NBS 30(R) and NBS 90(R), are narrow belt sorters that contain high-friction divert wheels that raise between the belts, enabling product to be diverted at a 30 or 90 degree angle. Amortization of Goodwill ------------------------ Amortization of goodwill represented costs associated with the acquisition of Ermanco, totaling approximately $468,000 for the year ended December 31, 2001, as compared to $469,000 for the year ended December 31, 2000. Restructuring Expenses ---------------------- During the second quarter of 2001, the Company restructured its business operations and recorded a charge of $1,538,000 for restructuring costs. In conjunction with the restructuring plan, the Company reduced the number of office employees by fourteen and discontinued production operations at its Easton, Pennsylvania facility. All production employees working in the Easton, Pennsylvania manufacturing plant were laid off by the end of November 2001. Prior to the restructuring, the Company employed approximately twenty production employees, with an additional 27 individuals on an extended layoff. The restructuring charges included costs of $678,000 for severance and other personnel costs, $562,000 for pension expense associated with the curtailment of the defined benefit plan for the Company's Easton, Pennsylvania collective bargaining personnel, and $298,000 for plant closure and professional service fees relating to the restructuring. The restructuring charges were determined based on formal plans approved by the Company's management and the Board of Directors. This restructuring action is expected to result in approximately $1,100,000 in annual cost savings to the Company. 18 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Results of Operations - For The Year Ended December 31, 2001 Compared To The ---------------------------------------------------------------------------- Year Ended December 31, 2000 ---------------------------- Restructuring Expenses (Continued) ---------------------- Restructuring expenses of $337,000 for the year ended December 31, 2000 were associated with a restructuring initiative, whereby the Company reduced the number of employees by sixteen. No material liability remained for this restructuring initiative as of December 31, 2001. Interest Expense and Interest Income ------------------------------------ Interest expense of $1,298,000 was lower by $335,000 in the year ended December 31, 2001 than in the year ended December 31, 2000. The decrease in interest expense was primarily attributable to the reduced level of term debt due to principal repayments and lower interest rates. Interest income of $252,000 was lower by $145,000 in the year ended December 31, 2001 compared to the year ended December 31, 2000. The decrease in interest income was attributable to a reduction in the level of funds available for short-term investments and lower interest rates Equity in Income of Joint Ventures ---------------------------------- Equity in income of joint ventures represents the Company's proportionate share of its investments in the SI/BAKER and SI-Egemin joint ventures that are being accounted for under the equity method. The net favorable variance of $207,000 in the equity in income of joint ventures for the year ended December 31, 2001 as compared to the year ended December 31, 2000 was comprised of increased earnings of approximately $97,000 attributable to the SI/BAKER joint venture and decreased losses of approximately $110,000 attributable to the SI-Egemin joint venture. The favorable variance of $97,000 for the year ended December 31, 2001 in the equity in income of the SI/BAKER joint venture was attributable to an improvement in the gross profit percentage by approximately 6% due to favorable performance on several contracts initiated in prior fiscal years that were completed during the year ended December 31, 2001 plus a reduction of $80,000 in revenue-based royalty costs due to the parent companies. The favorable variance of $110,000 for the year ended December 31, 2001 in the equity in income of the SI-Egemin joint venture was primarily attributable to a reduction in operating expenses of the joint venture. The Company divested of its investment in the SI-Egemin joint venture at the end of calendar year 2001. Other Income, Net ----------------- The unfavorable variance of $55,000 in other income, net, for the year ended December 31, 2001 as compared to the year ended December 31, 2000 was primarily attributable to a reduction of revenue-based royalty income from the Company's SI/BAKER joint venture and license agreements related to international conveyor system sales. Income Tax Expense (Benefit) --------------------------- The Company recognized an income tax benefit of $257,000 during the year ended December 31, 2001 compared to the incurrence of income tax expense of $2,233,000 during the year ended December 31, 2000. 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 divestment of the SI-Egemin joint venture. Income tax expense for the year ended December 31, 2000 was generally recorded at statutory federal and state tax rates. 19 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Results of Operations - For The Year Ended December 31, 2001 Compared To The ---------------------------------------------------------------------------- Year Ended December 31, 2000 (Continued) ---------------------------- Backlog of Orders ----------------- The total backlog of orders at December 31, 2001 was approximately $13,342,000. During the year ended December 31, 2001, the Company received orders totaling approximately $41,181,000. Results of Operations - For The Year Ended December 31, 2000 Compared To The ---------------------------------------------------------------------------- Ten Months Ended December 31, 1999 ---------------------------------- On September 30, 1999, the Board of Directors of the Company approved an amendment to the Bylaws to change the fiscal year end from the Sunday nearest to the last day of February to December 31. The year ended December 31, 2000 consisted of twelve months, while the fiscal year ended December 31, 1999 consisted of ten months. On September 30, 1999, the Company concluded the acquisition of all of the outstanding common stock of Ermanco Incorporated. The results for the ten months ended December 31, 1999 include the operations of Ermanco from October 1, 1999 through December 31, 1999. See Note 12 of Notes to Consolidated Financial Statements for further information. The Company's net earnings for the year ended December 31, 2000 was $3,480,000 compared to a net loss of $2,780,000 for the ten months ended December 31, 1999. Contributing to the net earnings for the year ended December 31, 2000 was the inclusion of Ermanco operations for the entire twelve months, compared to the inclusion of the Ermanco operations for only three months during the ten months ended December 31, 1999. Contributing to the net loss for the ten months ended December 31, 1999 were cost overruns of $3,000,000 associated with four contracts, severance charges of $323,000, and the write-off of $561,000 of certain long-lived assets. Net Sales and Gross Profit on Sales ----------------------------------- Net sales of $64,306,000 for the year ended December 31, 2000 increased 56.4% compared to net sales of $41,108,000 for the ten months ended December 31, 1999. The sales increase of $23,198,000 was comprised of an increase in Ermanco's contribution to product sales approximating $26,993,000, offset by a decrease in SI Systems' sales of approximately $3,795,000 for the year, principally in the Order Picking, Fulfillment, and Replenishment product line, when compared to the ten months ended December 31, 1999. Since Ermanco was purchased on September 30, 1999, Ermanco sales recorded in the ten months ended December 31, 1999 consisted of sales from October 1, 1999 through December 31, 1999 only. SI Systems' business is dependent upon a limited number of large contracts with a limited number of customers. This dependence can cause unexpected fluctuations in sales volume. Along with sales recognized on the percentage of completion accounting method, the monthly rate of new orders can also vary substantially, causing fluctuations in the current backlog of orders and future revenue recognition. 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. Although SI Systems sales declined in the year ended December 31, 2000 as compared to the ten months ended December 31, 1999, gross profit on sales for the year ended December 31, 2000 increased compared to the ten months ended December 31, 1999. 20 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Results of Operations - For The Year Ended December 31, 2000 Compared To The ---------------------------------------------------------------------------- Ten Months Ended December 31, 1999 ---------------------------------- Net Sales and Gross Profit on Sales (Continued) ----------------------------------- Gross profit as a percentage of sales was 28.1% for the year ended December 31, 2000 compared to 10.0% for the ten months ended December 31, 1999. The increase in the gross profit percentage for the year ended December 31, 2000 was primarily attributable to effective business controls relative to pricing practices and favorable performance on several contracts, principally for SI Systems' higher margin proprietary products, initiated in the prior fiscal year that were completed or nearing completion during the year ended December 31, 2000. Offsetting the impact of the favorable performance on several contracts was the recognition of an additional loss in the second quarter of fiscal 2000 on a major contract, which experienced additional cost overruns. Gross profit on sales for the ten months ended December 31, 1999 was unfavorably impacted by significant cost overruns on four projects, competitive pricing pressures, as well as to first time inefficiencies associated with the development of enhanced Order Picking, Fulfillment, and Replenishment products related to these projects. The cost overruns associated with these contracts resulted in approximately $8,700,000 in sales with $11,700,000 in related cost of sales during the ten months ended December 31, 1999. As of December 31, 1999, SI Systems had accrued the estimated costs to completion for the four projects incurring cost overruns. Estimates relative to loss contracts, which the Company experienced to an unusual extent in the period ended December 31, 1999, were inherently more difficult to make than those in which the contracts proceed according to original expectations. During 2000, SI Systems had $1,491,000 of revenue associated with these contracts, with an additional loss of $743,000. By December 31, 2000, the Company had obtained customer acceptance for 96% of these contracts which are now in their warranty periods, which periods continue through various dates, concluding in the second quarter of 2002. The Company believes that its warranty accruals and previously established remaining contract accruals for these projects will be adequate to meet any related remaining obligation of the Company. Selling, General and Administrative Expenses -------------------------------------------- Selling, general and administrative expenses of $10,901,000 were higher by $4,095,000 in the year ended December 31, 2000 than in the ten months ended December 31, 1999. The increase of $4,095,000 was comprised of additional cost of operations totaling approximately $3,450,000 related to Ermanco, and an increase in SI Systems' selling, general and administrative expenses of approximately $645,000 for the year when compared to the ten months ended December 31, 1999. Since Ermanco Incorporated was purchased on September 30, 1999, there were selling, general and administrative expenses associated with the Ermanco operation only for October through December 1999 included in the ten months ended December 31, 1999. Product Development Costs ------------------------- Product development costs, including patent expense, of $175,000 were lower by $126,000 for the year ended December 31, 2000 than in the ten months ended December 31, 1999. Development programs in the year ended December 31, 2000 included enhancements to the Company's Order Picking, Fulfillment, and Replenishment product line, and new products which were introduced in February 2001. The new products, NBS 30(R) and NBS 90(R), are narrow belt sorters that contain high-friction divert wheels that raise between the belts, enabling product to be diverted at a 30 or 90 degree angle. Development programs in the ten months ended December 31, 1999 included enhancements to the Lo-Tow(R) and Order Picking, Fulfillment, and Replenishment product lines. 21 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Results of Operations - For The Year Ended December 31, 2000 Compared To The ---------------------------------------------------------------------------- Ten Months Ended December 31, 1999 (Continued) ---------------------------------- Amortization of Goodwill ------------------------ Amortization of goodwill represented costs associated with the acquisition of Ermanco, totaling approximately $469,000 for the year ended December 31, 2000, as compared to $116,000 for the ten months ended December 31, 1999, which included only three months of amortization due to the timing of the acquisition in 1999. During the ten months ended December 31, 1999, the Company also incurred goodwill amortization expense of $93,000 associated with the acquisition of the Modular Automation Corp. Goodwill and Other Asset Impairment ----------------------------------- Goodwill and other asset impairment of $561,000 for the ten months ended December 31, 1999 represented the write-off of certain long-lived assets, primarily goodwill, associated with the elimination of the Automated Guided Vehicle product line related to the acquisition of Modular Automation Corp. Restructuring Expenses ---------------------- Restructuring expenses of $337,000 represented a restructuring initiative whereby approximately sixteen engineering and administrative employees were separated from the Company in the year ended December 31, 2000, as compared to restructuring expenses of $323,000 whereby approximately ten executive, engineering, and administrative employees were separated from the Company in the ten months ended December 31, 1999. No material liability remains for these restructuring activities. Interest Expense and Interest Income ------------------------------------ Interest expense of $1,633,000 was higher by $1,189,000 in the year ended December 31, 2000 than in the ten months ended December 31, 1999. The increase in interest expense was primarily attributable to the term debt and subordinated notes issued in connection with the Ermanco acquisition which was completed on September 30, 1999. Interest income of $397,000 was higher by $267,000 in the year ended December 31, 2000 compared to the ten months ended December 31, 1999. The increase in interest income was attributable to the higher level of funds available for short-term investments. Equity in Income of Joint Ventures ---------------------------------- Equity in income of joint ventures represents the Company's proportionate share of its investments in the SI/BAKER and SI-Egemin joint ventures that are being accounted for under the equity method. The net favorable variance of $205,000 for the year ended December 31, 2000 in the equity in income of joint ventures was comprised of a favorable variance of $316,000 attributable to the SI/BAKER joint venture and an unfavorable variance of $111,000 attributable to the SI-Egemin joint venture. The favorable variance of $316,000 for the year ended December 31, 2000 in the equity in income of SI/BAKER joint venture was attributable principally to increased sales of approximately $3,644,000 and an increase in the gross profit percentage of 2%. The increase in sales for the year ended December 31, 2000 compared to the ten months ended December 31, 1999 was primarily due to expanded product offerings released to market in late 1999. The unfavorable variance of $111,000 for the year ended December 31, 2000 in the equity in income of the SI-Egemin joint venture was attributable to additional start-up costs. The SI-Egemin joint venture was initiated in July 1999. 22 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Results of Operations - For The Year Ended December 31, 2000 Compared To The ---------------------------------------------------------------------------- Ten Months Ended December 31, 1999 (Continued) ---------------------------------------------- Other Income, Net ----------------- The favorable variance of $354,000 in other income, net, for the year ended December 31, 2000 as compared to the ten months ended December 31, 1999 was primarily attributable to an increase of revenue-based royalty income from the Company's SI/BAKER joint venture and license agreements related to international conveyor system sales. Income Tax Expense (Benefit) --------------------------- The Company recognized income tax expense of $2,233,000 during the year ended December 31, 2000 compared to the income tax benefit of $1,394,000 during the ten months ended December 31, 1999. Income tax expense for the year ended December 31, 2000 was generally recorded at statutory federal and state tax rates. The income tax benefit recognized for the ten months ended December 31, 1999 represented the carryback of losses experienced during the ten months ended December 31, 1999 against prior year income. The income tax benefit recognized for the ten months ended December 31, 1999 was negatively impacted by the write-off of goodwill of Modular Automation Corp., which was not deductible. Backlog of Orders ----------------- The total backlog of orders at December 31, 2000 was approximately $22,913,000. During the year ended December 31, 2000, the Company received orders totaling approximately $63,534,000. -------------------- Critical Accounting Policies ---------------------------- 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 related disclosure of commitments and contingencies at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 1 of Notes to Consolidated Financial Statements. Revenue Recognition ------------------- Revenues on sales 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. Installation is an integral part of most systems sold by the Company and is not sold or billed separately. As some of these contracts may extend over one or more years, generally no more than two 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. 23 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Revenue Recognition (Continued) ------------------- 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 sales contracts, including both typical and more complex systems. 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, as occurred in 1999 when the Company determined that it had significantly underestimated the costs involved principally in four major contracts. The cost overruns associated with these contracts resulted in approximately $8,700,000 in sales with $11,700,000 in related cost of sales during the ten months ended December 31, 1999. During 2000, the Company had $1,491,000 of revenue associated with these contracts, with an additional loss of $743,000. Revenues on other sales of parts or equipment are recognized when title transfers pursuant to shipping terms. There are no installation or customer acceptance aspects of these sales. The Company's business is dependent upon a limited number of large contracts with a limited number of customers. This dependence can cause unexpected fluctuations in sales volume. Along with sales recognized on the percentage of completion accounting method, the monthly rate of new orders can also vary substantially, causing fluctuations in the current backlog of orders and future revenue recognition. 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. Warranty -------- The Company's products are warranted against defects in materials and workmanship for a specified period. The Company provides an accrual for estimated future warranty costs and potential product liability claims based upon a percentage of cost of sales and warranty experience. Historically, the level of warranty reserve has been appropriate based on management's assessment of estimated future warranty claims. However, if unanticipated warranty issues arise in the future, there could be a significant impact on the recorded warranty reserve. Inventories ----------- Inventories are valued at the lower of average cost or market. Inventories primarily consist of materials purchased or manufactured for stock. The Company does not defer general and administrative costs or initial startup costs. The Company provides an inventory reserve determined by a specific identification of individual slow moving items and a general reserve to cover 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. Restructuring ------------- During the second quarter of 2001, the Company restructured its business operations and recorded a charge of $1,538,000 for restructuring costs. In conjunction with the restructuring plan, the Company reduced the number of office employees by fourteen and discontinued production operations at its Easton, Pennsylvania facility. The restructuring charges included costs of $678,000 for severance and other personnel costs, $562,000 for pension expense associated with the curtailment of the defined benefit plan for the Company's Easton, Pennsylvania production employees, and $298,000 for plant closure and professional service fees relating to the restructuring. The determination of the 24 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Restructuring (Continued) ------------- amount of the restructuring charge involved a number of estimates. However, the remaining restructuring accrual is deemed appropriate based on management's assessment of estimated future cash payments. Allowance for Doubtful Accounts ------------------------------- The Company provides an allowance for doubtful accounts determined by a specific identification of individual accounts and a general reserve to cover 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 ----------------- The Company reviews the recovery of the net book value of long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," for impairment 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. New Accounting Pronouncements ----------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for by the purchase method and adds disclosure requirements related to business combination transactions. SFAS No. 141 also establishes criteria for the recognition of intangible assets apart from goodwill. This Statement applies to all business combinations for which the acquisition date was July 1, 2001 or later. The Company had no acquisitions during 2001. The Company intends to implement the provisions of SFAS No. 141 in any future business combinations. On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes guidelines for the financial accounting and reporting of acquired goodwill and other intangible assets. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization; rather, it will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company is required to adopt the provisions of this pronouncement no later than the beginning of 2002, however, goodwill and other intangible assets acquired after June 30, 2001, are subject immediately to the amortization provisions of this statement. The Company had no acquisitions of goodwill or other intangibles in the second half of 2001. The Company will adopt the amortization provisions of SFAS No. 142 beginning in the first quarter of 2002. During the years ended December 31, 2001 and December 31, 2000, and the ten months ended December 31, 1999, goodwill and other intangible amortization was $508,000, $558,000, and $252,000, respectively. The Company has not yet determined the final impact of adopting SFAS No. 142. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement also supersedes APB No. 30 provisions related to the accounting and reporting for the disposal of a segment of a business. This Statement establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement retains most of the requirements in SFAS No. 121 related to the recognition of impairment of long-lived assets to be held and used. The Statement is effective for years beginning after December 15, 2001. The Company is evaluating the potential impact of adopting SFAS No. 144. 25 Item 7. Management's Discussion And Analysis Of Financial Condition And ------- --------------------------------------------------------------- Results Of Operations --------------------- Cautionary Statement -------------------- Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission rules, regulations, and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. Among other things, they regard the Company's acquisition activities, earnings, liquidity, financial condition, and certain operational matters. Words or phrases denoting the anticipated results of future events, such as "anticipate," "believe," "estimate," "expect," "may," "will," "will likely," "are expected to," "will continue," "should," "project," and similar expressions that denote uncertainty, are intended to identify such forward-looking statements. The Company's actual results, performance, or achievements could differ materially from the results expressed in, or implied by, such "forward-looking statements" as a result of the factors set forth in Exhibit 99. Item 7a. Quantitative and Qualitative Disclosures about Market Risk -------- ---------------------------------------------------------- The Company's primary interest rate market risk exposure is from changes in interest rates. The Company's policy is to manage interest rate exposure through the use of a combination of fixed and floating rate debt instruments, and since September 30, 1999, an interest rate swap agreement. Generally, the Company seeks to match the terms of its debt with its purpose. The Company uses a variable rate line of credit facility to provide working capital for operations. In the ten months ended December 31, 1999, the Company entered into an interest rate swap agreement for 50% of its new term loan from its principal bank to effectively convert half of the term loan from a variable rate note to a fixed rate note. A standard interest rate swap agreement involves the payment of a fixed rate times a notional amount by one party in exchange for a floating rate times the same notional amount from another party. The counterpart to the swap agreement is the Company's principal bank. 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, including the interest rate swap agreement, are material to its results of operations. 26 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, 2001 and December 31, 2000. Consolidated Statements of Operations for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999. Notes to Consolidated Financial Statements. o Financial Statement Schedule for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999: 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. 27 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, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000, and for the ten months ended December 31, 1999, 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. /S/ KPMG LLP Philadelphia, PA March 8, 2002 28 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 2001 and December 31, 2000 (In Thousands, Except Share Data)
December 31, December 31, 2001 2000 ------------------- ------------------ Assets ------ Current assets: Cash and cash equivalents.......................... $ 6,114 7,925 ------ ------ Receivables: Trade (net of allowance for doubtful accounts of $74 as of December 31, 2001 and $54 as of December 31, 2000........... 7,093 7,040 Notes and other receivables...................... 630 301 ------ ------ Total receivables.............................. 7,723 7,341 ------ ------ Costs and estimated earnings in excess of billings............................................ 244 1,665 ------ ------ Inventories: Raw materials...................................... 1,731 2,198 Work-in-process.................................... 254 340 Finished goods..................................... 408 508 ------ ------ Total inventories................................ 2,393 3,046 ------ ------ Deferred income tax benefits.......................... 2,077 2,326 Prepaid expenses and other current assets............. 649 547 ------ ------ Total current assets............................. 19,200 22,850 ------ ------ Property, plant and equipment, at cost: Land............................................... 27 27 Buildings and improvements......................... 3,727 3,746 Machinery and equipment............................ 5,059 6,341 ------ ------ 8,813 10,114 Less: accumulated depreciation.................... 6,112 7,334 ------ ------ Net property, plant and equipment................ 2,701 2,780 ------ ------ Investments in joint ventures......................... 1,667 2,000 Excess of cost over fair value of net assets acquired, less amortization of $1,053 as of December 31, 2001 and $585 as of December 31, 2000. 17,657 18,125 Other assets, at cost less accumulated amortization of $94 as of December 31, 2001 and $210 as of December 31, 2000.................................. 118 162 ------ ------ Total assets..................................... $ 41,343 45,917 ====== ======
See accompanying notes to consolidated financial statements. 29 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 2001 and December 31, 2000 (In Thousands, Except Share Data)
December 31, December 31, 2001 2000 ----------------- ----------------- Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Current installments of long-term debt................ $ 2,305 1,521 Accounts payable...................................... 3,319 4,412 Customers' deposits and billings in excess of costs and estimated earnings for completed and uncompleted contracts............................... 3,345 4,446 Accrued salaries, wages, and commissions.............. 676 2,130 Income taxes payable.................................. 46 369 Accrued royalties payable............................. 92 253 Accrued product warranties............................ 863 857 Accrued pension and retirement savings plan liabilities............................ 1,122 688 Accrued restructuring expenses........................ 494 - Accrued other liabilities............................. 1,126 517 ------ ------ Total current liabilities......................... 13,388 15,193 ------ ------ Long-term liabilities: Long-term debt, excluding current installments: Term loan........................................... 6,900 9,775 Subordinated notes payable.......................... 3,000 3,000 Other............................................... - 5 ------ ------ Total long-term debt.............................. 9,900 12,780 Other long-term liability............................. 412 - Deferred income taxes payable......................... 628 823 Deferred compensation................................. 134 141 ------ ------ Total long-term liabilities....................... 11,074 13,744 ------ ------ Stockholders' equity: Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 4,221,635 shares as of December 31, 2001 and 4,194,869 shares as of December 31, 2000................................................ 4,222 4,195 Additional paid-in capital............................ 7,071 6,882 Retained earnings..................................... 5,841 5,903 Accumulated other comprehensive loss.................. (253) - ------ ------ Total stockholders' equity........................ 16,881 16,980 ------ ------ Total liabilities and stockholders' equity........ $ 41,343 45,917 ====== ======
See accompanying notes to consolidated financial statements. 30 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Statements Of Operations For the Years Ended December 31, 2001 and December 31, 2000, and for the Ten Months Ended December 31, 1999 (In Thousands, Except Share and Per Share Data)
December 31, December 31, December 31, 2001 2000 1999 ---------------- ---------------- ---------------- Net sales................................. $ 50,752 64,306 41,108 Cost of sales............................. 38,327 46,248 36,982 ------ ------ ------ Gross profit on sales.................. 12,425 18,058 4,126 ------ ------ ------ Selling, general and administrative expenses 10,161 10,901 6,806 Product development costs................. 456 175 301 Amortization of goodwill.................. 468 469 209 Goodwill and other asset impairment............................. - - 561 Restructuring expenses.................... 1,538 337 323 Interest expense.......................... 1,298 1,633 444 Interest income........................... (252) (397) (130) Equity in income of joint ventures........ (542) (335) (130) Other income, net......................... (383) (438) (84) ------ ------ ------ 12,744 12,345 8,300 ------ ------ ------ Earnings (loss) before income taxes.................................. (319) 5,713 (4,174) Income tax expense (benefit).............. (257) 2,233 (1,394) ------ ------ ------ Net earnings (loss).................... $ (62) 3,480 (2,780) ====== ====== ====== Basic earnings (loss) per share........... $ (.01) .83 (.72) ====== ====== ====== Diluted earnings (loss) per share......... $ (.01) .82 (.73) ====== ====== ====== Weighted average shares outstanding............................ 4,210,819 4,189,874 3,835,718 Dilutive effect of stock options.......... - 1,885 - Dilutive effect of phantom stock units.................................. - 15,885 16,493 --------- --------- --------- Weighted average shares outstanding assuming dilution.......... 4,210,819 4,207,644 3,852,211 ========= ========= =========
See accompanying notes to consolidated financial statements. 31 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Statements Of Stockholders' Equity For the Years Ended December 31, 2001 and December 31, 2000, and for the Ten Months Ended December 31, 1999 (In Thousands, Except Share And Per Share Data)
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Stockholders' Comprehensive Stock Capital Earnings Loss Equity Income (Loss) ------------ ------------- ------------ -------------------------------------------------- Balance at February 28, 1999.............. $ 3,705 2,767 5,675 - 12,147 Net loss and comprehensive loss........... - - (2,780) - (2,780) (2,780) ====== Dividends declared-- $.10 per share cash dividend.......................... - - (371) - (371) Common stock repurchases.................. (11) (9) (101) - (121) Stock options and awards exercised........ 10 40 - - 50 Shares issued in connection with Ermanco acquisition.................... 481 4,019 - - 4,500 ------ ----- ----- ----- ------ Balance at December 31, 1999.............. 4,185 6,817 2,423 - 13,425 Net earnings and comprehensive income................................. - - 3,480 - 3,480 3,480 ===== Issuance of common shares as interest payment on subordinated notes.................................. 10 65 - - 75 ------ ----- ----- ----- ------ Balance at December 31, 2000.............. 4,195 6,882 5,903 - 16,980 Net loss.................................. - - (62) - (62) (62) Cash flow hedge, net of tax............... - - - (253) (253) (253) ---- Comprehensive loss........................ (315) ==== 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 ====== ===== ===== ===== ======
See accompanying notes to consolidated financial statements. 32 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Statements Of Cash Flows For the Years Ended December 31, 2001 and December 31, 2000, and for the Ten Months Ended December 31, 1999 (In thousands)
December 31, December 31, December 31, 2001 2000 1999 ----------------- ----------------- ----------------- Cash flows from operating activities: Net earnings (loss).......................... $ (62) 3,480 (2,780) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation of plant and equipment............................ 706 648 369 Amortization of intangibles............ 508 558 252 Loss (gain) on disposition of equipment......................... 52 (2) (3) Equity in income of joint ventures..... (542) (335) (130) Write-off of intangible assets......... - - 561 Issuance of common shares as interest payment on subordinated notes................... 75 75 - Issuance of common shares as payment of employee's bonus....... 111 - - Cash dividend received from joint venture........................ 750 - - Change in operating assets and liabilities, net of effects of acquisitions: Receivables....................... (257) 435 4,752 Costs and estimated earnings in excess of billings........... 1,421 199 7,070 Inventories....................... 653 359 366 Deferred income tax benefits, net............................. 213 441 (1,058) Prepaid expenses and other current assets.................. (102) 168 211 Other noncurrent assets........... 4 (48) 94 Accounts payable.................. (1,093) (757) (1,647) Customers' deposits and billings in excess of costs and estimated earnings for completed and uncompleted contracts........... (1,101) (708) 478 Accrued salaries, wages, and commissions................. (1,454) 774 336 Income taxes payable.............. (323) 320 (874) Accrued royalties payable......... (161) (31) (73) Accrued pension and retirement savings plan liabilities .................... 434 225 (119)
33 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Statements Of Cash Flows (Continued) For the Years Ended December 31, 2001 and December 31, 2000, and for the Ten Months Ended December 31, 1999 (In thousands)
December 31, December 31, December 31, 2001 2000 1999 ----------------- ----------------- ----------------- Cash flows from operating activities (Continued): Accrued product warranties........ 6 (46) 367 Accrued restructuring expenses........................ 494 - - Accrued other liabilities......... 609 (606) 444 Deferred compensation............. (7) (78) (247) ----- ----- ----- Net cash provided by operating activities ............................. 934 5,071 8,369 ----- ----- ----- Cash flows from investing activities: Investment in joint venture.................. - (266) (228) Acquisitions, net of cash acquired........... - (231) (2,961) Proceeds from the disposition of land and equipment........................ 13 232 3 Additions to property, plant and equipment (692) (395) (298) ----- ----- ----- Net cash used by investing activities........ (679) (660) (3,484) ----- ----- ----- Cash flows from financing activities: Sale of common shares in connection with employee incentive stock option plan ............................. 30 - 34 Repayment of long-term debt.................. (2,096) (2,728) (30) Dividends paid on common stock............... - - (371) Repurchase and retirement of common stock.............................. - - (105) ----- ----- ----- Net cash used by financing activities........ (2,066) (2,728) (472) ----- ----- ----- Increase (decrease) in cash and cash equivalents...................... (1,811) 1,683 4,413 Cash and cash equivalents, beginning of period....................... 7,925 6,242 1,829 ----- ----- ----- Cash and cash equivalents, end of period............................. $ 6,114 7,925 6,242 ===== ===== =====
See accompanying notes to consolidated financial statements. 34 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 -------------------------------------------------------- On September 30, 1999, Paragon Technologies, Inc. ("the Company") concluded the acquisition of all of the outstanding common stock of Ermanco Incorporated ("Ermanco"). The results for the years ended December 31, 2001 and December 31, 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 Company's Easton, Pennsylvania operations (hereafter referred to as "SI Systems") is a specialized systems integrator supplying SI Systems' branded automated materials handling systems to manufacturing, order selection, and distribution operations. The systems are marketed, designed, sold, installed, and serviced by its own staff or agents, generally as labor-saving devices to improve productivity, quality, and reduce costs. SI Systems also operates as a project manager in connection with the installation, integration, and service of its products generally utilizing subcontractors. 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. SI Systems' branded integrated materials 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 materials handling needs. SI Systems' staff develops and designs computer control programs required for the efficient operation of the systems. SI Systems branded products are sold to customers located primarily in North America, including the U.S. government. The Company's Spring Lake, Michigan operations (hereafter referred to as "Ermanco"), is a manufacturer of Ermanco branded light to medium duty unit handling conveyor products, serving the materials handling industry through local independent distributors in North America. 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. The systems product line of Ermanco accounted for approximately 43% of Ermanco's total revenues in the year ended December 31, 2001, and the balance is from resale distribution. In the year ended December 31, 2001, the United States government accounted for revenues of $5,219,000. In the year ended December 31, 2000, Brandt & Hill Inc. accounted for revenues of $10,979,000, and the United States government accounted for revenues of $8,157,000. In the ten months ended December 31, 1999, the United States government accounted for revenues of $11,565,000, and Ciba Vision Corporation accounted for revenues of $6,600,000. No other customer accounted for over 10% of revenues. 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, 2001, one customer owed the Company $1,242,000 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. 35 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements Fiscal Year ----------- On September 30, 1999, the Board of Directors of the Company approved an amendment to the Company's Bylaws to change the fiscal year end of the Company from the Sunday nearest to the last day of February to December 31. The years ended December 31, 2001 and December 31, 2000 consisted of twelve months; while the fiscal year ended December 31, 1999 consisted of ten months. 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. Acquisitions ------------ Acquisition of Modular Automation Corp. -------------------------------------- On April 13, 1999, the Company acquired all of the outstanding common stock of Modular Automation Corp. ("MAC") of Greene, New York, for $1,957,000, paid in the form of cash. The amount of goodwill and covenant not to compete recorded at the time of the acquisition were $616,000 and $50,000, respectively. However, as of December 31, 1999, the Company decided to abandon the AGV product line associated with the MAC acquisition of its Automated Materials Handling Systems segment and the remaining $561,000 of intangible assets were written off as impaired in 1999. Acquisition of Ermanco Incorporated ----------------------------------- On September 30, 1999, the Company acquired all of the outstanding common stock of Ermanco Incorporated ("Ermanco"). Under the terms of the Stock Purchase Agreement, the Company acquired all of the outstanding common stock of Ermanco for a purchase price of $22,801,000 consisting of $15,301,000 in cash, of which $1,551,000 was held in escrow ($801,000 was released in January 2000, and $750,000 was released in March 2001), $3,000,000 in promissory notes payable to the fourteen stockholders of Ermanco, and 481,284 shares of the Company's common stock with a value of $4,500,000 based on the average closing price of $9.35 of the Company's common stock for the five trading days immediately preceding the date of the Stock Purchase Agreement, August 6, 1999. The Company financed $14,000,000 of the acquisition through term debt. In 2000, the Company paid additional costs of $45,000 in connection with the acquisition, and $186,000 to satisfy a purchase price adjustment contingency. There are no remaining contingent arrangements that may result in additional payments by the Company under the Stock Purchase Agreement. The acquisition required a net cash outlay of $2,264,000. The acquisition was accounted for as purchase and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair value at the date of acquisition. The amount of the excess of cost over fair value of net assets acquired associated with the acquisition was $18,710,000 and is being amortized over a period of 40 years. 36 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements Acquisition of Ermanco Incorporated (Continued) ----------------------------------- On the basis of a pro forma consolidation of the results of operations of Ermanco, as if the acquisition had taken place on March 1, 1999, the following unaudited pro forma financial results for the ten months ended December 31, 1999 are as follows (in thousands, except per share amounts and unaudited):
For the Ten Months Ended December 31, 1999 ------------------------- Net sales........................................................... $ 60,168 ====== Net earnings (loss)................................................. $ (1,755) ====== Basic earnings (loss) per share..................................... $ (.42) ====== Diluted earnings (loss) per share................................... $ (.42) ======
Use of Estimates ---------------- The preparation of the financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The judgments made in assessing the appropriateness of the estimates and assumptions utilized by management in the preparation of the financial statements are based on historical and empirical data and other factors germane to the nature of the risk being analyzed. Materially different results may occur if different assumptions or conditions were to prevail. Estimates and assumptions are mainly utilized to establish the appropriateness of the allowance for doubtful accounts, inventory reserve, warranty reserve, restructuring accrual, 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 materially, approximate their carrying values due to the short-term nature of the instruments. The carrying amount of the Company's long-term debt appropriates market value as the debt carries a variable interest rate. 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 debt instruments purchased with a 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 a general reserve to cover 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. The Company does not defer general and administrative costs or initial startup costs. Inventory reserves are $954,000 and $992,000 as of December 31, 2001 and December 31, 2000, respectively. 37 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements 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 buildings and improvements and machinery and equipment are 15-40 years and 3-7 years, respectively. 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 McKesson Automated Systems Inc. ("McKesson Automation") of Pineville, Louisiana formed a joint venture, SI/BAKER, INC. ("SI/BAKER"). SI/BAKER draws upon the automated materials handling systems experience of the Company and the automated pill counting and dispensing products of McKesson Automation to provide automated pharmacy systems. Each member company contributed $100,000 in capital to fund the joint venture. The Company accounts for its investment in the joint venture on the equity basis. On July 15, 1999, the Company and Egemin N.V. ("Egemin") of Schoten, Belgium formed a joint venture, SI-Egemin N.V. ("SI-Egemin"). SI-Egemin drew upon the automated materials handling systems experience of the Company and Egemin to provide automated materials handling systems worldwide. Since inception, each member Company contributed $494,000 in capital to fund the joint venture. 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 ----------- Deferred Debt Issuance Costs ---------------------------- Deferred debt issuance costs, included in Other assets, incurred in connection with the line of credit and term loan with the Company's principal bank associated with the acquisition of Ermanco (see Notes 3 and 4) are amortized over a period of 3 and 7 years, respectively. Asset Impairments ----------------- The Company reviews the recovery of the net book value of long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," for impairment whenever events and circumstances indicate that the net book value of an asset may not be recoverable from the estimated undiscounted future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the net book value, an impairment loss is recognized equal to an amount by which the net book value exceeds the fair value of assets. Revenue Recognition ------------------- Revenues on sales 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. Installation is an integral part of most systems sold by the Company and is not sold or billed separately. As these contracts may extend over one or more years, generally no more than two 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. 38 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements Revenue Recognition (Continued) ------------------- 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 sales contracts, including both typical and more complex systems. However, in rare instances, as occurred in 1999, the Company determined that it had significantly underestimated the costs involved, principally in four major contracts that included enhancements to Order Picking, Fulfillment, and Replenishment products. The cost overruns associated with these contracts resulted in approximately $8,700,000 in sales with $11,700,000 in related cost of sales during the ten months ended December 31, 1999. As of December 31, 1999, the Company had accrued the estimated costs to completion for these four projects. During 2000, the Company had $1,491,000 of revenue associated with these contracts, with an additional loss of $743,000. The Company obtained customer acceptance for these contracts. Two of the contracts remain in their warranty periods, which periods continue through various dates, concluding in the second quarter of 2002. The Company believes that its warranty accruals and previously established remaining contract accruals for these projects will be adequate to meet any related remaining obligation of the Company. 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 ------------- During the second quarter of 2001, the Company restructured its business operations and recorded a charge of $1,538,000 for restructuring costs. In conjunction with the restructuring plan, the Company reduced the number of office employees by fourteen and discontinued production operations at its Easton, Pennsylvania facility. All production employees working in the Easton, Pennsylvania manufacturing plant were laid off by the end of November 2001. Prior to the restructuring, the Company employed approximately twenty production employees, with an additional 27 individuals on an extended layoff. The restructuring charges included costs of $678,000 for severance and other personnel costs, $562,000 for pension expense associated with the curtailment of the defined benefit plan for the Company's Easton, Pennsylvania production employees, and $298,000 for plant closure and professional service fees relating to the restructuring. The restructuring charges were determined based on formal plans approved by the Company's management and the Board of Directors. The liability related to the curtailment of the defined benefit plan is recorded as accrued pension and retirement savings plan liabilities on the consolidated balance sheet. The major components of the restructuring charge and remaining accruals are as follows:
Balance at Cash Balance at June 30, 2001 Payments December 31, 2001 ------------------ -------------- ------------------------- Severances $ 678,000 (404,000) 274,000 Other 298,000 ( 78,000) 220,000 ------- ------- ------- $ 976,000 (482,000) 494,000 ======= ======= =======
39 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements Restructuring (Continued) ------------- Restructuring expenses of $337,000 represented a restructuring initiative whereby approximately sixteen engineering and administrative employees were separated from the Company in the year ended December 31, 2000. Restructuring expenses of $323,000 resulted from ten executive, engineering, and administrative employees being separated from the Company in the ten months ended December 31, 1999. No liability remains for these restructuring activities. Warranty -------- The Company's products are warranted against defects in materials and workmanship for a specified period. The Company provides an accrual for estimated future warranty costs and potential product liability claims based upon a percentage of cost of sales and warranty experience. 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 accounts for stock option grants in accordance with APB 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. 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 $8,000, ($40,000), and ($30,000) for the years ended December 31, 2001 and December 31, 2000, and in the ten months ended December 31, 1999, respectively. 40 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements Earnings (Loss) Per Share ------------------------- Basic and diluted earnings (loss) per share for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, 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, 2001 Income (loss) numerator............. $ (62,000) - (62,000) Shares denominator.................. 4,210,819 - 4,210,819 --------- --------- Per share amount.................... $ (.01) (.01) ========= ========= For the year ended December 31, 2000 Income (loss) numerator............ $ 3,480,000 (25,000) 3,455,000 Shares denominator................. 4,189,874 17,770 4,207,644 --------- --------- Per share amount................... $ .83 .82 ========= ========= For the ten months ended December 31, 1999 Income (loss) numerator............ $ (2,780,000) (20,000) (2,800,000) Shares denominator................. 3,835,718 16,493 3,852,211 --------- --------- Per share amount................... $ (.72) (.73) ========= =========
Cash Flow Hedge --------------- The Company is exposed to market risk from changes in interest rates, and uses an interest rate swap to hedge this risk. The seven-year interest rate swap has a notional amount of $5,462,500 and is classified as a cash flow hedge of forecasted variable rate interest payments on a portion of the Company's term loan. Gains and losses on the interest rate swap are deferred in other comprehensive income (loss). The fair value of the interest rate swap at December 31, 2001 was a liability of approximately $412,000. The separate components of other comprehensive loss are as follows (in thousands):
Gross Tax Effect Net ----- ---------- --- Cumulative impact of adoption of FAS 133....................... $ 165 69 96 Other comprehensive loss..................... 247 90 157 --- --- --- Accumulated other comprehensive loss at December 31, 2001................ $ 412 159 253 === === ===
The Company uses derivative financial instruments as risk management tools and not for speculative purposes. 41 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements New Accounting Standards Adopted -------------------------------- On January 1, 2002, the Company adopted "Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No. 133. These Statements establish accounting and reporting standards that require every derivative instrument to be recorded on the consolidated balance sheet as either an asset or a liability measured at its fair value. SFAS No. 133, as amended, requires the transition adjustment resulting from adopting these Statements to be reported in net income or accumulated other comprehensive income, as appropriate, as the cumulative effect of change in accounting principle. On January 1, 2001, the Company recorded the value of an interest rate swap as a liability on the consolidated balance sheet. The transition adjustment was an after-tax loss to accumulated other comprehensive loss. New Accounting Pronouncements ----------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for by the purchase method and adds disclosure requirements related to business combination transactions. SFAS No. 141 also establishes criteria for the recognition of intangible assets apart from goodwill. This Statement applies to all business combinations for which the acquisition date was July 1, 2001 or later. The Company had no acquisitions during 2001. The Company intends to implement the provisions of SFAS No. 141 in any future business combinations. On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes guidelines for the financial accounting and reporting of acquired goodwill and other intangible assets. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization; rather, it will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company is required to adopt the provisions of this pronouncement no later than the beginning of 2002, however, goodwill and other intangible assets acquired after June 30, 2001, are subject immediately to the amortization provisions of this statement. The Company had no acquisitions of goodwill or other intangibles in the second half of 2001. The Company will adopt the amortization provisions of SFAS No. 142 beginning in the first quarter of 2002. During the years ended December 31, 2001 and December 31, 2000, and the ten months ended December 31, 1999, goodwill and other intangible amortization was $508,000, $558,000, and $252,000, respectively. The Company has not yet determined the final impact of adopting SFAS No. 142. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement also supersedes APB No. 30 provisions related to the accounting and reporting for the disposal of a segment of a business. This Statement establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement retains most of the requirements in SFAS No. 121 related to the recognition of impairment of long-lived assets to be held and used. The Statement is effective for years beginning after December 15, 2001. The Company is evaluating the potential impact of adopting SFAS No. 144. 42 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (2) Uncompleted Contracts --- --------------------- Costs and estimated earnings on uncompleted contracts are as follows (in thousands):
December 31, December 31, 2001 2000 -------------------- -------------------- Costs and estimated earnings on uncompleted contracts............................ $ 38,255 37,778 Less: billings to date............................. 41,356 40,559 ------ ------ $ (3,101) (2,781) ====== ====== Included in accompanying balance sheets under the following captions: Costs and estimated earnings in excess of billings.......................... $ 244 1,665 Customers' deposits and billings in excess of costs and estimated earnings for completed and uncompleted contracts.......................... (3,345) (4,446) ------ ------ $ (3,101) (2,781) ====== ======
(3) Line of Credit Loan --- ------------------- In order to complete the acquisition of Ermanco on September 30, 1999, the Company obtained financing from its principal bank. The Company entered into a three-year line of credit facility which may not exceed the lesser of $6,000,000 or an amount based on a borrowing base formula tied principally to accounts receivable, inventory, fair market value of the Company's property and plant, and liquidation value of equipment. This amount will be reduced by the unpaid principal balance of the term loan. The line of credit facility 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, securities, and a first mortgage on all real estate. The line of credit facility contains various restrictive covenants relating to additional indebtedness, asset acquisitions or dispositions, investments, guarantees, and maintenance of certain financial ratios. 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 amended, as of December 31, 2001. As of December 31, 2001, the Company did not have any borrowings under the line of credit facility. The line of credit facility has an expiration date of September 30, 2002. 43 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (4) Long-Term Debt --- -------------- A summary of long-term debt follows (in thousands):
December 31, December 31, 2001 2000 ----------------- ---------------- Term loan................................................ $ 9,200 11,288 Subordinated notes payable............................... 3,000 3,000 Capital lease obligations................................ 5 13 ------ ------ Total.................................................... 12,205 14,301 Less: current installments of long-term debt............ 2,305 1,521 ------ ------ Long-term debt........................................... $ 9,900 12,780 ====== ======
The Company received $14,000,000 in the form of a seven-year term loan from its bank to finance the acquisition of Ermanco on September 30, 1999. During the first two years of the term loan, the Company was obligated to repay equal quarterly payments of $312,500 plus accrued interest. After September 30, 2001, the Company commenced making equal quarterly payments of $575,000, plus interest continuing until the loan is fully repaid. The interest rate on the term loan is variable at a rate equal to the three-month LIBOR Market Index Rate plus three percent (4.90% as at December 31, 2001). To obtain the term loan, 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, securities, and a first mortgage on all real estate. The term loan contains various restrictive covenants relating to additional indebtedness, asset acquisitions or dispositions, investments, guarantees, and maintenance of certain financial ratios. 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 amended, as of December 31, 2001. The subordinated promissory notes issued on September 30, 1999 to the fourteen stockholders of Ermanco, two of which are directors, totaled $3,000,000. The notes have a term of seven years and bear interest at an annual rate of ten percent through September 30, 2002, twelve percent from October 1, 2002 through September 30, 2004, and fourteen percent from October 1, 2004 through September 30, 2006. The weighted average interest rate on the promissory notes is 11.714% over the term of the notes. Interest shall be payable quarterly, in cash, or under certain conditions, in the Company's common stock upon approval of the Company's Board of Directors. The promissory notes may be prepaid prior to the end of the seven-year term provided that there is no debt outstanding under the Company's line of credit facility and term loan. Since July 1, 2001, the Company has been and will be prohibited from making any cash payments of subordinated debt and interest until the Company is in full compliance with all the financial covenants as originally set forth in the Loan Agreement with the Company's principal bank. The bank waived the restriction from paying interest on the subordinated debt in the form of cash for the fourth quarter ended December 31, 2001 and the first quarter ended March 31, 2002. The Company intends to satisfy its quarterly interest obligations with the issuance of the Company's common stock in the event the Company's principal bank does not grant waivers regarding the making of cash payments of interest on subordinated debt. Financing agreements related to the lease of computer software have been recorded as capital leases. These agreements had a total initial contract value of $36,000. The current and long-term portions of capital lease obligations are $5,000 and $0, respectively. 44 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (4) Long-Term Debt (Continued) --- -------------- Principal payments of long-term debt (including capital leases) from December 31, 2001 under terms of existing agreements are as follows: 2002................... $ 2,305 2003................... 2,300 2004................... 2,300 2005................... 1,438 2006................... 3,862 ------ $ 12,205 ====== 45 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, 2001 and December 31, 2000, and for the ten months ended December 31, 1999:
1992 ISOP 1997 ECP TOTAL ---------------- --------------------------------------------------------------------------------------- -------- Option price* $ 4.36 6.33 13.33 15.25 10.88 10.00 8.25 8.00 8.94 7.06 5.88 6.63 7.50 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= Options out- standing as of February 28, 1999......... 7,264 26,400 58,800 52,748 - - - - - - - - - 145,212 Granted........ - - - - 40,000 76,772 39,000 10,000 7,000 - - - - 172,772 Exercised...... (7,039) (3,000) - - - - - - - - - - - (10,039) Lapsed......... - (7,875)(18,900)(19,579) - - - - - - - - - (46,354) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- Options out- standing as of December 31, 1999............. 225 15,525 39,900 33,169 40,000 76,772 39,000 10,000 7,000 - - - - 261,591 Granted........ - - - - - - - - - 106,000 10,000 236,675 - 352,675 Exercised...... - - - - - - - - - - - - - - Lapsed......... (225) (5,700)(15,000) (10,762) - (24,242) - (10,000) (7,000) (5,000) - - - (77,929) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- ------- ------- Options out- standing as of December 31, 2000............. - 9,825 24,900 22,407 40,000 52,530 39,000 - - 101,000 10,000 236,675 - 536,337 Granted........ - - - - - - - - - - - - 142,000 142,000 Exercised...... - (2,700) - - - - - - - (1,750) - - - (4,450) Lapsed......... - (7,125)(15,150) (8,841) - (25,550) - - - (20,250) - (40,200) - (117,116) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- ------- ------- Options out- standing as of December 31, 2001............. - - 9,750 13,566 40,000 26,980 39,000 - - 79,000 10,000 196,475 142,000 556,771 ====== ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ======= ======= ======= *The option prices and number of options have been adjusted to reflect the three-for-two stock splits of August 11, 1995 and November 10, 1997.
46 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (5) Capital Stock Options (Continued) --- --------------------- 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 1992 ISOP authorizes up to 112,500 shares of common stock for issuance pursuant to the terms of the Plan. The plan, approved in 1992, also authorizes stock appreciation rights; however, none have been issued. The Plan will expire 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. Currently, 556,771 options are outstanding under the plan, and all options have a term of five years. The Company has elected to continue to account for its stock-based compensation plans under the guidelines of Accounting Principles Board Opinion No. 25; however, additional disclosure as required under the guidelines of SFAS No. 123, "Accounting for Stock-Based Compensation," 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 SFAS No. 123), net earnings (loss) (in thousands) and basic earnings (loss) per share for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999 would have been as follows:
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ----------------- ----------------- ---------------- Net earnings (loss) As reported...... $ (62) 3,480 (2,780) Pro forma........ (212) 3,316 (2,865) Basic earnings (loss) As reported...... $ (.01) .83 (.72) per share Pro forma........ (.05) .79 (.75)
The above pro forma net earnings (loss) and basic 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. In order to perform this calculation, the following assumptions were made for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively: dividend yields of 0%, 0%, and 1.25%; risk-free interest rates of 3.92%, 4.69%, and 6.50%; expected volatilities of 34.7%, 35.3%, and 33.6%; and an expected holding period of four years. 47 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (6) Employee Benefit Plans --- ---------------------- The Company maintains defined benefit plans for employees covered by collective bargaining agreements. 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 the 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, and cash or cash equivalents. The benefit obligations for the Company's defined benefit plans were (in thousands):
September 30, September 30, 2001 2000 -------------------- --------------------- Change in benefit obligations: Benefit obligation at beginning of year............. $ 2,925 2,450 Service cost (excluding administrative expenses).... 124 99 Interest cost....................................... 216 190 Amendment........................................... - 374 Actuarial (gain) loss............................... 56 (105) Benefits paid....................................... (128) (93) ----- ----- Benefit obligation at end of year................... $ 3,193 2,925 ===== =====
The amendment in 2000 provided an increase in the monthly benefit amount. The fair value of the plan assets of the Company's defined benefit plans follows (in thousands):
September 30, September 30, 2001 2000 -------------------- --------------------- Change in plan assets: Fair value of plan assets at beginning of year...... $ 3,811 3,329 Actual return on plan assets........................ 357 569 Employer contribution............................... 77 54 Expenses............................................ (72) (58) Benefits paid....................................... (128) (83) ----- ----- Fair value of plan assets at end of year............ $ 4,045 3,811 ===== =====
Accrued pension liability included in the Company's balance sheets at September 30, 2001 and September 30, 2000 were (in thousands):
September 30, September 30, 2001 2000 -------------------- --------------------- Reconciliation to balance sheets: Funded status: Plan assets in excess of benefit obligation......... $ 852 886 Unrecognized net actuarial gain..................... (1,840) (1,940) Unrecognized net obligation......................... (14) (14) Unrecognized prior service costs.................... 6 627 ----- ----- Accrued benefit cost recognized in the Company's balance sheets.................................... $ (996) (441) ===== =====
48 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (6) Employee Benefit Plans (Continued) --- ---------------------- 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 for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, includes the following components (in thousands):
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ---------------- ----------------- ----------------- Service cost-benefits earned during the period $ 182 159 89 Interest cost on projected benefit obligation............................ 216 190 123 Expected return on plan assets - increase (277) (231) (151) Amortization of net asset................ (1) (21) (18) Amortization of prior service cost....... 60 62 40 Recognized net actuarial gain............ (187) (48) (33) ----- ----- ----- Net periodic pension expense (benefit)............................. (7) 111 50 Curtailment cost......................... 562 - - ----- ----- ----- Total pension expense.................... $ 555 111 50 ===== ===== =====
The weighted average rates and actuarial assumptions used to develop the net periodic pension expense (benefit) and the projected benefit obligation were:
As of --------------------------------------------------------- September 30, September 30, September 30, 2001 2000 1999 ----------------- ----------------- ----------------- Discount rate........................... 7.0% - 7.25% 7.0% - 7.75% 7.0% - 7.5% Expected long-term rate of return on plan assets................ 8.0% - 8.50% 8.0% - 8.50% 8.0% - 8.5%
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 $199,000, $386,000, and $198,000 for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. 49 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (7) Income Taxes --- ------------ The provision for income tax expense (benefit) consists of the following (in thousands):
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ------------------ ------------------ ------------------ Federal - current.................. $ (510) 1,541 (365) - deferred................. 322 372 (777) ----- ----- ----- (188) 1,913 (1,142) ----- ----- ----- State - current.................. 32 240 27 - deferred................. (109) 69 (281) ----- ----- ----- (77) 309 (254) ----- ----- ----- Foreign - current.................. 8 11 2 ----- ----- ----- $ (257) 2,233 (1,394) ===== ===== =====
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 Ten Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ------------------ ----------------- ------------------ Computed tax expense (benefit) at statutory rate of 34%............ $ (108) 1,942 (1,419) Increase (reduction) in taxes resulting from: State income taxes, net of federal benefit.............. (51) 204 (167) Equity in income of joint venture (139) 70 (58) Change in the valuation allowance for deferred tax assets....................... - (102) - Write-off of intangible assets - - 210 Miscellaneous items............ 41 119 40 ----- ------ ----- $ (257) 2,233 (1,394) ===== ===== =====
50 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (7) Income Taxes (Continued) --- ------------ The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2001 and December 31, 2000 are presented below (in thousands):
December 31, December 31, 2001 2000 ----------------- ----------------- Deferred tax assets: Net operating and built-in loss carryforward expiring through 2007)............................... $ 405 307 Inventories............................................ 458 495 Accrued restructuring costs............................ 179 - Accrued warranty costs................................. 332 331 Accrued pension costs.................................. 397 183 Accruals for other book expenses, not yet deductible for tax purposes..................................... 1,349 1,544 ----- ----- Total gross deferred tax assets.................... 3,120 2,860 ----- ----- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation......................................... (159) (143) Amortization........................................... (783) (443) Investment in SI/BAKER joint venture................... (605) (652) Other.................................................. (124) (119) ------ ----- Total gross deferred tax liabilities............... (1,671) (1,357) ----- ----- Net deferred tax assets............................ $ 1,449 1,503 ===== =====
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, 2001. (8) Contingencies --- ------------- The Company is guarantor (not to exceed $1,000,000) of one-half of SI/BAKER's borrowings under a line of credit which had no outstanding balance at December 31, 2001. The Company is presently engaged in certain legal proceedings, which management believes present no significant risk of material loss to the Company. 51 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (9) Commitments and Related Party Transactions --- ------------------------------------------ Ermanco's operations are located in a 113,000 square foot steel building in Spring Lake, Michigan. The building is leased from an organization that is affiliated with the Company through a common director and officer, Messrs. Shulman and Kirschner. The leasing agreement requires fixed monthly rentals of $32,858 (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 of all taxes, insurance, and other ownership related costs of the property. The lease expires on September 30, 2004. The Company paid $394,000, $374,000, and $90,000 in the years ended December 31, 2001 and December 31, 2000, and in the ten months ended December 31, 1999, respectively, under this leasing arrangement. The Company also leases certain automobiles and office equipment, office space, computer equipment, and software under various operating leases with terms extending through July 2005. Financing agreements related to the lease of computer software have been recorded as capital leases. These agreements had a total initial contract value of $36,000. As of December 31, 2001, the contract value of the agreement is $5,000. Total rental expense, including short-term leases, in the years ended December 31, 2001 and December 31, 2000, and in the ten months ended December 31, 1999, approximated $584,000, $623,000, and $199,000, respectively. Future minimum rental commitments at December 31, 2001 are as follows (in thousands):
Capital Leases Operating Leases ------------------- ------------------- 2002................................................ $ 5 558 2003................................................ - 537 2004................................................ - 412 2005................................................ - 60 ---- ----- Total minimum lease payments........................ 5 1,567 ===== Less: current portion.............................. 5 ---- Long-term capital lease obligations................. $ - ====
To complete the acquisition of Ermanco, the Company issued $3,000,000 in subordinated promissory notes to the stockholders of Ermanco. See Note 4 of the Notes to Consolidated Financial Statements for more information on the promissory notes issued to the fourteen stockholders of Ermanco, eleven of whom continue to be employees, and two are directors of the Company. The Company has employment agreements with several of the Company's executive officers. Each of the agreements has varying expiration dates. They provide for each party to receive annual compensation during the term of the employment agreements, participate in bonus plans, plus usual and customary fringe benefits associated with being an employee of the Company. Under certain circumstances, several of the agreements provide for post termination severance payments. See Note 11 of Notes to Consolidated Financial Statements for transactions related to the SI/BAKER joint venture. 52 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, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, are as follows (in thousands, except share data):
For the For the Year For the Ten Year Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ---------------- ----------------- ---------------- Supplemental disclosures of cash flow information: Cash paid for: Interest.......................... $ 1,030 1,837 7 ===== ===== ====== Income taxes...................... $ 195 1,472 1,030 ===== ===== ====== Supplemental disclosures of noncash investing and financing activities: Receivable associated with the divestment of a joint venture..... $ 125 - - ===== ===== ====== Adjustment to excess of cost over fair value of net assets acquired due to a change in the estimated fair value of land acquired..................... $ - 70 - ===== ===== ====== Issuance of 2,850 common shares in exchange for 1,943 common shares delivered to the Company by an officer in connection with the employee incentive stock option plan....... $ - - 16 ===== ===== ====== Issuance of 481,284 common shares for the Ermanco acquisition....................... $ - - 4,500 ===== ===== ====== Issuance of $14,000 of term debt for the Ermanco acquisition....................... $ - - 14,000 ===== ===== ====== Issuance of $3,000 in subordinated notes payable in connection with the Ermanco acquisition............... $ - - 3,000 ===== ===== ====== Additional consideration and costs payable in connection with the Ermanco acquisition...... $ - - 231 ===== ===== ======
53 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (11) Joint Ventures ---- -------------- The Company has entered into various transactions with SI/BAKER as follows:
December 31, December 31, 2001 2000 ----------------- ------------------ SI/BAKER, INC., 50% owned by the Company: Balance Sheets data (in thousands): Amount included in notes and other receivables........... $ 52 68 Amount included in costs and estimated earnings in excess of billings..................................... - 34 Investment in SI/BAKER................................... 1,667 1,788 Amount included in accounts payable...................... - -
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ---------------- ----------------- ---------------- Statements of Operations Data (in thousands): Systems and services sold under various subcontracts................ $ 876 593 237 Services purchased for resale under various subcontracts................ - 1 60 Reimbursement for administrative and other services provided............. 55 106 116 Royalty income........................ 243 283 210
Information pertaining to the Company's investment in the SI/BAKER joint venture is as follows (in thousands): Balance at February 28, 1999.........................................................$ 1,041 Equity in net earnings............................................................... 215 ----- Balance at December 31, 1999......................................................... 1,256 Equity in net earnings............................................................... 532 ----- Balance at December 31, 2000......................................................... 1,788 Equity in net earnings............................................................... 629 Cash dividends....................................................................... (750) ----- Balance at December 31, 2001.........................................................$ 1,667 =====
Undistributed earnings of SI/BAKER (less related deferred tax expenses) at December 31, 2001 and December 31, 2000 were $961,500, and $1,036,000, respectively. Summary financial information and operating results for the SI/BAKER joint venture are set forth in the following table (in thousands):
December 31, December 31, 2001 2000 ------------------ ----------------- Current assets........................................... $ 5,974 8,065 Property, plant and equipment, net....................... 118 75 Other assets............................................. - 8 Current liabilities...................................... 2,750 4,572 Long-term liabilities.................................... 9 - ----- ----- Net assets............................................... $ 3,333 3,576 ===== =====
54 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (11) Joint Ventures (Continued) ---- --------------
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ----------------- ---------------- ------------------ Net sales.............................. $ 12,139 14,139 10,495 ====== ====== ====== Net earnings........................... $ 1,257 1,063 431 ====== ====== ======
Operations of the SI-Egemin joint venture were not material to the Company during the years ended December 31, 2001 and December 31, 2000, and during the ten months ended December 31, 1999. 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. On September 30, 1999, the Company completed the acquisition of Ermanco. Prior to the acquisition, the Company operated in one major market segment. With the addition of the Ermanco operations, the Company now operates in two major market segments, and products are sold worldwide as follows (in thousands):
For the year ended Automated Materials Conveyor December 31, 2001: Handling Systems Systems 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........ 363 851 1,214
For the year ended Automated Materials Conveyor December 31, 2000: Handling Systems Systems Total ----------------- ------------------- -------- -------- Sales........................................ $ 29,649 34,657 64,306 Earnings before interest expense, interest income, equity in income of joint ventures, and income taxes................. 3,430 3,184 6,614 Total assets................................. 15,429 30,488 45,917 Capital expenditures......................... 151 244 395 Depreciation and amortization expense........ 428 778 1,206
55 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Notes To Consolidated Financial Statements (Continued) (12) Major Segments of Business (Continued) ---- --------------------------
For the ten months ended Automated Materials Conveyor December 31, 1999 Handling Systems Systems Total ----------------- ------------------- -------- -------- Sales................................. $ 33,444 7,664 41,108 Earnings before interest expense, interest income, equity in income of joint ventures, and income taxes. (4,620) 629 (3,991) Total assets.......................... 16,525 28,881 45,406 Capital expenditures.................. 206 92 298 Depreciation and amortization expense............................. 430 191 621
Geographic segment information was as follows (in thousands):
For the year ended Europe December 31, 2001 Domestic and Asia Canada Other Total ----------------- -------------- ----------- --------- ---------- ---------- Sales.................................. $45,427 3,498 1,751 76 50,752 Earnings before interest expense, interest income, equity in income of joint ventures, and income taxes............................... 185 - - - 185 Total assets........................... 41,343 - - - 41,343 Capital expenditures................... 692 - - - 692 Depreciation and amortization expense................ 1,214 - - - 1,214
Intersegment sales for the year ended December 31, 2001 totaled $0.
For the year ended Europe December 31, 2000 Domestic and Asia Canada Other Total ----------------- -------------- ----------- --------- ---------- ---------- Sales.................................. $58,537 4,507 1,262 - 64,306 Earnings before interest expense, interest income, equity in income of joint ventures, and income taxes............................... 6,614 - - - 6,614 Total assets........................... 45,917 - - - 45,917 Capital expenditures................... 395 - - - 395 Depreciation and amortization expense................ 1,206 - - - 1,206
Intersegment sales for the year ended December 31, 2000 totaled $109,000.
For the year ended Europe December 31, 1999 Domestic and Asia Canada Other Total ----------------- -------------- ----------- --------- ---------- ---------- Sales.................................. $39,574 864 670 - 41,108 Earnings before interest expense, interest income, equity in income of joint ventures, and income taxes............................... (3,991) - - - (3,991) Total assets........................... 45,406 - - - 45,406 Capital expenditures................... 298 - - - 298 Depreciation and amortization expense................ 621 - - - 621
Intersegment sales for the ten months ended December 31, 1999 totaled $30,000. 56 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, 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
For the Year Ended First Second Third Fourth December 31, 2000 Quarter Quarter Quarter Quarter ----------------- ------- ------- ------- ------- Net sales................................. $ 18,344 16,689 13,473 15,800 Gross profit on sales..................... $ 4,432 4,516 4,187 4,923 Net earnings.............................. $ 772 785 848 1,075 Basic earnings per share.................. $ .18 .19 .20 .26 Diluted earnings per share................ $ .17 .19 .20 .26
57 PARAGON TECHNOLOGIES, INC. AND SUBSIDIARY Schedule II ----------- VALUATION AND QUALIFYING ACCOUNTS Forthe Years Ended December 31, 2001 and December 31, 2000, and for the Ten Months Ended December 31, 1999 (in thousands)
Additions Due Additions Balance at to Acquisition Charged to Beginning of of Ermanco Costs and Balance at Year Incorporated Expenses Deductions End of Year --------------- ---------------- ------------- ------------ ------------- Year ended December 31, 2001: Reserve for inventory loss............ $ 992 - 569 607 (a) 954 (b) Accrued product warranties............ 857 - 295 (c) 289 (d) 863 Allowance for doubtful accounts....... 54 - 40 20 74 ----- ----- ----- ----- ----- $ 1,903 - 904 916 1,891 ===== ===== ===== ===== ===== Year ended December 31, 2000: Reserve for inventory loss............ $ 941 - 213 162 (a) 992 (b) Accrued product warranties............ 903 - 130 (c) 176 (d) 857 Allowance for doubtful accounts....... 54 - 106 106 54 ----- ----- ----- ----- ----- $ 1,898 - 449 444 1,903 ===== ===== ===== ===== ===== Ten months ended December 31, 1999: Reserve for inventory loss............ $ 854 79 508 500 (a) 941 (b) Accrued product warranties............ 486 51 486 (c) 120 (d) 903 Allowance for doubtful accounts....... - 48 6 - 54 ----- ----- ----- ----- ----- $ 1,340 178 1,000 620 1,898 ===== ===== ===== ===== ===== (a) Inventory items disposed of, net of salvage proceeds. (b) Allowance is reflected in the net inventory on the balance sheet. (c) Costs include materials and incidental costs, but exclude any services. (d) Payments of warranty costs and reversal of unused expired warranty accrual.
58 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 74 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. Mr. Bradt served in the U.S. Marine Corps and graduated from Cornell University with a Mechanical/Industrial Engineering Degree in 1953. After retiring as CEO of SI Handling Systems, Inc., he taught in the MBA programs at Lehigh and Cornell Universities. Most recently, he was director of Human Services in Northampton County, Pennsylvania. He is active as a director in a number of local, state, and national organizations involved in business, education, human services, and government. Gilman J. Hallenbeck........................................................... 2001 63 Gilman J. Hallenbeck is Chairman of the Board of Street Lighting Equipment Corporation, a manufacturer of architectural outdoor lighting and equipment. He has held this position since 1964. He is also a co-owner of Bolt Electric Co., a distributor of electrical products selling to electrical contractors, NUJA Realty Corporation, a commercial real estate holding and management company, and Asbury Leasing Company, a lessor of capital equipment. Mr. Hallenbeck has held these interests since 1967. From 1966 to 1997, he was Chairman of the Board of Area Lighting Research, Inc., a manufacturer and distributor of photoelectric controls and electrical energy savings devices. He is a graduate of the United States Military Academy at West Point. William R. Johnson............................................................. 1999 55 William R. Johnson is the President and Chief Executive Officer of the Company. Mr. Johnson joined the Company as President in March 1999 and in July 1999 was promoted to Chief Executive Officer. Before joining the Company, Mr. Johnson was with Reliance Electric, a Rockwell International business. He joined Reliance Electric in 1977 as Manager of A C Engineering and, in 1979, managed Reliance's large motor engineering efforts. In 1981, he was appointed Plant Manager of the Kings Mountain, North Carolina facility. In 1986, he became General Manager of the Engineered Motor Division. From 1993 to 1995, Mr. Johnson was the former General Manager of Rockwell Automation's Engineered Motors and Generators Business and from 1995 to 1998, he was the Senior Vice President of Rockwell Automation's Reliance Electric Motor Group. Mr. Johnson received his Bachelor's Degree in Electrical Engineering from Michigan Technological University and his M.B.A. from the College of St. Thomas. Mr. Johnson is a director of the Lehigh Valley Partnership and has served on the boards of a number of community organizations.
59
Name, Other Positions or Offices With The Company Director and Principal Occupation for Past Five Years Since Age -------------------------------------------------------------------------------- --------- -------- Leon C. Kirschner.............................................................. 1999 61 Leon C. Kirschner is the Chief Operating Officer of the Company and President of Ermanco Incorporated since 1983. From 1968 to 1983, Mr. Kirschner was the Senior Vice President of W&H Systems. Mr. Kirschner began his career in 1961 as an engineer at Celanese Plastics, and from 1963 to 1968 he worked for P.P.G. Industries as Plant Engineer. Mr. Kirschner received his Bachelor's Degree in Engineering from Stevens Institute of Technology and his M.B.A. from New York University. Mr. Kirschner is also a director of Terrace Food Group, Inc. Theodore W. Myers.............................................................. 2002 58 Theodore W. 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. After graduating from Fairleigh Dickinson University in 1966 with a B.S. in Marketing and Finance, he served in the Armed Forces during the Vietnam era and subsequently returned as a National Bank Examiner for the Controller of the Currency until he became the internal auditor for Dean Witter Reynolds in 1971. Prior to his employment with Tucker Anthony, he was a Vice President with Prudential Bache and Vice President/Manager of the Flemington, New Jersey office of Paine Webber from 1985 to 1991, and from 1977 to 1985, he was an Assistant Vice President with Thompson McKinnon Securities and Dean Witter Reynolds. Anthony W. Schweiger........................................................... 2001 60 Anthony W. Schweiger is the Chairman of the Board of the Company and the President of The Tomorrow Group, LLC, which provides specialized financial and management services for complex and strategic/turnaround business issues. Since March of 2001, he has also been the Managing Principal of e-brilliance, an IT consulting and education business. As a consultant, he has served as the senior acting manager in a variety of businesses, including Acting COO for WineAccess, a development stage infomediary from May 1998 to March 1999, and Acting Chief Executive Officer for Care Systems in 1995. He was Managing Director of the Stafford Companies, an investment banking firm, from November 1994 until April 1995. From November 1993 through August 1994, he served as the Executive Vice President of First Advantage Mortgage Corporation, a mortgage banking company. Prior to that, he served as the President and Chief Executive Officer of Meridian Mortgage Corporation from 1987 until 1993, and the Executive Vice President/Chief Operating Officer from that company's inception in 1983. Mr. Schweiger is a graduate of the Wharton School at the University of Pennsylvania with a Bachelor's Degree in Economics. Mr. Schweiger is also a director of Radian Group Inc.
60
Name, Other Positions or Offices With The Company Director and Principal Occupation for Past Five Years Since Age -------------------------------------------------------------------------------- --------- -------- Steven Shulman................................................................. 1999 61 Steven Shulman, an investment banker with over 30 years of experience, began his career in 1967 with Burnham & Company. From 1970 to 1984, Mr. Shulman was the Senior Vice President of Corporate Development at Wheelabrator. Since 1984, Mr. 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., Terrace Food Group, Inc., C3i Inc., and Beacon Capital Partners, Inc. In addition, he serves as Chairman of Terrace Food Group, Inc. Mr. Shulman is a graduate of Stevens Institute of Technology where he received a Bachelor's Degree in Mechanical Engineering and a Master's Degree in Industrial Management. 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.
The names, ages, and offices with the Company of its executive officers are as follows: Name Age Office ---- --- ------ William R. Johnson 55 President and Chief Executive Officer, Director Leon C. Kirschner 61 Chief Operating Officer, President - Ermanco, Director Ronald J. Semanick 40 Vice President - Finance, Chief Financial Officer, Treasurer and Secretary Gordon A. Hellberg 48 Vice President - Sales Lee F. Schomberg 55 Vice President - Marketing Information regarding Messrs. Johnson 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 June 25, 2001, and has served Ermanco in various management positions since 1987. After earning a B.S. in Engineering from Western Michigan University, Mr. Hellberg was employed with Haworth, Inc., L.S.I./Rapistan Division, and psb - Advanced Material Handling Systems, Inc. Mr. Hellberg has also completed post-graduate studies in Business Law, Principles of Management, Project Management, and Statistics. Mr. Schomberg was appointed Vice President - Marketing of the Company on June 25, 2001, and has served Ermanco in various sales and marketing positions since 1986. Mr. Schomberg's previous employers include Seimens/Dematic (formerly Rapistan), and FKI Logistex (formerly Matthews Conveyor). He received a B.S. in Engineering from the University of Wisconsin. Mr. Schomberg is currently an officer in the Conveyor Equipment Manufacturers Association (CEMA) and a corporate representative to the Material Handling Institute of America (MHIA). 61 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, 2001 were made on a timely basis. -------------------------------------- Item 11. Executive Compensation -------- ---------------------- Set forth below is certain information relating to compensation received by the Company's Chief Executive Officer and the four other most highly compensated executive officers (the "Named Executive Officers").
Summary Compensation Table -------------------------- Long Term Comp. ------ Awards Fiscal ------ Year Other Annual Stock All Other Ended Salary Bonus Compensation Options Compensation Name and Position (1) ($)(2) ($) ($)(3) (#)(4) ($)(5) ----------------------------------------------------------------------------------------------------- William R. Johnson 12/31/01 $265,200 $ - $ 6,788 40,000 $ 9,980 President and 12/31/00 255,000 421,132 4,920 80,000 14,713 Chief Executive 12/31/99 166,154 50,000 3,690 40,000 150,000 Officer (6) Leon C. Kirschner 12/31/01 265,277 3,928 8,063 25,000 54,209 Chief Operating 12/31/00 260,238 64,065 7,457 50,000 54,109 Officer and 12/31/99 63,250 35,316 2,395 25,000 14,401 President of Ermanco Incorporated (7) Ronald J. Semanick 12/31/01 105,000 27,247 6,788 5,000 4,185 Vice President - 12/31/00 88,787 78,446 3,143 25,000 7,579 Finance, Chief 12/31/99 58,391 4,000 - 2,000 2,336 Financial Officer, and Treasurer (8) Gordon A. Hellberg 12/31/01 116,000 13,439 3,724 5,000 3,903 Vice President - 12/31/00 110,000 27,104 5,230 14,000 2,378 Sales (9) 12/31/99 26,000 14,632 1,406 7,000 1,822 Lee F. Schomberg 12/31/01 109,000 12,528 3,646 5,000 4,832 Vice President - 12/31/00 106,000 26,242 4,014 14,000 4,505 Marketing (10) 12/31/99 25,500 10,300 2,865 7,000 3,290 ---------------------------------- (1) On September 30, 1999, the Board of Directors of Paragon Technologies, Inc. (the "Company") approved an amendment to the Company's Bylaws to change the fiscal year end of the Company from the Sunday nearest to the last day of February to December 31. For the years ended December 31, 2001 and 62 December 31, 2000, the fiscal year consisted of twelve months. For the year ended December 31, 1999, the fiscal year consisted of ten months. (2) This column includes employee pre-tax contributions to the Company's 401(k) Retirement Savings Plans. (3) This column consists of an auto allowance for the business usage of personal automobiles for Messrs. Johnson and Semanick, and also automobile benefits for Messrs. Kirschner, Hellberg, and Schomberg. 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. (4) 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. (5) 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 executives. This column also includes relocation costs of $150,000 relating to Mr. Johnson during the ten months ended December 31, 1999, the cost of a supplemental health insurance plan for Messrs. Kirschner, Hellberg, and Schomberg, and the cost of a supplemental disability insurance plan for Mr. Kirschner. Pursuant to the supplemental health insurance and disability insurance plans, Mr. Kirschner received benefits in the amounts of $52,509, $52,509, and $14,221 for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. (6) Mr. Johnson became President and a Director of the Company on March 29, 1999 and Chief Executive Officer of the Company on July 21, 1999. Based on the consideration of the Company exceeding its planned basic earnings per share goal during the year ended December 31, 2000, Mr. Johnson was awarded a bonus of $421,132. In accordance with the Company's Management Incentive Plan, Mr. Johnson's bonus included cash up to his base salary of $255,000 and 18,562 shares of the Company's common stock issued under the Company's 1997 Equity Compensation Plan, valued at $166,132 based upon the closing price of $8.95 of the Company's common stock on March 8, 2001, the award date of the bonus. The Company withheld 6,172 shares of the Company's common stock for the payment of applicable taxes. (7) Mr. Kirschner joined the Company upon the acquisition of Ermanco Incorporated on September 30, 1999, and was appointed as Director and Corporate Vice President of the Company and President of Ermanco Incorporated. On June 25, 2001, Mr. Kirschner was appointed Chief Operating Officer of the Company. (8) Mr. Semanick was appointed Vice President - Finance, Chief Financial Officer, and Treasurer of the Company on May 10, 2000. His fiscal year 2000 remuneration above represents total compensation for the entire fiscal year of 2000. (9) Mr. Hellberg joined the Company upon the acquisition of Ermanco Incorporated on September 30, 1999, and was appointed Vice President - Sales on June 25, 2001. His fiscal year 2001 remuneration above represents total compensation for the entire fiscal year of 2001. (10) Mr. Schomberg joined the Company upon the acquisition of Ermanco Incorporated on September 30, 1999, and was appointed Vice President - Marketing on June 25, 2001. His fiscal year 2001 remuneration above represents total compensation for the entire fiscal year of 2001.
63 Stock Options Granted to Named Executive Officers During The Year Ended December 31, 2001 The following table sets forth certain information regarding options for the purchase of the Company's common stock that were awarded to the Named Executive Officers during the year ended December 31, 2001. Options Grants in the Year Ended December 31, 2001 --------------------------------------------------
Potential % of Total Realizable Options Value at Assumed Granted to Annual Rates Employees of Stock Price In The Year Appreciation for Options Ended Exercise Option Term (2) Granted December Price Expiration ------------------ Name (#) (1) 31, 2001 ($/Share) Date 5% ($) 10% ($) ------------------- ------- ----------- --------- ---------- ------- -------- William R. Johnson 40,000 28.2% $7.50 08/09/06 $82,884 $183,153 Leon C. Kirschner 25,000 17.6% 7.50 08/09/06 51,803 114,471 Ronald J. Semanick 5,000 3.5% 7.50 08/09/06 10,361 22,894 Gordon A. Hellberg 5,000 3.5% 7.50 08/09/06 10,361 22,894 Lee F. Schomberg 5,000 3.5% 7.50 08/09/06 10,361 22,894 ------------------------------------ (1) Options vest at a rate of twenty-five percent (25%) per year on the first four (4) anniversaries of the grant dates, or will immediately vest upon a change in control of the Company. (2) The potential realizable value portion of the foregoing table illustrates value that might be realized upon the exercise of the options immediately prior to the expiration of the term, assuming the specified rates of appreciation on the Company's common stock over the term of the options. These numbers do not take into account provisions for termination of the option following termination of employment or vesting over a period of four years. The dollar amounts under these columns are the result of calculations at the 5% and 10% rates required by the SEC and, therefore, are not intended to forecast possible future appreciation of the stock price.
64 Stock Options Exercised During The Year Ended December 31, 2001 and Held by Named Executive Officers as of December 31, 2001. 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, 2001. Aggregated Option Exercises in the Year Ended December 31, 2001 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, 2001 December 31, 2001 On Value Exercisable/ Exercisable/ Name Exercise (1) Realized Unexercisable (1) Unexercisable ------------------ ------------ -------- ------------------ ----------------- William R. Johnson - $ - 40,000/120,000 $ 38,125/164,375 Leon C. Kirschner - - 25,000/ 75,000 30,078/108,984 Ronald J. Semanick 375 584 9,500/ 25,000 15,156/ 51,719 Gordon A. Hellberg - - 7,000/ 19,000 8,422/ 28,016 Lee F. Schomberg - - 7,000/ 19,000 8,422/ 28,016 (1) All common shares and stock option figures have been adjusted to reflect stock splits and dividends.
Employment Agreement with William R. Johnson The Company entered into an executive employment agreement with William R. Johnson, its President and CEO, commencing on March 29, 1999. The employment agreement was amended and restated on October 1, 2001. Terms of the amended and restated three-year employment agreement include a base salary of not less than $265,200 per year. The amended and restated employment agreement entitles Mr. Johnson to participate in the Company's Management Incentive Plan that provides for the opportunity to receive a bonus based on the achievement of orders, sales, and earnings per share targets as defined for each fiscal year by the Board of Directors. The Company has the right to terminate Mr. Johnson's employment with or without cause. Cause is defined as any material breach of the employment agreement, disloyalty to the Company, willful misconduct, conviction of a felony or other criminal act. Mr. Johnson has the right to terminate the employment agreement voluntarily. The employment agreement may also be terminated upon a change in control of the Company. The employment agreement provides for severance benefits in an amount equal to two times the sum of Mr. Johnson's salary in effect plus the average of the bonus paid for the two fiscal years preceding the year of termination in the event of a termination upon a change in control. In the event of termination without cause, the employment agreement also provides for severance benefits in an amount equal to the sum of Mr. Johnson's salary in effect plus the average of the bonus paid in the two years preceding the effective date of the termination, multiplied by the number of years between the effective date of termination and the October 1, 2004 expiration date of the employment agreement. In addition, Mr. Johnson is entitled to receive other benefits normally made available by the Company and an automobile allowance for a period of years equal to the number of years between the effective date of the termination and the October 1, 2004 expiration date of the employment agreement. 65 Other benefits normally made available by the Company to executive officers, including participation in any health plan, retirement savings plan, and receipt of a monthly auto allowance are also made available to Mr. Johnson under the employment agreement. Employment Agreement with Leon C. Kirschner The Company entered into a three-year employment agreement with Leon C. Kirschner, a former stockholder of Ermanco Incorporated, on October 1, 1999. Effective October 1, 1999, in accordance with the employment agreement, Mr. Kirschner was appointed 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. Terms of the employment agreement include a base salary of not less than $253,000 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 orders, sales, and earnings per share targets as defined for each fiscal year by the Board of Directors. Effective September 1, 2001, the Board of Directors increased Mr. Kirschner's base salary to $272,328 per year. 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 as may be established from time to time by the President and CEO of the Company, provided that Mr. Kirschner may perform duties and responsibilities at his residence in Telluride, Colorado for up to eight weeks per year so long as the Company's Spring Lake, Michigan operations have achieved certain financial goals as set forth in the plan for the applicable fiscal year approved by the President and CEO of the Company. The Company shall reimburse Mr. Kirschner for his travel expenses between Spring Lake, Michigan and Telluride, Colorado for up to twelve trips per year up to a maximum of six hundred dollars per trip. 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, conviction of a felony or other criminal act. Mr. Kirschner has the right to terminate the employment agreement voluntarily. The employment agreement may also be terminated upon a change in control of the Company. The employment agreement provides for severance benefits of up to two year's base salary in the event of termination upon a change in control. In the event of termination without cause, the employment agreement also provides for severance benefits in an amount equal to the sum of Mr. Kirschner's salary in effect plus the average of the bonus paid in the two years preceding the effective date of the termination, multiplied by the lesser of two or the number of years between the effective date of the termination and the September 30, 2002 expiration date of the employment agreement. In addition, Mr. Kirschner is entitled to receive all benefits and an automobile allowance for a period of years equal to the lesser of two or the number of years between the effective date of the termination and the September 30, 2002 expiration date of the employment agreement. In the event Mr. Kirschner becomes self-employed after the termination of his employment with the Company, he shall be entitled to receive reimbursement for the reasonable business travel expenses incurred by him for a period equal to the lesser of two or the number of years between the effective date of the termination and the September 30, 2002 expiration date of the employment agreement. Other benefits normally made available by the Company to executive officers, including participation in any health plan, retirement savings plan, and receipt of automobile benefits are also made available to Mr. Kirschner under the employment agreement. 66 Employment Agreements with Other Executive Officers The Company entered into two-year employment agreements with each of Gordon A. Hellberg, Lee F. Schomberg, and Ronald J. Semanick on October 1, 2001. Terms of the employment agreements include a base salary of not less than $118,000 per year for Mr. Hellberg as the Company's Vice President-Sales, a base salary of not less than $110,000 per year for Mr. Schomberg as the Company's Vice President-Marketing and a base salary of not less than $105,000 per year for Mr. Semanick as the Company's Chief Financial Officer, Vice President-Finance, and Treasurer. Effective January 1, 2002, the Board of Directors increased Mr. Semanick's base salary to $115,000. Each of the employment agreements entitle the executives to participate in the Company's Management Incentive Plan that provides for the opportunity to receive a bonus based upon the achievement of orders, sales, operating income or earnings per share targets as defined for each fiscal year by the Board of Directors. The Company has the right to terminate each of the executives' employment agreement with or without cause. Cause is defined as any material breach of the employment agreement, disloyalty to the Company, willful misconduct, conviction of a felony or other criminal act. Each executive has the right to terminate the employment agreement voluntarily. The employment agreements may also be terminated upon a change in control of the Company. The employment agreements provide that each executive shall be entitled, as severance pay, to continue to receive his salary in effect for a period of 18 months and receive a lump sum payment in an amount equal to one and one-half times the average of the bonus paid to the executive for the two fiscal years preceding the year in which the termination becomes effective in the event of a termination upon a change in control. In the event of termination without cause, the employment agreement also provides that the executive shall be entitled, as severance pay, to continue to receive his salary and the annual average of the bonus paid to the executive for the two years preceding the year in which the termination becomes effective for a period equal to the greater of one year or the number of years between the effective date of the termination and the October 1, 2003 expiration date of the employment agreement. Other benefits normally made available by the Company to executive officers, including participation in any health plan, retirement savings plan, and receipt of a monthly auto allowance are also made available to each executive under the employment agreements. COMPENSATION OF DIRECTORS Directors who are also employees of the Company receive no additional remuneration for their services as directors. The Chairman of the Board of Directors and other non-employee directors receive an annual retainer of $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. There are no additional directors' fees paid for serving on the Committees of the Board of Directors. Directors are also reimbursed for their customary and usual expenses incurred in attending Board and Committee Meetings including those for travel, food, and lodging. The Company permits its directors, at their election, to defer receipt of payment of directors' fees. During the year ended December 31, 2001, $44,300 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, 2001, distributions under the Directors' Deferred Compensation Plan totaled $58,912. 67 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is currently comprised of Mr. Shulman, Chairman, and Messrs. Bradt and Hallenbeck. 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. Item 12. Security Ownership of Management and Certain Beneficial Owners -------- -------------------------------------------------------------- The following table sets forth certain information as of April 29, 2002 (unless otherwise noted) regarding the ownership of common stock (i) by each person known by the Company to be the beneficial owner of more than five percent 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 included elsewhere in this Proxy Statement, 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) 940,735 - 22.26% 1703 Oregon Pike Suite 101 Lancaster, PA 17601 L. Jack Bradt (3) 354,324 2,500 8.44% 10 Ivy Court Easton, PA 18045 Gilman J. Hallenbeck (4) 184,210 - 4.36% William R. Johnson 22,390 60,000 1.92% Leon C. Kirschner 167,302 31,250 4.66% Theodore W. Myers (5) 25,200 - * Anthony W. Schweiger 42,000 - * Steven Shulman 151,038 2,500 3.63% Gordon A. Hellberg 2,234 8,750 * Lee F. Schomberg 28,748 8,750 * Ronald J. Semanick 2,989 12,250 * All current directors and executive officers as a group (10 persons) (3) (4) (5) 980,435 126,000 25.42% ------------------------------------------- *Less than 1%. 68 (1) The percentage for each individual, entity or group is based on the aggregate number of shares outstanding as of April 29, 2002 (4,226,635) 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 April 29, 2002. (2) This information is presented in reliance on information disclosed in a Schedule 13G filed with the Securities and Exchange Commission on January 14, 2002. (3) Includes 45,883 shares held by members of Mr. Bradt's immediate family. Mr. Bradt disclaims beneficial ownership of such shares. (4) Includes 78,000 shares held by members of Mr. Hallenbeck's immediate family. Mr. Hallenbeck disclaims beneficial ownership of such shares. (5) Includes 2,800 shares held by members of Mr. Myers' immediate family. Mr. Myers disclaims beneficial ownership of such shares.
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 amounts of $1,382,861 and $1,001,382 to Steven Shulman and Leon C. Kirschner, respectively. 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, eleven of whom continue to be employees of the Company. Ermanco's operations are located in a 113,000 square foot steel building in Spring Lake, Michigan. The building is leased from an organization 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 $32,858 (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 of all taxes, insurance, and other ownership related costs of the property. The lease expires on September 30, 2004. The Company has employment agreements with several of the Company's executive officers. Each of the agreements has varying expiration dates. They provide for each party to receive annual compensation during the term of the employment agreements, participate in bonus plans, plus usual and customary fringe benefits associated with being an employee of the Company. Under certain circumstances, several of the agreements provide for post termination severance payments. 69 PART IV Item 14. 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, 2001 and December 31, 2000 Consolidated Statements of Operations for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999 Notes to Consolidated Financial Statements 2. Index to Financial Statement Schedule II Valuation and Qualifying Accounts and Reserves 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). 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). 4.1 Form of Subordinated Promissory Note payable to the Stockholders of Ermanco Incorporated dated September 30, 1999 (incorporated by reference to Exhibit 4.1 to Form 8-K filed on October 15, 1999). 10.4 1992 Incentive Stock Option Plan, Amended and Restated, Effective as of July 16, 1997* (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarterly period ended August 31, 1997). 10.5 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). 10.6 Directors' Deferred Compensation Plan* (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-8 [No. 333-10181]). 10.7 1997 Equity Compensation Plan* (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-8 [No. 333-36397]). 70 PART IV (Continued) ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -------- --------------------------------------------------------------- (Continued) 10.8 Joint Venture Agreement and Governing Documents Relating to SI/BAKER, INC. (incorporated by reference to Exhibit 21.1 to Annual Report on Form 10-K for the fiscal year ended February 26, 1995). 10.9 Second Amendment to the Joint Venture Agreement Relating to SI/BAKER, INC. (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended February 28, 1999). 10.10 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). 10.11 Employment Agreement with Leon C. Kirschner* (incorporated by reference to Exhibit 10.11 to Form 8-K filed on October 15, 1999). 10.12 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). 10.13 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). 10.14 Term Loan 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 10.14 to Form 8-K filed on October 15, 1999). 10.15 Promissory Note related to the Term Loan 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 10.15 to Form 8-K filed on October 15, 1999). 10.16 Escrow Agreement entered into September 30, 1999 by and among SI Handling Systems, Inc., the stockholders of Ermanco Incorporated, and First Union National Bank (incorporated by reference to Exhibit 10.16 to Form 8-K filed on October 15, 1999). 10.17 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). 10.18 Registration Rights Agreement (incorporated by reference to Exhibit 10.1 to Form S-3, filed on July 5, 2000). 10.19 Executive Employment Agreement with Gordon A. Hellberg dated October 1, 2001* (filed herewith). 10.20 Executive Employment Agreement with Lee F. Schomberg dated October 1, 2001* (filed herewith). 10.21 Executive Employment Agreement with Ronald J. Semanick dated October 1, 2001* (filed herewith). 10.22 Amended and Restated Executive Employment Agreement with William R. Johnson dated October 1, 2001* (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23.1 Consent of Independent Auditors (filed herewith). 23.2 Consent of Independent Auditors relating to SI/BAKER, INC. (filed herewith). 99 Cautionary Statement (filed herewith). * Management contract or compensatory plan or arrangement required to be filed as an Exhibit pursuant to Item 14(c) of this report. 71 PART IV (Continued) ------- (b) Reports on Form 8-K. During the quarter ended December 31, 2001, the Company filed a Form 8-K on December 11, 2001. The filing pertained to the changing of the state of incorporation of the Company from Pennsylvania to Delaware. On December 7, 2001, Paragon Technologies, Inc., a Pennsylvania corporation ("Paragon") merged with and into (the "Merger") Paragon Technologies, Inc., a Delaware corporation and a wholly-owned subsidiary of Paragon. The surviving corporation in the Merger is Paragon Technologies, Inc., a Delaware corporation (the "Surviving Corporation"). The sole purpose of the Merger was to change the state of incorporation of Paragon from the Commonwealth of Pennsylvania to the State of Delaware. The Articles of Incorporation and the Bylaws of the Surviving Corporation were included as part of the Form 8-K filing. (c) Exhibits 10.19, 10.20, 10.21, 10.22, 21, 23.1, 23.2, and 99 are filed with this report. (d) Schedule A - SI/BAKER, INC. Financial Statements and Independent Auditors' Report Thereon. 72 Schedule A ---------- SI/BAKER, INC. Financial Statements December 31, 2001 and December 31, 2000 (With Independent Auditors' Report Thereon) 73 Independent Auditors' Report ---------------------------- The Board of Directors SI/BAKER, INC.: We have audited the accompanying balance sheets of SI/BAKER, INC. as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2001 and 2000, and for the ten months ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the financial position of SI/BAKER, INC. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000, and for the ten months ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. /S/ KPMG LLP Philadelphia, Pennsylvania March 8, 2002 74 SI/BAKER, INC. Balance Sheets December 31, 2001 and December 31, 2000 (In Thousands, Except Share Data)
December 31, December 31, 2001 2000 ------------------- ------------------ Assets ------ Current assets: Cash and cash equivalents.......................... $ 3,302 4,681 Receivables: Trade............................................ 1,434 1,001 Other receivables................................ 234 65 ----- ----- Total receivables.............................. 1,668 1,066 ----- ----- Costs and estimated earnings in excess of billings. 498 1,873 Deferred income tax benefits....................... 379 409 Prepaid expenses and other current assets.......... 127 36 ----- ----- Total current assets........................... 5,974 8,065 ----- ----- Machinery and equipment, at cost...................... 207 222 Less: accumulated depreciation.................... 89 147 ----- ----- Net machinery and equipment.................... 118 75 ----- ----- Equipment leased to customer.......................... - 487 Less: accumulated depreciation.................... - 487 ----- ----- Net equipment leased to customer............... - - ----- ----- Deferred income tax benefits.......................... - 8 ----- ----- Total assets................................... $ 6,092 8,148 ===== =====
See accompanying notes to financial statements. 75 SI/BAKER, INC. Balance Sheets December 31, 2001 and December 31, 2000 (In Thousands, Except Share Data)
December 31, December 31, 2001 2000 ------------------- ------------------ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable: Trade............................................... $ 276 663 Affiliated companies................................ - 56 ----- ----- Total accounts payable............................ 276 719 ----- ----- Customers' deposits and billings in excess of costs and estimated earnings........................ 814 1,459 Accrued salaries, wages, and commissions.............. 443 358 Income taxes payable.................................. 38 127 Accrued royalties payable............................. 105 766 Accrued product warranties............................ 998 1,055 Accrued other liabilities............................. 76 88 ----- ----- Total current liabilities......................... 2,750 4,572 ----- ----- Long-term liabilities: Deferred income taxes payable......................... 9 - ----- ----- Total long-term liabilities....................... 9 - ----- ----- Stockholders' equity: Common stock, $1 par value; authorized 1,000 shares; issued and outstanding 200 shares........... - - Additional paid-in capital............................ 200 200 Retained earnings..................................... 3,133 3,376 ----- ----- Total stockholders' equity........................ 3,333 3,576 ----- ----- Total liabilities and stockholders' equity........ $ 6,092 8,148 ===== =====
See accompanying notes to financial statements. 76 SI/BAKER, INC. Statements Of Operations For the Years Ended December 31, 2001 and December 31, 2000, and for the Ten Months Ended December 31, 1999 (In thousands)
December 31, December 31, December 31, 2001 2000 1999 ---------------- ---------------- ---------------- Net sales............................. $ 12,139 14,139 10,495 Cost of sales......................... 8,663 10,931 8,326 ------ ------ ------ Gross profit on sales.............. 3,476 3,208 2,169 ------ ------ ------ Selling, general and administrative expenses............ 1,058 1,035 984 Product development costs............. 180 161 200 Royalty expense to parent companies... 486 566 420 Interest income....................... (166) (177) (85) Interest expense...................... - - 4 Other income, net..................... (185) (178) (98) ------ ------ ------ 1,373 1,407 1,425 ------ ------ ------ Earnings before income taxes.......... 2,103 1,801 744 Income tax expense.................... 846 738 313 ------ ------ ------ Net earnings..................... $ 1,257 1,063 431 ====== ====== ======
SI/BAKER, INC. Statements Of Stockholders' Equity For the Years Ended December 31, 2001 and December 31, 2000, and for the Ten Months Ended December 31, 1999 (In thousands)
Additional Total Common Paid-In Retained Stockholders' Stock Capital Earnings Equity ----------- ----------- ----------- ---------------- Balance at February 28, 1999.......... $ - 200 1,882 2,082 Net earnings.......................... - - 431 431 --- --- ------ ----- Balance at December 31, 1999.......... - 200 2,313 2,513 Net earnings.......................... - - 1,063 1,063 --- --- ----- ----- Balance at December 31, 2000.......... - 200 3,376 3,576 Net earnings.......................... - - 1,257 1,257 Cash dividends paid................... - - (1,500) (1,500) --- --- ----- ----- Balance at December 31, 2001.......... $ - 200 3,133 3,333 === === ===== =====
See accompanying notes to financial statements. 77 SI/BAKER, INC. Statements Of Cash Flows For the Years Ended December 31, 2001 and December 31, 2000, and for the Ten Months Ended December 31, 1999 (In thousands)
December 31, December 31, December 31, 2001 2000 1999 ------------------ -------------------- ------------------ Cash flows from operating activities: Net earnings........................... $ 1,257 1,063 431 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of machinery and equipment and leased equipment........................ 34 46 123 Changes in operating assets and liabilities: Receivables........................ (602) 421 409 Costs and estimated earnings in excess of billings............ 1,375 286 357 Deferred income taxes.............. 47 (4) (104) Prepaid expenses and other current assets................... (91) 17 83 Other assets....................... - - 95 Accounts payable................... (443) (84) 278 Customers' deposits and billings in excess of costs and estimated earnings........... (645) (655) 1,010 Accrued salaries, wages, and commissions...................... 85 111 156 Income taxes payable............... (89) (16) 143 Accrued royalties payable.......... (661) 405 152 Accrued product warranties......... (57) 213 182 Accrued other liabilities.......... (12) 11 67 Deferred compensation.............. - - (123) ----- ----- ----- Net cash provided by operating activities........... 198 1,814 3,259 ----- ----- ----- Cash flows from investing activities: Additions to machinery and equipment............................ (77) (28) (18) ----- ----- ----- Cash flows from financing activities: Dividends paid on common stock......... (1,500) - - Repayment of notes payable to bank................................. - - (500) ----- ----- ----- Net cash used by financing activities........... (1,500) - (500) ----- ----- ----- Increase (decrease) in cash and cash equivalents................... (1,379) 1,786 2,741 Cash and cash equivalents, beginning of year...................... 4,681 2,895 154 ----- ----- ----- Cash and cash equivalents, end of year............................ $ 3,302 4,681 2,895 ===== ===== ===== Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes....................... $ 956 759 2 ===== ===== ===== Interest........................... $ - - 3 ===== ===== =====
See accompanying notes to financial statements. 78 SI/BAKER, INC. Notes To Financial Statements Note 1: Organization, Description of Business, and Summary of ------- ----------------------------------------------------- Significant Accounting Policies ------------------------------- Organization, Description of Business, and Concentration of Credit Risk ----------------------------------------------------------------------- On March 1, 1993, Paragon Technologies, Inc. and Automated Prescription Systems, Inc. formed a joint venture, SI/BAKER, INC. (the "Company" or "joint venture"). On September 29, 1998, McKesson HBOC, Inc. [NYSE:MCK], a healthcare supply management company, announced the completion of its acquisition of Automated Prescription Systems, Inc. Automated Prescription Systems, Inc. was renamed McKesson Automation Systems Inc. ("McKesson Automation"). The joint venture draws upon the automated materials handling systems experience of Paragon Technologies, Inc. and the automated pill counting and dispensing products of McKesson Automation to provide automated pharmacy systems. Each member company contributed $100,000 in capital to fund the joint venture. The Company designs and installs computer controlled, fully automated, integrated systems for managed care and central fill pharmacy operations. The Company's systems are viewed as labor saving devices which address the issues of improved productivity and cost reduction. Systems can be expanded as customers' operations grow and they may be integrated with a wide variety of components to meet specific customer needs. Although the Company is not dependent on any single customer, much of its revenue is derived from contracts to design and install systems for managed care and central fill pharmacy operations for North American corporations and the federal government. In the year ended December 31, 2001, four customers accounted for revenues of $1,974,000, $1,706,000, $1,544,000, and $1,484,000, respectively. In the year ended December 31, 2000, three customers accounted for revenues of $4,024,000, $3,045,000, and $2,175,000, respectively. In the ten months ended December 31, 1999, two customers accounted for revenues of $3,608,000 and $2,700,000, respectively. No other customer accounted for over 10% of revenues. The Company's systems are sold on a fixed-price basis. Contract terms provide for progress payments and a portion of the purchase price is withheld by the buyer until the system has met contractual specifications. As of December 31, 2001, two customers owed the Company $651,000 and $254,000, respectively. 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. Fiscal Year ----------- On November 4, 1999, the Board of Directors of the Company approved an amendment to the Company's Bylaws to change the fiscal year end from the last day of February to December 31. The years ended December 31, 2001 and December 31, 2000 consisted of twelve months. For the year ended December 31, 1999, the fiscal year consisted of ten months. Use of Estimates ---------------- The preparation of the financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The judgments made in assessing the appropriateness of the estimates and assumptions utilized by management in the preparation of the financial statements are based on historical and empirical data and other factors germane to the nature of the risk being analyzed. Materially different results may occur if different assumptions or conditions were to prevail. Estimates and assumptions are mainly utilized to establish the appropriateness of the warranty reserve and revenue recognition. 79 SI/BAKER, INC. Notes To Financial Statements Financial Instruments --------------------- The Company believes that the market values of its short-term assets and liabilities, which are financial instruments materially, approximate their carrying values due to the short-term nature of the instruments. Cash and Cash Equivalents ------------------------- For the purpose of reporting cash flows, cash and cash equivalents include cash on deposit, amounts invested on an overnight basis with a bank, and other highly liquid debt instruments purchased with a maturity of three months or less. The Company does not believe it is exposed to any significant credit risk on cash and cash equivalents. Machinery and Equipment ----------------------- Machinery and equipment are depreciated on the straight-line method over the estimated useful lives of individual assets. The range of lives used in determining depreciation rates for machinery and equipment is 3-7 years. Maintenance and repairs are charged to operations; betterments and renewals are capitalized. Upon sale or retirement of 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. Revenue Recognition ------------------- Revenues on sales 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. Installation is an integral part of most systems sold by the Company and is not sold or billed separately. As these contracts may extend over one or more years, generally no more than two 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. 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 sales contracts, including both typical and more complex systems. Warranty -------- The Company's products are warranted against defects in materials and workmanship for a specified period. The Company provides an accrual for estimated future warranty costs based upon a percentage of net sales and warranty experience. Product Development Costs ------------------------- The Company expenses product development costs as incurred. Royalty Arrangement ------------------- During the fiscal year ended February 28, 1995, an amendment to the joint venture investment agreement was adopted to compensate each member company at a rate of 2% of gross sales for marketing and sales efforts on behalf of SI/BAKER, INC. The expense is included as royalty expense to parent companies in the Company's Statements of Operations. 80 SI/BAKER, INC. Notes To Financial Statements Royalty Arrangement (Continued) ------------------- The Company receives a royalty from McKesson Automation based on the monthly lease rates for all cells, counters, cassettes, and any other McKesson Automation equipment leased to customers in the Company's defined market segment since the inception of SI/BAKER on March 1, 1993. The royalty received by the Company is included in other income. 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. New Accounting Pronouncements ----------------------------- In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement also supersedes APB No. 30 provisions related to the accounting and reporting for the disposal of a segment of a business. This Statement establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement retains most of the requirements in SFAS No. 121 related to the recognition of impairment of long-lived assets to be held and used. The Statement is effective for years beginning after December 15, 2001. The Company is evaluating the potential impact of adopting SFAS No. 144. Note 2: Uncompleted Contracts ------- --------------------- Costs and estimated earnings on uncompleted contracts are as follows at December 31, 2001 and December 31, 2000 (in thousands):
December 31, December 31, 2001 2000 ------------------ ------------------ Costs incurred on uncompleted contracts................... $ 9,203 24,770 Estimated earnings........................................ 3,854 7,041 ------ ------ 13,057 31,811 Less: billings to date................................... 13,373 31,397 ------ ------ $ (316) 414 ====== ====== Included in accompanying balance sheets under the following captions: Costs and estimated earnings in excess of billings.......................................... $ 498 1,873 Customers' deposits and billings in excess of costs and estimated billings...................... (814) (1,459) ------ ------ $ (316) 414 ====== ======
81 SI/BAKER, INC. Notes To Financial Statements Note 3: Short-Term Bank Borrowings and Compensating Balances ------- ---------------------------------------------------- On March 4, 1996, the Company established a Line of Credit Facility (the "Facility") with its principal bank (the "Bank"). Under terms of the $3,000,000 Facility, the Company's parent companies have each provided a limited guarantee and surety in the amount not to exceed $1,000,000 for a combined guarantee of $2,000,000 to the Bank for the payment and performance of the related note, including any further renewals or modifications of the Facility. The Facility contains various covenants and requires the maintenance of a net worth ratio. The Company was in compliance with all covenants during the year ended December 31, 2001. The Facility has an expiration date of August 31, 2002. As of December 31, 2001, there was no debt outstanding under the Facility. Interest on the Facility is at the Bank's prime rate of interest minus one percent (3.75% as of December 31, 2001) or the LIBOR-based rate plus one and three-quarters percent. Note 4: Employee Benefit Plan ------- --------------------- The Company has a multi-faceted defined contribution Retirement Savings Plan. Employees age 21 and above with at least one year of service are eligible to participate in the Plan. Under the 401(k) feature of the Plan, the Company contributes 2% of base pay to each eligible salaried employee's account and, in addition, matches 50% of the first 4% of pay which the employee contributes to the Plan. The Plan also contains provisions for profit sharing contributions determined annually by the Board of Directors. Total expense for the Retirement Savings Plan was $55,000, $48,000, and $67,000, for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, respectively. Note 5: Income Taxes ------- ------------ The provision for income tax expense (benefit) consists of the following (in thousands):
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ------------------ ------------------ ------------------ Federal - current.................. $ 637 594 322 - deferred................. 37 (3) (83) --- --- --- 674 591 239 --- --- --- State - current.................. 163 148 95 - deferred................. 9 (1) (21) --- --- --- 172 147 74 --- --- --- $ 846 738 313 === === ===
A reconciliation between the U. S. federal statutory rate and the Company's effective income tax rate is (in thousands): 82 SI/BAKER, INC. Notes To Financial Statements Note 5: Income Taxes (Continued) ------- ------------
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, 2001 2000 1999 ------------------ ----------------- ------------------ Computed tax expense at statutory rate of 34%...................... $ 715 612 253 Increase in taxes resulting from: State income taxes, net of federal benefit......... 114 97 49 Miscellaneous items.............. 17 29 11 --- --- --- $ 846 738 313 === === ===
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2001 and December 31, 2000 are presented below (in thousands):
December 31, December 31, 2001 2000 ------------------ ------------------- Deferred tax assets: Accruals of book costs, not yet deductible for tax purposes...................... $ 395 420 Machinery and equipment, principally due to differences in depreciation............... - 9 --- --- Total gross deferred tax assets................ 395 429 --- --- Deferred tax liabilities: Other.............................................. (16) (12) Machinery and equipment, principally due to differences in depreciation............... (9) - --- --- Total gross deferred tax liabilities........... (25) (12) --- --- Net deferred tax assets........................ $ 370 417 === ===
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, 2001. Note 6: Royalties ------- --------- In April 1996, a competitor filed suit against the Company and its parents, alleging that certain of the products of the Company infringed a patent held by the competitor. On December 20, 1996, a Settlement Agreement was reached between the Company, its parents, and the competitor. The competitor dismissed the action and granted a license to the Company for certain of its products. In exchange for the license, the Company agreed to dismiss its counterclaims and pay the competitor a per system royalty. On December 31, 1996, the Company satisfied a $600,000 liability under the Settlement Agreement relative to systems installed to date. 83 SI/BAKER, INC. Notes To Financial Statements Note 6: Royalties (Continued) ------- --------- The term of the Settlement Agreement continues until the expiration of the competitor's patent; however, the Company's status as sole licensee remained in effect until December 31, 2000, and all orders related to licensed products received by the Company after December 31, 2000 are not subject to royalty payments. Note 7: Commitments Total rental expense, including short-term leases, for the years ended December 31, 2001 and December 31, 2000, and for the ten months ended December 31, 1999, approximated $107,000, $88,000, and $74,000, respectively. Future minimum rental commitments at December 31, 2001 under operating leases for office space is as follows: 2002........................... $ 72,000 2003........................... 42,000 2004........................... 32,000 84 SI/BAKER, INC. Notes To Financial Statements (Continued) Note 8: Related Party Transactions ------- -------------------------- The Company has entered into various transactions with affiliated entities as follows (in thousands): (a) McKesson Automation Systems Inc.(50% Stockholder):
December 31, December 31, Balance Sheets Data 2001 2000 ------------------- ------------------- Amount included in trade receivables........... $ 75 6 Amount included in other receivables.......... 49 45 Amount included in costs and estimated earnings in excess of billings.............. 12 179 Amount included in accounts payable........... - 22 Amount included in accrued royalties payable.. 52 68 Amount included in accrued other liabilities.. - 27
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, Statements of Operations Data 2001 2000 1999 ------------------ ------------------ ------------------- Sales of systems and services..... $ 1,204 (55) 216 Systems and services purchased for resale under various subcontracts................... 84 265 115 Royalty expense to parent companies...................... 243 283 210 Other income - royalty income.... 188 172 95
(b) Paragon Technologies, Inc. (50% Stockholder):
December 31, December 31, Balance Sheets Data 2001 2000 ------------------- ------------------- Amount included in accounts payable............ $ - 34 Amount included in accrued royalties payable..................................... 52 68
For the Year For the Year For the Ten Ended Ended Months Ended December 31, December 31, December 31, Statements of Operations Data 2001 2000 1999 ------------------ ------------------- ----------------- Systems and services purchased for resale under various subcontracts $ 876 593 237 Systems and services sold under various subcontracts........... - 1 60 Purchase of administrative and other services................. 55 106 116 Royalty expense to parent companies 243 283 210
85 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: April 30, 2002 By /s/ Anthony W. Schweiger ------------------------------------------ Anthony W. Schweiger Interim Chairman of the Board of Directors Dated: April 30, 2002 By /s/ William R. Johnson ------------------------------------------ William R. Johnson President and Chief Executive Officer 86 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: April 30, 2002 /s/ Anthony W. Schweiger -------------------------------------------- Anthony W. Schweiger Interim Chairman of the Board of Directors Dated: April 30, 2002 /s/ William R. Johnson -------------------------------------------- William R. Johnson President & Chief Executive Officer, Director Dated: April 30, 2002 /s/ Ronald J. Semanick -------------------------------------------- Ronald J. Semanick Vice President-Finance, Chief Financial Officer and Treasurer, and Secretary (Principal Accounting and Financial Officer) Dated: April 30, 2002 /s/ Leon C. Kirschner -------------------------------------------- Leon C. Kirschner Chief Operating Officer, and President of Ermanco Incorporated, Director Dated: April 30, 2002 /s/ L. Jack Bradt -------------------------------------------- L. Jack Bradt Director Dated: April 30, 2002 /s/ Gilman J. Hallenbeck -------------------------------------------- Gilman J. Hallenbeck Director Dated: April 30, 2002 /s/ Theodore W. Myers -------------------------------------------- Theodore W. Myers Director Dated: April 30, 2002 /s/ Steven Shulman -------------------------------------------- Director 87 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). 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). 4.1 Form of Subordinated Promissory Note payable to the Stockholders of Ermanco Incorporated dated September 30, 1999 (incorporated by reference to Exhibit 4.1 to Form 8-K filed on October 15, 1999). 10.4 1992 Incentive Stock Option Plan, Amended and Restated, Effective as of July 16, 1997* (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarterly period ended August 31, 1997). 10.5 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). 10.6 Directors' Deferred Compensation Plan* (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-8 [No. 333-10181]). 10.7 1997 Equity Compensation Plan* (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-8 [No. 333-36397]). 10.8 Joint Venture Agreement and Governing Documents Relating to SI/BAKER, INC. (incorporated by reference to Exhibit 21.1 to Annual Report on Form 10-K for the fiscal year ended February 26, 1995). 10.9 Second Amendment to the Joint Venture Agreement Relating to SI/BAKER, INC. (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended February 28, 1999). 10.10 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). 10.11 Employment Agreement with Leon C. Kirschner* (incorporated by reference to Exhibit 10.11 to Form 8-K filed on October 15, 1999). 10.12 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). 10.13 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). 10.14 Term Loan 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 10.14 to Form 8-K filed on October 15, 1999). 10.15 Promissory Note related to the Term Loan 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 10.15 to Form 8-K filed on October 15, 1999). 10.16 Escrow Agreement entered into September 30, 1999 by and among SI Handling Systems, Inc., the stockholders of Ermanco Incorporated, and First Union National Bank (incorporated by reference to Exhibit 10.16 to Form 8-K filed on October 15, 1999). 10.17 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). 10.18 Registration Rights Agreement (incorporated by reference to Exhibit 10.1 to Form S-3, filed on July 5, 2000). 88 EXHIBIT INDEX (Continued) ------------- 10.19 Executive Employment Agreement with Gordon A. Hellberg dated October 1, 2001* (filed herewith). 10.20 Executive Employment Agreement with Lee F. Schomberg dated October 1, 2001* (filed herewith). 10.21 Executive Employment Agreement with Ronald J. Semanick dated October 1, 2001* (filed herewith). 10.22 Amended and Restated Executive Employment Agreement with William R. Johnson dated October 1, 2001* (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23.1 Consent of Independent Auditors (filed herewith). 23.2 Consent of Independent Auditors relating to SI/BAKER, INC. (filed herewith). 99 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. 89