-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RX7yV3TYmK3D8Dc9bV5JPLW/K+QNcXwRVkK9q8+yv60X7vu6Lc4c+MSMe+4HSMJC +74htwBQOHaiXnUD8fK7VQ== 0000090045-02-000041.txt : 20021114 0000090045-02-000041.hdr.sgml : 20021114 20021114144246 ACCESSION NUMBER: 0000090045-02-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAGON TECHNOLOGIES INC CENTRAL INDEX KEY: 0000090045 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION, MINING & MATERIALS HANDLING MACHINERY & EQUIP [3530] IRS NUMBER: 221643428 STATE OF INCORPORATION: PA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15729 FILM NUMBER: 02824440 BUSINESS ADDRESS: STREET 1: 600 KUEBLER ROAD CITY: EASTON STATE: PA ZIP: 18040 -929 BUSINESS PHONE: 6102523205 MAIL ADDRESS: STREET 1: 600 KUEBLER RD CITY: EASTON STATE: PA ZIP: 18040-9295 FORMER COMPANY: FORMER CONFORMED NAME: SI HANDLING SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-Q 1 f10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 2002 Commission File No. 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 Incorporation or Organization) Identification No.) 600 Kuebler Road, Easton, PA 18040 - --------------------------------------------------- --------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: 610-252-3205 --------------------- Indicate by checkmark 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 --- --- Number of shares of common stock, par value $1.00 per share, outstanding as of October 28, 2002: 4,244,916. PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Balance Sheets September 30, 2002 and December 31, 2001 (In Thousands, Except Share Data)
(UNAUDITED) September 30, December 31, 2002 2001 ------------------- ------------------ Assets - ------ Current assets: Cash and cash equivalents $ 6,748 6,114 Receivables: Trade (net of allowance for doubtful accounts of $283 as of September 30, 2002 and $54 as of December 31, 2001) 5,015 7,093 Notes and other receivables 1,359 630 ------ ------ Total receivables 6,374 7,723 ------ ------ Costs and estimated earnings in excess of billings 220 244 Inventories: Raw materials 981 1,731 Work-in-process 142 254 Finished goods 276 408 ------ ------ Total inventories 1,399 2,393 ------ ------ Deferred income tax benefits 1,780 2,077 Prepaid expenses and other current assets 740 649 ------ ------ Total current assets 17,261 19,200 ------ ------ Property, plant and equipment, at cost: Land 27 27 Buildings and improvements 3,727 3,727 Machinery and equipment 4,287 5,059 ------ ------ 8,041 8,813 Less: accumulated depreciation (5,705) (6,112) ------ ------ Net property, plant and equipment 2,336 2,701 ------ ------ Investment in joint venture 1,720 1,667 Excess of cost over fair value of net assets acquired, less amortization of $1,053 as of September 30, 2002 and December 31, 2001 17,657 17,657 Other assets, at cost less accumulated amortization of $126 as of September 30, 2002 and $94 as of December 31, 2001 86 118 ------ ------ Total assets $ 39,060 41,343 ====== ======
See accompanying notes to consolidated financial statements. 2 Item 1. Financial Statements (Continued) - ------- -------------------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Balance Sheets September 30, 2002 and December 31, 2001 (In Thousands, Except Share Data)
(UNAUDITED) September 30, December 31, 2002 2001 ------------------- ------------------ Liabilities and Stokholders' Equity - ----------------------------------- Current liabilities: Current installments of long-term debt $ 2,300 2,305 Accounts payable 2,969 3,319 Customers' deposits and billings in excess of costs and estimated earnings for completed and uncompleted contracts 2,331 3,345 Accrued salaries, wages, and commissions 544 676 Income taxes payable 2 46 Accrued royalties payable 108 92 Accrued product warranties 1,092 863 Accrued pension and retirement savings plan liabilities 1,160 1,122 Accrued restructuring expenses 222 494 Accrued other liabilities 1,371 1,126 ------ ------ Total current liabilities 12,099 13,388 ------ ------ Long-term liabilities: Long-term debt, excluding current installments: Term loan 5,175 6,900 Subordinated notes payable 3,000 3,000 ------ ------ Total long-term debt 8,175 9,900 Other long-term liability 431 412 Deferred income taxes payable 1,213 628 Deferred compensation 19 134 ------ ------ Total long-term liabilities 9,838 11,074 ------- ------ Stockholders' equity: Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 4,244,916 shares as of September 30, 2002 and 4,221,635 shares as of December 31, 2001 4,245 4,222 Additional paid-in capital 7,231 7,071 Retained earnings 5,905 5,841 Accumulated other comprehensive loss (258) (253) ------ ------ Total stockholders' equity 17,123 16,881 ------ ------ Total liabilities and stockholders' equity $ 39,060 41,343 ====== ======
See accompanying notes to consolidated financial statements. 3 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited) For the Three and Nine Months Ended September 30, 2002 and September 30, 2001 (In Thousands, Except Share And Per Share Data)
Three Months Ended Nine Months Ended ------------------------------------ ----------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ----------------- ----------------- ----------------- ----------------- Net sales $ 9,010 12,796 29,670 38,947 Cost of sales 7,119 9,499 22,404 28,994 --------- --------- --------- --------- Gross profit on sales 1,891 3,297 7,266 9,953 --------- --------- --------- --------- Selling, general and administrative expenses 2,251 2,213 6,774 7,899 Product development costs 94 86 253 402 Amortization of goodwill - 117 - 351 Restructuring expenses - - - 1,538 Interest expense 265 310 803 1,001 Interest income (35) (35) (88) (215) Equity in income of joint ventures (11) (148) (53) (373) Other income, net (4) (81) (528) (283) --------- --------- --------- --------- 2,560 2,462 7,161 10,320 --------- --------- --------- --------- Earnings (loss) before income taxes (669) 835 105 (367) Income tax expense (benefit) (267) 366 41 (155) --------- --------- --------- --------- Net earnings (loss) $ (402) 469 64 (212) ========= ========= ========= ========= Basic earnings (loss) per share $ (.09) .11 .02 (.05) ========= ========= ========= ========= Diluted earnings (loss) per share $ (.09) .11 .01 (.05) ========= ========= ========= ========= Weighted average shares outstanding 4,235,887 4,214,191 4,227,911 4,207,575 Dilutive effect of stock options - 26,375 65,696 33,474 Dilutive effect of phantom stock units - 15,617 4,692 17,381 --------- --------- --------- --------- Weighted average shares outstanding assuming dilution 4,235,887 4,256,183 4,298,299 4,258,430 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 4 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Comprehensive Income (Unaudited) For the Three and Nine Months Ended September 30, 2002 and September 30, 2001 (In Thousands)
Three Months Ended Nine Months Ended ------------------------------------ ----------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ----------------- ----------------- ----------------- ----------------- Net earnings (loss) $ (402) 469 64 (212) Other comprehensive income (loss), net of tax: Cash flow hedge: Cumulative effect of adoption of FAS 133 - - - (96) Change in fair value during the period (49) (132) (5) (182) ----- ----- ----- ----- Total other comprehensive income (loss) (49) (132) (5) (278) ----- ----- ----- ----- Comprehensive income (loss) $ (451) 337 59 (490) ===== ===== ===== =====
See accompanying notes to consolidated financial statements. 5 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2002 and September 30, 2001 (In Thousands, Except Share Data)
Nine Months Ended ---------------------------------------- September 30, September 30, 2002 2001 ------------------- ------------------- Cash flows from operating activities: Net earnings (loss) $ 64 (212) Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation of plant and equipment 488 547 Amortization of intangibles 32 383 Gain on disposition of equipment (94) - Equity in income of joint ventures (53) (373) Issuance of 18,281 and 9,926 common shares, respectively, as noncash interest payments on subordinated notes 150 75 Issuance of 12,390 common shares as payment of employee's bonus - 111 Change in operating assets and liabilities: Receivables 1,224 (2,641) Costs and estimated earnings in excess of billings 24 442 Inventories 994 199 Prepaid expenses and other current assets (91) 73 Other noncurrent assets - 1 Accounts payable (350) (68) Customers' deposits and billings in excess of costs and estimated earnings for completed and uncompleted contracts (1,014) (333) Accrued salaries, wages, and commissions (132) (1,274) Income taxes payable (44) (369) Accrued royalties payable 16 (166) Accrued product warranties 229 (102) Accrued pension and retirement savings plan liabilities 38 481 Accrued restructuring expenses (272) 709 Accrued other liabilities 245 397 Deferred income taxes 896 11 Deferred compensation (115) (36) ------ ----- Net cash provided (used) by operating activities 2,235 (2,145) ------ ----- Cash flows from investing activities: Proceeds from the disposition of equipment 200 - Proceeds from the divestment of a joint venture 125 - Additions to property, plant and equipment (229) (530) ------ ----- Net cash provided (used) by investing activities 96 (530) ------ -----
See accompanying notes to consolidated financial statements. 6 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) (Continued) For the Nine Months Ended September 30, 2002 and September 30, 2001 (In Thousands, Except Share Data)
Nine Months Ended ---------------------------------------- September 30, September 30, 2002 2001 ------------------- ------------------- Cash flows from financing activities: Sale of common shares in connection with employee incentive stock option plan 33 30 Repayment of long-term debt (1,730) (1,519) ------ ----- Net cash used by financing activities (1,697) (1,489) ------ ----- Increase (decrease) in cash and cash equivalents 634 (4,164) Cash and cash equivalents, beginning of period 6,114 7,925 ------ ----- Cash and cash equivalents, end of period $ 6,748 3,761 ====== ====== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 618 809 ====== ===== Income taxes $ 51 471 ====== =====
See accompanying notes to consolidated financial statements. 7 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Nine Months Ended September 30, 2002 and September 30, 2001 (1) The information contained in this Form 10-Q report is unaudited. In the opinion of the management of Paragon Technologies, Inc. ("Paragon" or the "Company"), the interim financial statements furnished reflect all adjustments and accruals that are necessary to present a fair statement of results for the interim periods. The financial statements include the accounts of the Company and Ermanco Incorporated ("Ermanco"), a wholly owned subsidiary company, after elimination of intercompany balances and transactions. Results for interim periods are not necessarily indicative of results expected for the fiscal year. This quarterly report should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our annual report on Form 10-K, as amended, for the year ended December 31, 2001, as filed with the Securities and Exchange Commission. Refer to the Company's Form 10-K, as amended, for the year ended December 31, 2001 for more complete financial information. (2) 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 associates by 14 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 20 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 Company's defined benefit plan for the Company's Easton, Pennsylvania production employees, and $298,000 for plant closure and professional service fees related 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 sheets. The major components of the restructuring charge and remaining accruals are as follows:
Balance at Cash Balance at December 31, 2001 Payments September 30, 2002 ---------------------- -------------- ------------------------- Severances $ 274,000 (178,000) 96,000 Other 220,000 (94,000) 126,000 ------- -------- ------- $ 494,000 (272,000) 222,000 ======= ======= =======
(3) 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 and products offered for sale. The Company operates in two major market segments. 8 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Nine Months Ended September 30, 2002 and September 30, 2001 The Company's Easton, Pennsylvania operations (hereafter referred to as "SI Systems") is a specialized systems integrator supplying SI Systems' branded automated material 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 material handling solutions involve both standard and specially designed components and include integration of non-proprietary automated handling technologies so as to provide turnkey solutions for its customers' unique material handling needs. 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 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 material handling industry through a worldwide network of approximately 100 experienced material handling equipment distributors and licensees. Ermanco also provides complete conveyor systems for a variety of applications, including distribution and manufacture of computers and electronic products, utilizing primarily its own manufactured conveyor products, engineering services by its own staff or subcontractors, and subcontracted installation services. Ermanco supplies material handling systems and equipment to both national and international markets. Ermanco offers services ranging from the delivery of basic transportation conveyors to turnkey installations of complex, fully automated work-in-process production lines and distribution centers, utilizing sophisticated, custom-designed controls software. Many of Ermanco's sales are to distributors who have non-exclusive agreements with the Company. 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 three and nine months ended September 30, 2002 and September 30, 2001 are as follows (in thousands): For the three months ended September 30, 2002:
% of Total SI Systems Ermanco Total Sales --------------- -------------- -------------- -------------- Systems sales $ 2,706 5,363 8,069 89.5% Aftermarket sales 630 311 941 10.5% ------ ------ ------ ----- Total sales $ 3,336 5,674 9,010 100.0% ====== ====== ====== ===== As a % of total sales 37.0% 63.0% 100.0%
For the three months ended September 30, 2001:
% of Total SI Systems Ermanco Total Sales --------------- -------------- -------------- -------------- Systems sales $ 2,583 8,338 10,921 85.3% Aftermarket sales 1,373 502 1,875 14.7% ------ ------ ------ ----- Total sales $ 3,956 8,840 12,796 100.0% ====== ====== ====== ===== As a % of total sales 30.9% 69.1% 100.0%
9 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Nine Months Ended September 30, 2002 and September 30, 2001 For the nine months ended September 30, 2002:
% of Total SI Systems Ermanco Total Sales --------------- -------------- -------------- -------------- Systems sales $ 8,411 17,560 25,971 87.5% Aftermarket sales 2,345 1,354 3,699 12.5% ------ ------ ------ ----- Total sales $ 10,756 18,914 29,670 100.0% ====== ====== ====== ===== As a % of total sales 36.3% 63.7% 100.0%
For the nine months ended September 30, 2001:
% of Total SI Systems Ermanco Total Sales --------------- -------------- -------------- -------------- Systems sales $ 11,004 22,691 33,695 86.5% Aftermarket sales 3,746 1,506 5,252 13.5% ------ ------ ------ ----- Total sales $ 14,750 24,197 38,947 100.0% ====== ====== ====== ===== As a % of total sales 37.9% 62.1% 100.0%
The Company's products are sold through its own sales personnel, along with a network of distributors and licensees. Domestic and international sales by brand during the three and nine months ended September 30, 2002 and September 30, 2001 are as follows (in thousands): For the three months ended September 30, 2002:
% of Total SI Systems Ermanco Total Sales --------------- -------------- -------------- -------------- Domestic sales $ 3,299 5,308 8,607 95.5% International sales 37 366 403 4.5% ------ ------ ------ ----- Total sales $ 3,336 5,674 9,010 100.0% ====== ====== ====== =====
For the three months ended September 30, 2001:
% of Total SI Systems Ermanco Total Sales --------------- -------------- -------------- -------------- Domestic sales $ 3,878 7,790 11,668 91.2% International sales 78 1,050 1,128 8.8% ------ ------ ------ ----- Total sales $ 3,956 8,840 12,796 100.0% ====== ====== ====== =====
For the nine months ended September 30, 2002:
% of Total SI Systems Ermanco Total Sales --------------- -------------- -------------- -------------- Domestic sales $ 10,567 17,484 28,051 94.5% International sales 189 1,430 1,619 5.5% ------ ------ ------ ----- Total sales $ 10,756 18,914 29,670 100.0% ====== ====== ====== =====
For the nine months ended September 30, 2001:
% of Total SI Systems Ermanco Total Sales --------------- -------------- -------------- -------------- Domestic sales $ 14,050 20,562 34,612 88.9% International sales 700 3,635 4,335 11.1% ------ ------ ------ ----- Total sales $ 14,750 24,197 38,947 100.0% ====== ====== ====== =====
10 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Nine Months Ended September 30, 2002 and September 30, 2001 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 three and nine months ended September 30, 2002 and September 30, 2001 are as follows (in thousands):
As a % of Total Sales ----------------- For the three months ended September 30, 2002 $ 376 4.2% For the three months ended September 30, 2001 1,412 11.0%
As a % of Total Sales ----------------- For the nine months ended September 30, 2002 $ 3,102 10.5% For the nine months ended September 30, 2001 5,806 14.9%
The Company identifies operating segments based on the types of products offered for sale as follows:
For the Three Months Ended September 30, 2002 (In Thousands): SI Systems Ermanco Total - ------------------------------------------- ------------------- ----------------- ----------- Sales $ 3,336 5,674 9,010 Earnings (loss) before interest expense, interest income, equity in income of joint ventures, and income taxes (43) (407) (450) Total assets 8,809 30,251 39,060 Capital expenditures 34 21 55 Depreciation and amortization expense 68 112 180
For the Three Months Ended September 30, 2001 (In Thousands): SI Systems Ermanco Total - ------------------------------------------- ------------------- ----------------- ----------- Sales $ 3,956 8,840 12,796 Earnings before interest expense, interest income, equity in income of joint ventures, and income taxes 376 586 962 Total assets 12,438 31,214 43,652 Capital expenditures 57 280 337 Depreciation and amortization expense 104 229 333
11 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Nine Months Ended September 30, 2002 and September 30, 2001
For the Nine Months Ended September 30, 2002 (In Thousands): SI Systems Ermanco Total - ------------------------------------------- ------------------- ----------------- ----------- Sales $ 10,756 18,914 29,670 Earnings (loss) before interest expense, interest income, equity in income of joint ventures, and income taxes 1,075 (308) 767 Total assets 8,809 30,251 39,060 Capital expenditures 55 174 229 Depreciation and amortization expense 208 312 520
For the Nine Months Ended September 30, 2001 (In Thousands): SI Systems Ermanco Total - ------------------------------------------- ------------------- ----------------- ----------- Sales $ 14,750 24,197 38,947 Earnings before interest expense, interest income, equity in income of joint ventures, and income taxes (before restructuring expenses) 559 1,025 1,584 Restructuring expenses 1,538 - 1,538 Total assets 12,438 31,214 43,652 Capital expenditures 121 409 530 Depreciation and amortization expense 311 619 930
(4) New Accounting Pronouncements ----------------------------- Effective January 1, 2002, the Company adopted Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"), which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Impairment losses, if any, will be measured as of January 1, 2002 and recognized as the cumulative effect of a change in accounting principle in 2002. FAS 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to Be Disposed Of." As of January 1, 2002, the Company had unamortized goodwill of $17,657,000, all of which was attributable to Ermanco. FAS 142 requires that the Company completes a first phase of the impairment review for goodwill by June 30, 2002. The required review was completed during the second quarter of 2002 and did not indicate any impairment. 12 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Nine Months Ended September 30, 2002 and September 30, 2001 (4) New Accounting Pronouncements (Continued) ----------------------------- Comparison to Prior Year "As Adjusted" -------------------------------------- The following table presents prior year reported amounts adjusted to eliminate the effect of goodwill amortization in accordance with FAS 142.
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Reported net earnings (loss) $(402,000) 469,000 64,000 (212,000) Add back: goodwill amortization, net of tax - 66,000 - 203,000 ------- ------- ------- ------- Adjusted net earnings (loss) $(402,000) 535,000 64,000 (9,000) ======= ======= ======= ======= Basic net earnings (loss) per share: Reported net earnings (loss) per share $ (.09) .11 .02 (.05) Add back: goodwill amortization, net of tax - .02 - .05 ------- ------- ------- ------- Adjusted net earnings (loss) per share $ (.09) .13 .02 - ======= ======= ======= ======= Diluted net earnings (loss) per share: Reported net earnings (loss) per share $ (.09) .11 .01 (.05) Add back: goodwill amortization, net of tax - .02 - .05 ------- ------- ------- ------- Adjusted net earnings (loss) per share $ (.09) .13 .01 - ======= ======= ======= =======
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. This Statement was adopted by the Company on January 1, 2002 and did not have any impact on the Company's financial statements. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146) which addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement nullifies Emerging Issues Task Force Issue 94-3. "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and establishes that fair value is the objective for initial measurement of the liability. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. 13 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Nine Months Ended September 30, 2002 and September 30, 2001 (5) Other Comprehensive Loss ------------------------ 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 $4,600,000 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 accumulated other comprehensive loss. The fair value of the interest rate swap at September 30, 2002 was a liability of approximately $431,000. The separate components of other comprehensive loss are as follows (in thousands):
Gross Tax Effect Net ----- ---------- --- Accumulated other comprehensive loss at December 31, 2001 $ 412 159 253 Other comprehensive loss 19 14 5 --- --- --- Accumulated other comprehensive loss at September 30, 2002 $ 431 173 258 === === ===
The Company uses derivative financial instruments as risk management tools and not for speculative purposes. (6) Long-Term Debt - --- -------------- The Company was in violation of the covenant related to its Funds Flow Coverage Ratio and received waivers from its principal bank for the covenant violation for the quarters ended June 30, 2002 and September 30, 2002. During August 2002, the Company entered into an arrangement to amend its credit agreements with its principal bank relative to future covenant requirements and the maintenance of a minimum cash balance covenant. In August 2002, the line of credit agreement was amended to extend the expiration date of the facility to June 30, 2003 and decrease the amount available under the facility. During November 2002, the Company prepaid, without penalty, $1,200,000 of the term loan reducing the balance of the term loan to $5,987,500 and placed $1,150,000 in escrow with the Company's principal bank. Beginning with the quarter ended December 31, 2002, the escrow amount will be reduced by $287,500 every quarter and applied to the principal portion of the term loan until the escrow amount reaches zero at September 30, 2003. The Company will resume making equal quarterly payments of $575,000 plus accrued interest beginning with the quarter ended December 31, 2003. The Company also amended its credit agreements relative to future covenant requirements, the minimum cash balance covenant was reduced to $4,000,000, and certain conditions were added regarding the sale of the Company's Easton facility. In November 2002, the line of credit agreement was also amended to decrease the amount available under the facility to $1,000,000. The Company remains prohibited from making any cash payments of subordinated debt and interest through the quarter ended September 30, 2003, and beginning with the quarter ended December 31, 2003 interest payments on the subordinated debt may be made in the form of cash if the Company is in full compliance with all the financial covenants set forth in the Loan Agreement, as amended, with the Company's principal bank. The Company intends to satisfy its quarterly interest obligations on subordinated debt 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. 14 Item 2. Management's Discussion and Analysis of Financial Condition and - ------ ---------------------------------------------------------------- Results of Operations --------------------- Liquidity and Capital Resources - ------------------------------- The Company's cash and cash equivalents increased to $6,748,000 at September 30, 2002 from $6,114,000 at December 31, 2001. The increase resulted from cash provided by operating activities totaling $2,235,000, proceeds of $200,000 from the disposition of equipment, and proceeds of $125,000 from the divestment of a joint venture. Partially offsetting the increase in cash and cash equivalents from these sources was the repayment of long-term debt of $1,730,000 and purchases of capital equipment of $229,000. Funds used by operating activities during the nine months ended September 30, 2001 were $2,145,000. Acquisition of Ermanco Incorporated - ----------------------------------- On September 30, 1999, the Company acquired 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, $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 order to complete the Ermanco acquisition, the Company obtained financing from its principal bank. The Company entered into a line of credit facility which may not exceed the lesser of $1,000,000, as amended, 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 September 30, 2002, the Company did not have any borrowings under the line of credit facility, and the facility expires effective June 30, 2003. 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. In connection with the most recent amendment, the Company prepaid, without penalty, $1,200,000 of the term loan reducing the balance of the term loan to $5,987,500 and placed $1,150,000 in escrow with the Company's principal bank. Beginning with the quarter ended December 31, 2002, the escrow amount will be reduced by $287,500 every quarter and applied to the principal portion of the term loan until the escrow amount reaches zero at September 30, 2003. The Company will resume making equal quarterly payments of $575,000 plus accrued interest beginning with the quarter ended December 31, 2003. The interest rate on the term loan is variable at a rate equal to the three-month LIBOR Market Index Rate plus three percent, which was 4.80% as of September 30, 2002. The Company also entered into an interest rate swap agreement for a portion of the term loan to hedge the floating interest rate. At September 30, 2002, the notional amount of the seven-year interest rate swap was $4,600,000, and it fixes interest at a rate of 9.38%. As of September 30, 2002, the liability associated with the fair value of the cash flow hedge was approximately $431,000. 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, maintenance of certain financial ratios, and as amended, maintenance of a minimum cash balance covenant of $4,000,000. The Company was in compliance with all covenants or obtained appropriate waivers as of September 30, 2002 (See Note 6). 15 Item 2. Management's Discussion and Analysis of Financial Condition and - ------ ---------------------------------------------------------------- Results of Operations --------------------- Acquisition of Ermanco Incorporated (Continued) - ----------------------------------- On September 30, 1999, the Company also issued promissory notes to fourteen stockholders of Ermanco, two of which are directors of the Company (Messrs. Shulman and Kirschner), in the 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. From July 1, 2001 through September 30, 2003, the Company has been and will be prohibited from making any cash payments on subordinated debt and interest. However, the bank waived the restriction from paying interest on the subordinated debt in the form of cash for the quarter ended December 31, 2001 and the quarter ended March 31, 2002. Beginning with the quarter ended December 31, 2003 interest payments on the subordinated debt may be made in the form of cash if the Company is in full compliance with all the financial covenants set forth in the Loan Agreement, as amended, with the Company's principal bank. The Company intends to satisfy its quarterly interest obligations on subordinated debt 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. The Company was in violation of the covenant related to its Funds Flow Coverage Ratio and received waivers from its principal bank for the covenant violation for the quarters ended June 30, 2002 and September 30, 2002. During August 2002, the Company entered into an arrangement to amend its credit agreements with its principal bank relative to future covenant requirements and the maintenance of a minimum cash balance covenant. In August 2002, the line of credit agreement was amended to extend the expiration date of the facility to June 30, 2003 and decrease the amount available under the facility. During November 2002, the Company prepaid, without penalty, $1,200,000 of the term loan reducing the balance of the term loan to $5,987,500 and placed $1,150,000 in escrow with the Company's principal bank. Beginning with the quarter ended December 31, 2002, the escrow amount will be reduced by $287,500 every quarter and applied to the principal portion of the term loan until the escrow amount reaches zero at September 30, 2003. The Company will resume making equal quarterly payments of $575,000 plus accrued interest beginning with the quarter ended December 31, 2003. The Company also amended its credit agreements relative to future covenant requirements, the minimum cash balance covenant was reduced to $4,000,000, and certain conditions were added regarding the sale of the Company's Easton facility. In November 2002, the line of credit agreement was also amended to decrease the amount available under the facility to $1,000,000. Commitments and Contingencies - ----------------------------- Ermanco's operations are located in a 94,000 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 also leases certain automobiles and office equipment, office space, computer equipment, and software under various operating leases with terms extending through September 2007. 16 Item 2. Management's Discussion and Analysis of Financial Condition and - ------ ---------------------------------------------------------------- Results of Operations --------------------- Commitments and Contingencies (Continued) - ----------------------------- 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 September 30, 2002, SI/BAKER did not have any borrowings under the Facility, and the Facility expires effective June 30, 2003. Other Liquidity and Capital Resource Matters - -------------------------------------------- The Company anticipates that its financial resources, consisting of cash generated from operations and borrowings available under its credit facility will be adequate to satisfy its future cash requirements through the next year. If the Company is unable to meet the terms of its financial covenants relating to its outstanding indebtedness and is unable to receive a waiver from its lender, a default could result under the Company's borrowing agreements. A default may result in the acceleration of the Company's indebtedness and cause the Company's debt to become immediately due and payable. If acceleration occurs, the Company may not be able to repay its debt, and the Company may not be able to borrow sufficient additional funds to refinance such debt. Sales volume, as well as cash liquidity, may experience fluctuations due to the unpredictability of future contract sales and the dependence upon a limited number of large contracts with a limited number of customers. 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 stockholder 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 - --------------------- (a) Nine Months Ended September 30, 2002 Versus Nine Months Ended September 30, --------------------------------------------------------------------------- 2001 ---- The Company's net earnings for the nine months ended September 30, 2002 was $64,000 compared to a net loss of $212,000 for the nine months ended September 30, 2001. Contributing to the net earnings for the nine months ended September 30, 2002 was other income from the short-term licensing of certain real property of $300,000 and a gain on the sale of excess fixed assets of $94,000, and the application of the non-amortization provision of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," whereby goodwill is no longer amortized thereby resulting in an increase to pre-tax income of $351,000. Contributing to the net loss for the nine months ended September 30, 2001 were restructuring charges of $1,538,000. Net Sales and Gross Profit on Sales - ----------------------------------- Net sales of $29,670,000 for the nine months ended September 30, 2002 decreased 23.8% compared to net sales of $38,947,000 for the nine months ended September 30, 2001. The sales decrease of $9,277,000 was primarily attributable to a lower volume of orders associated with the current economic slowdown and competitive pricing pressures. The net sales decrease was comprised of a decrease in Ermanco's branded sales of approximately $5,283,000 and a decrease in SI Systems' branded sales of approximately $3,994,000 for the nine months ended September 30, 2002 when compared to the nine months ended September 30, 2001. The decline in Ermanco branded sales was primarily due to the prior year comparable period containing a greater 17 Item 2. Management's Discussion and Analysis of Financial Condition and - ------ ---------------------------------------------------------------- Results of Operations --------------------- Results Of Operations - --------------------- (a) Nine Months Ended September 30, 2002 Versus Nine Months Ended September 30, --------------------------------------------------------------------------- 2001 ---- Net Sales and Gross Profit on Sales (Continued) - ----------------------------------- amount of sales related to distributors and companies in the technology sector. The decline in SI Systems' branded sales was primarily due to the prior year comparable period containing a greater amount of sales related to the LO-TOW(R) product line. Contributing to the reduction of approximately $2,640,000 in LO-TOW(R) sales for the nine months ended September 30, 2002 was a decrease of approximately $2,800,000 in sales related to the U.S. Postal Service. 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 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. 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 system contracts. Gross profit, as a percentage of sales, was 24.5% for the nine months ended September 30, 2002 compared to 25.6% for the nine months ended September 30, 2001. Gross profit, as a percentage of sales, for the nine months ended September 30, 2002 was unfavorably impacted by 1.9% due to the underabsorption of overhead costs caused by a decline in sales volume. Gross profit, as a percentage of sales, for the nine months ended September 30, 2002, when compared to the nine months ended September 30, 2001, was favorably impacted by approximately 0.7% as a result of the reversal of previously established contract accruals due to changes in cost estimates. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses of $6,774,000 were lower by $1,125,000 for the nine months ended September 30, 2002 than in the nine months ended September 30, 2001. The decrease of $1,125,000 was comprised of cost savings of approximately $525,000, attributable to the Company's restructuring of its business operations in the prior fiscal year and emphasis on cost reduction. Also contributing to the reduction in selling, general and administrative expenses was a reduction of approximately $325,000 in marketing expenses associated with marketing research and the Company's participation in a biannual industry trade show in the first quarter of the prior fiscal year, $200,000 of compensation expense based on profit performance, and $310,000 of charges during the second quarter of the prior fiscal year related to a strategic transaction that was not completed. Partially offsetting the aforementioned favorable variance was $150,000 of provision related to increasing the allowance for doubtful accounts associated with possible uncollectible receivables. Product Development Costs - ------------------------- Product development costs, including patent expense, of $253,000 were lower by $149,000 for the nine months ended September 30, 2002 than in the nine months ended September 30, 2001. Development programs in the nine months ended September 30, 2002 were aimed at improvements to the Company's sortation and accumulation conveyor technologies and the Order Picking, Fulfillment, and Replenishment product line. Development programs in the nine months ended September 30, 2001 included enhancements to the Company's Order Picking, Fulfillment, and Replenishment product line and development efforts related to NBS 30(TM) and NBS 90(TM), narrow belt sorters, that were introduced in the material handling marketplace during the first quarter of 2001. 18 Item 2. Management's Discussion and Analysis of Financial Condition and - ------ ---------------------------------------------------------------- Results of Operations --------------------- Results of Operations - --------------------- (a) Nine Months Ended September 30, 2002 Versus Nine Months Ended September 30, --------------------------------------------------------------------------- 2001 (Continued) ---- Amortization of Goodwill - ------------------------ Amortization of goodwill represented costs associated with the acquisition of Ermanco. Due to the application of the non-amortization provision of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortized after December 31, 2001 as compared to amortization expense of $351,000 for the nine months ended September 30, 2001. 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 associates by 14 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 20 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. Interest Expense and Interest Income - ------------------------------------ Interest expense of $803,000 was lower by $198,000 for the nine months ended September 30, 2002 than in the nine months ended September 30, 2001. The decrease in interest expense was attributable to the reduced level of term debt due to principal payments and lower interest rates. Interest income of $88,000 for the nine months ended September 30, 2002 decreased by $127,000, when compared to the nine months ended September 30, 2001. The decrease in interest income was primarily attributable to a reduction in the level of interest rates pertaining to short-term investments. Equity in Income of Joint Ventures - ---------------------------------- Equity in income of joint ventures represents the Company's proportionate share of its investment in the SI/BAKER joint venture and prior to January 1, 2002 its investment in the SI-Egemin joint venture, that are accounted for under the equity method. The net unfavorable variance of $320,000 in the equity in income of joint ventures for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 was comprised of decreased earnings of approximately $384,000 attributable to the SI/BAKER joint venture and decreased losses of approximately $64,000 attributable to the SI-Egemin joint venture. The unfavorable variance of $384,000 for the nine months ended September 30, 2002 in the equity in income of the SI/BAKER joint venture was attributable to a decline in sales of approximately $3,629,000, an increase of $107,000 in product development costs, an increase of $107,000 in selling, general and administrative expenses, and a reduction of $108,000 in interest income as compared to the nine months ended September 30, 2001. The sales decrease was primarily attributable to a larger backlog of orders at the beginning of the prior fiscal year and a lower volume of orders received during the first nine months of 2002, primarily associated with the current economic slowdown. SI/BAKER increased product development costs aimed at enhancing the Company's product offerings, while selling, general and administrative expenses primarily 19 Item 2. Management's Discussion and Analysis of Financial Condition and - ------ ---------------------------------------------------------------- Results of Operations --------------------- Results of Operations - --------------------- (a) Nine Months Ended September 30, 2002 Versus Nine Months Ended September 30, --------------------------------------------------------------------------- 2001 ---- Equity in Income of Joint Ventures (Continued) - ---------------------------------- rose due to the addition of resources aimed at expanding the customer base. The unfavorable variance in interest income was primarily attributable to a reduction in the level of funds and interest rates pertaining to short-term investments. Partially offsetting the aforementioned unfavorable variances was a reduction of $146,000 in revenue-based royalty costs due to the parent companies. The Company divested of its investment in the SI-Egemin joint venture at the end of calendar year 2001. The favorable variance of $64,000 for the nine months ended September 30, 2002 in the equity in income of the SI-Egemin joint venture was attributable to the prior fiscal year containing operating expenses of the joint venture. Other Income, Net - ----------------- The favorable variance of $245,000 in other income, net for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 was primarily attributable to $300,000 of short-term licensing income received during the first half of 2002 relating to certain real property of the Company's Easton, Pennsylvania facility. Also contributing to the favorable variance in other income, net for the nine months ended September 30, 2002 was a gain on the sale of excess fixed assets associated with the Company's Easton, Pennsylvania facility during the first quarter of 2002 of approximately $100,000. Partially offsetting the favorable variance in other income, net was 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 - ------------------ The Company recognized income tax expense of $41,000 during the nine months ended September 30, 2002, compared to the recognition of an income tax benefit of $155,000 in the comparable prior year period. The income tax benefit recognized for the nine months ended September 30, 2001 represented the carryback of losses experienced during the nine months of 2001 against prior year income. Income tax expense for the first nine months of 2002 was generally recorded at statutory federal and state tax rates. Backlog of Orders - ----------------- The total backlog of orders at September 30, 2002 was approximately $9,845,000. During the nine months ended September 30, 2002, the Company received orders totaling approximately $26,174,000. (b) Three Months Ended September 30, 2002 Versus Three Months Ended September ------------------------------------------------------------------------- 30, 2001 -------- With the exception of the following Statement of Operations captions, changes in the third quarter of calendar year 2002 compared to the prior year were consistent with those previously noted above for the nine month period. The Company's net loss for the three months ended September 30, 2002 was $402,000 compared to net earnings of $469,000 for the three months ended September 30, 2001. Contributing to the net loss for the three months ended September 30, 2002 was a decrease in sales of $3,786,000 due to the current economic slowdown, and severance costs of $171,000 due to a reduction in office associates. 20 Item 2. Management's Discussion and Analysis of Financial Condition and - ------ ---------------------------------------------------------------- Results of Operations --------------------- Results of Operations - --------------------- (b) Three Months Ended September 30, 2002 Versus Three Months Ended September ------------------------------------------------------------------------- 30, 2001 (Continued) -------- Net Sales and Gross Profit on Sales - ----------------------------------- Net sales of $9,010,000 for the three months ended September 30, 2002 decreased 29.6% compared to net sales of $12,796,000 for the three months ended September 30, 2001. The sales decrease of $3,786,000 was primarily attributable to a lower volume of orders associated with the current economic slowdown. The net sales decrease was comprised of a decrease in SI Systems branded sales of approximately $620,000 and a decrease in Ermanco branded sales of approximately $3,166,000 for the three months ended September 30, 2002 when compared to the three months ended September 30, 2001. The decline in SI Systems branded sales was primarily due to the prior year comparable period containing a greater amount of aftermarket sales related to Cartrac(R) products. The decline in Ermanco branded sales was primarily due to the prior year comparable period containing a greater amount of sales to distributors and companies in the technology sector. Gross profit, as a percentage of sales, was 21.0% for the three months ended September 30, 2002 compared to 25.8% for the three months ended September 30, 2001. Gross profit, as a percentage of sales, for the three months ended September 30, 2002 was unfavorably impacted by approximately 2% due to the underabsorption of overhead costs caused by a decline in sales volume. Gross profit, as a percentage of sales, for the three months ended September 30, 2001 was favorably impacted by approximately 2.0% as a result of the reversal of previously established contract accruals due to changes in cost estimates. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses of $2,251,000 were higher by $38,000 for the three months ended September 30, 2002 than in the three months ended September 30, 2001. The increase was primarily attributable to $171,000 of expenses pertaining to a reduction of office associates during the third quarter of 2002, partially offset by a reduction in compensation expense of approximately $130,000 based on profit performance. Other Income, Net - ----------------- The unfavorable variance of $77,000 in other income, net for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001 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 - ------------------ The Company recognized an income tax benefit of $267,000 during the three months ended September 30, 2002 compared to the recognition of income tax expense of $366,000 during the three months ended September 30, 2001. The income tax benefit recognized for the three months ended September 30, 2002 represented the carryback of losses experienced during the three months ended September 30, 2002 against prior period income. Income tax expense for the three months ended September 30, 2001 was generally recorded at statutory federal and state tax rates. 21 Item 2. Management's Discussion and Analysis of Financial Condition and - ------ ---------------------------------------------------------------- Results of Operations --------------------- 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": (1) as a result of risks and uncertainties identified in connection with those forward-looking statements, including those factors identified herein, and in the Company's other publicly filed reports; (2) as a result of risks associated with the Company's restructuring, including the failure to achieve anticipated operating savings, and the possibility that the restructuring charges will be greater than anticipated; (3) as a result of factors over which the Company has no control, including the strength of domestic and foreign economies, sales growth, competition, and certain costs increases; or (4) if the factors on which the Company's conclusions are based do not conform to the Company's expectations. Quantitative and Qualitative Disclosures - ---------------------------------------- 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. On September 30, 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. 22 Item 4. Controls and Procedures - ------- ----------------------- (a) Evaluation Of Disclosure Controls And Procedures ------------------------------------------------ The Company's Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a date within 90 days of filing date of the quarterly report (the "Evaluation Date"), have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this quarterly report was being prepared. (b) Changes in Internal Controls ---------------------------- There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such internal controls and procedures requiring corrective actions. 23 PART II -- OTHER INFORMATION ---------------------------- Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits: 10.23 Amended and Restated Executive Employment Agreement with Leon C. Kirschner dated as of August 28, 2002 (filed herewith). 10.24 Sixth Amendment to Line of Credit Note and Loan Agreement dated August 9, 2002 (filed herewith). 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by William R. Johnson, President and CEO, and Ronald J. Semanick, Chief Financial Officer and Vice President - Finance and Treasurer (filed herewith). (b) No reports on Form 8-K were filed during the quarter ended September 30, 2002. 24 Paragon Technologies, Inc. and Subsidiary SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARAGON TECHNOLOGIES, INC. /S/ William R. Johnson ----------------------------------------------- William R. Johnson President & CEO /S/ Ronald J. Semanick ----------------------------------------------- Ronald J. Semanick Chief Financial Officer Dated: November 14, 2002 ------------------------ 25 CERTIFICATION I, William R. Johnson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Paragon Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 --------------------- /s/ William R. Johnson - ---------------------------- William R. Johnson President and CEO 26 CERTIFICATION I, Ronald J. Semanick, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Paragon Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ------------------------------ /s/ Ronald J. Semanick - ------------------------------------- Ronald J. Semanick Chief Financial Officer, and Vice President - Finance and Treasurer 27 EX-10 3 ex10-23.txt EX-10.23 Exhibit 10.23 ------------- PARAGON TECHNOLOGIES, INC. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT is made as of the 28th day of August, 2002 by and between Leon C. Kirschner, a resident of Grand Rapids, Michigan (the "Employee"), and Paragon Technologies, Inc. (formerly SI Handling Systems, Inc.), a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (the "Company"). WHEREAS, the Company is engaged in the business of designing, selling, installing and servicing technologies and integrated automated material handling systems for industrial, warehousing and distribution customers (the "Business"). WHEREAS, the Company and the Employee are parties to that certain Executive Employment Agreement made as of the 7th day of August, 1999 (the "Original Agreement). WHEREAS, the Company desires to continue to employ the Employee and the Employee desires to continue to be employed by the Company, upon the amended and restated terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, and intending to be legally bound, the parties, subject to the terms and conditions set forth herein, agree as follows: 1. Employment and Term. The Company hereby employs the Employee and ------------------- the Employee hereby accepts employment with the Company, as an at will employee, for a period commencing on October 1, 2002 (the "Commencement Date") and continuing until the termination of this Agreement in accordance with the provisions of Section 7 hereof (the "Term"), to hold the office of President of Ermanco during the Term from and after the Commencement Date (such office, referred to herein as the "Position"). 2. Duties. During the Term, the Employee shall serve the Company ------ faithfully and to the best of his ability and shall devote his full time, attention, skill and efforts to the performance of the duties required by or appropriate for the Position. Subject to the oversight of the President and Chief Executive Officer, the Employee shall have such duties and responsibilities as may be assigned to him from time to time by the President and Chief Executive Officer. The Employee shall report to the President and Chief Executive Officer. The Employee shall perform his duties and responsibilities hereunder at the Company's facility located in Spring Lake, Michigan or at such other location in Western Michigan as may be established from time to time by the President and Chief Executive Officer. 3. Compensation. The Company shall pay the Employee, and the ------------ Employee hereby agrees to accept, as compensation for all services to be rendered to the Company and for the Employee's intellectual property covenants and assignments and covenant not to compete, as provided in Sections 5 and 6 hereof, the compensation set forth in this Section 3. 3.1 Salary. Beginning on the Commencement Date, the Company ------ shall pay the Employee a base salary at the weekly rate of Five Thousand Two Hundred Thirty-Seven Dollars ($5,237) (as the same may hereafter be adjusted, the "Salary") during the term of this Agreement. The Salary shall be inclusive of all applicable income, social security and other taxes and charges that are required by law to be withheld by the Company (collectively, "Taxes") and shall be paid and withheld in accordance with the Company's normal payroll practices for its executive employees from time to time in effect. 3.2 Bonus. The Employee shall be eligible to participate in ----- the Company's Officer Incentive Plan in effect for a particular fiscal year which is based on the achievement of earnings targets and other financial targets as defined for such fiscal year. 3.3 Equity Participation. -------------------- (a) Incentive Stock Options. The Employee may be ----------------------- granted "Incentive Stock Options" (as such term is defined in the Company's 1997 Equity Compensation Plan, as amended from time to time (the "Equity Compensation Plan")) to purchase shares of Common Stock under and subject to the terms of the Equity Compensation Plan, which shall vest at a rate of twenty five percent (25%) per year on each of the first four (4) anniversaries of the Grant Date; provided that as an express condition of receipt of such Incentive Stock Options, the Employee shall enter into and agree to be bound by the terms of the standard "Grant Instrument" (as such term is defined in the Equity Compensation Plan) applicable to the issuance of Incentive Stock Options under the Equity Compensation Plan. (b) Vesting. In the event of a "Change of Control" ------- (as such term is defined in the Equity Compensation Plan), all rights to acquire Common Stock pursuant to the Grant of Incentive Stock Options described in Section 3.3(a) hereof shall fully accelerate and be immediately vested and exercisable; provided that, in the event such acceleration and vesting would make the Change of Control ineligible for pooling of interests accounting treatment, in lieu of such acceleration and vesting, the Company shall make a payment to the Employee in an amount equal to the benefit that would have inured to the Employee if such acceleration and vesting had occurred so long as such payment would not make the Change of Control ineligible for pooling of interests accounting treatment or otherwise impose adverse tax consequences on the Company. In no event shall any right to acquire Common Stock pursuant to the Grant Incentive Stock Options described in Section 3.3(a) hereof vest upon or following the termination of the Employee's employment with the Company, except as provided in the Equity Compensation Plan (as amended from time to time, including, without limitation, with respect to the vesting of restricted stock or incentive stock options in event of the death or disability of an employee of the Company) or the applicable Grant Instrument. 3.4 Annual Compensation Review. The President and Chief -------------------------- Executive Officer shall review the Employee's compensation annually which review shall include, without limitation, an evaluation of the Employee's contribution to the Company's annual financial performance, including pre-tax earnings, effective management of the Company's operations, and backlog adequacy. 3.5 Fringe Benefits. During the Term, the Employee shall be --------------- entitled to participate in standard management benefits programs of the Company, including, without limitation, the Company's standard program with respect to automobile benefits, as amended from time to time (the "Benefits"). Employee shall be entitled to four (4) weeks paid vacation per year. 3.6 Reimbursement of Expenses. During the course of ------------------------- employment, the Employee shall be reimbursed for items of travel, food and lodging and miscellaneous expenses reasonably incurred by him on behalf of the Company, provided that such expenses are incurred, documented and submitted to the Company, all in accordance with the reimbursement policies of the Company as in effect from time to time. 4. Confidentiality. The Employee recognizes and acknowledges that --------------- the Proprietary Information (as hereinafter defined) is a valuable, special and unique asset of the Company. As a result, both during the Term and thereafter, the Employee shall not, without the prior written consent 2 of the Company, for any reason either directly or indirectly divulge to any third-party or use for his own benefit, or for any purpose other than the exclusive benefit of the Company, any confidential, proprietary, business and technical information or trade secrets of the Company or of any subsidiary or affiliate of the Company (the "Proprietary Information") revealed, obtained or developed in the course of his employment with the Company. Proprietary Information shall include, but shall not be limited to the intangible personal property described in Section 5(b) hereof and, in addition, technical information, including research design, results, techniques and processes; apparatus and equipment design; and computer software; technical management information, including project proposals, research plans, status reports, performance objectives and criteria, and analyses of areas for business development; and business information, including project, financial, accounting and personnel information, business strategies, plans and forecasts, customer lists, customer information and sales and marketing plans, efforts, information and data. In addition, "Proprietary Information" shall include all information and materials received by the Company or the Employee from a third party subject to an obligation of confidentiality and/or non-disclosure. Nothing contained herein shall restrict the Employee's ability to make such disclosures during the course of the employment as may be necessary or appropriate to the effective and efficient discharge of the duties required by or appropriate for the Position or as such disclosures may be required by law or by a governmental body or court. Furthermore, nothing contained herein shall restrict the Employee from divulging or using for his own benefit or for any other purpose any Proprietary Information that is readily available to the general public so long as such information did not become available to the general public as a direct or indirect result of the Employee's breach of this Section 4. Failure by the Company to mark any of the Proprietary Information as confidential or proprietary shall not affect its status as Proprietary Information under the terms of this Agreement. 5. Property. -------- (a) All right, title and interest in and to Proprietary Information shall be and remain the sole and exclusive property of the Company. During the Term, the Employee shall not remove from the Company's offices or premises any documents, records, notebooks, files, correspondence, reports, memoranda or similar materials of or containing Proprietary Information, or other materials or property of any kind belonging to the Company, unless necessary or appropriate in accordance with the duties and responsibilities required by or appropriate for the Position and, in the event that such materials or property are removed, all of the foregoing shall be returned to their proper files or places of safekeeping as promptly as possible after the removal shall serve its specific purpose. The Employee shall not make, retain, remove and/or distribute any copies of any of the foregoing for any reason whatsoever, except as may be necessary in the discharge of the assigned duties and shall not divulge to any third person the nature of and/or contents of any of the foregoing or of any other oral or written information to which he may have access or with which for any reason he may become familiar, except as disclosure shall be necessary in the performance of the duties; and upon the termination of his employment with the Company, he shall return to the Company all originals and copies of the foregoing then in his possession or under his control, whether prepared by the Employee or by others. (b) (i) The Employee acknowledges that all right, title and interest in and to any and all writings, documents, inventions, discoveries, ideas, developments, information, computer programs or instructions (whether in source code, object code, or any other form), algorithms, formulae, plans, memoranda, tests, research, designs, innovations, systems, analyses, specifications, models, data, diagrams, flow charts, and/or techniques (whether patentable or non-patentable or whether reduced to written or electronic form or otherwise) relating to the Business or any other business in which the Company or any of the Company's subsidiaries or affiliates is engaged during the Term that the Employee creates, makes, conceives, discovers or develops, either solely or jointly with any other person, at any time during the Term, during working hours or using any property or facility of the Company, and whether upon the request or suggestion of the Company or otherwise, (collectively, "Intellectual Work Product") shall be the sole and exclusive property of the Company. The Employee 3 shall promptly disclose to the Company all Intellectual Work Product, and the Employee shall have no claim for additional compensation for the Intellectual Work Product. (ii) The Employee acknowledges that all the Intellectual Work Product that is copyrightable shall be considered a work made for hire under United States Copyright Law. To the extent that any copyrightable Intellectual Work Product may not be considered a work made for hire under the applicable provisions of the United States Copyright Law, or to the extent that, notwithstanding the foregoing provisions, the Employee may retain an interest in any Intellectual Work Product, the Employee hereby irrevocably assigns and transfers to the Company any and all right, title, or interest that the Employee may have in the Intellectual Work Product under copyright, patent, trade secret and trademark law, in perpetuity or for the longest period otherwise permitted by law, without the necessity of further consideration. The Company shall be entitled to obtain and hold in its own name all copyrights, patents, trade secrets, and trademarks with respect thereto. (iii) The Employee shall reveal promptly all information relating to any Intellectual Work Product to the Board of Directors of the Company, cooperate with the Company and execute such documents as may be necessary or appropriate (A) in the event that the Company desires to seek copyright, patent or trademark protection, or other analogous protection, thereafter relating to the Intellectual Work Product, and when such protection is obtained, renew and restore the same, or (B) to defend any opposition proceedings in respect of obtaining and maintaining such copyright, patent or trademark protection, or other analogous protection. 6. Covenant not to Compete. The Employee shall not, during the ----------------------- Term (except in the performance of the Employee's duties hereunder) and for a period of two (2) years immediately following the termination of the Employee's employment hereunder do any of the following directly or indirectly without the prior written consent of the Board of Directors in its sole discretion: (a) engage or participate, directly or indirectly, in any business activity substantially competitive with the Business, as engaged in by the Company at the time enforcement of this provision is sought; (b) become interested (as owner, stockholder, lender, partner, co-venturer, director, officer, employee, agent, consultant or otherwise) in any person, firm, corporation, association or other entity engaged in any business that is competitive with the Business, or become interested in (as owner, stockholder, lender, partner, co-venturer, director, officer, employee, agent, consultant or otherwise) any portion of the business of any person, firm, corporation, association or other entity where such portion of such business is competitive with the Business, as engaged in by the Company at the time enforcement of this provision is sought, (notwithstanding the foregoing, the Employee may hold not more than five percent (5%) of the outstanding securities of any class of any publicly-traded securities of a company that is engaged in the Business); (c) engage, either directly or indirectly, in any business activity substantially competitive with the Business, as engaged in by the Company at the time enforcement of this provision is sought, with any (A) customer with whom the Company shall have dealt at any time during the one (1) year period immediately preceding the termination of the Employee's employment hereunder, or (B) corporate partner, collaborator, independent contractor or supplier with whom the Company shall have dealt at any time during the one (1) year period immediately preceding the termination of the Employee's employment hereunder; (d) influence or attempt to influence any then current or prospective supplier, customer, corporate partner, collaborator, or independent contractor of the Company to terminate or modify any written or oral agreement or course of dealing with the Company; or 4 (e) make any agreement or contract with any person with the purpose of influencing or attempting to influence any person either (i) to terminate or modify an employment, consulting, agency, distributorship or other arrangement with the Company, or (ii) to employ or retain, or arrange to have any other person or entity employ or retain, any person who has been employed or retained by the Company as an employee, consultant, agent or distributor of the Company at any time during the two (2) year period immediately preceding the termination of the Employee's employment hereunder. The Employee acknowledges that he has carefully read and considered the provisions of this Section 6. The Employee acknowledges that the foregoing restrictions may limit his ability to earn a livelihood in a business similar to the Business, but he nevertheless believes that he has received and will receive sufficient consideration and other benefits in connection with the payment by the Company of the compensation set forth in Sections 3 and 7 hereof to justify such restrictions, which restrictions the Employee does not believe would prevent him from earning a living in businesses that are not competitive with the Business and without otherwise violating the restrictions set forth herein. 7. Termination. Upon termination of the Employee's employment ----------- hereunder, the Employee shall be entitled only to such compensation and benefits as described in this Section 7. 7.1 Termination by the Company Without Cause. ---------------------------------------- (a) Notwithstanding anything to the contrary set forth herein, the Company shall have the right to terminate the Employee's employment hereunder at any time, for any reason or for no reason, without cause, effective upon the date designated by the Company upon written notice to the Employee. (b) In the event of a termination of the Employee's employment hereunder (A) pursuant to Section 7.1(a) hereof prior to the Expiration Date or (B) pursuant to a Constructive Termination (as defined in Section 7.4(b) hereof), the Employee shall be entitled to receive all accrued but unpaid (as of the effective date of such termination) Salary and the severance payments in the manner set forth in Section 7.1(c) hereof; provided that the Employee has complied with all of his obligations under this Agreement and continues to comply with all of his surviving obligations hereunder listed in Section 9 hereof. Except as specifically set forth in this Section 7.1, all Salary and Benefits shall cease at the time of such termination, except as required under applicable law and the Company shall have no further liability or obligation hereunder by reason of or subsequent to such termination. (c) In the event of the termination of the Employee's employment hereunder (A) pursuant to Section 7.1(a) hereof prior to the Expiration Date, or (B) pursuant to a Constructive Termination (as defined in Section 7.4(b) hereof), the Employee shall be entitled, as severance pay, for a period of one year following effective date of termination, to continue to receive, his Salary and (to the extent permitted by the terms of the applicable insurance policy then in effect) health insurance coverage, each as in effect as of the effective date of termination, provided that if the continuation of such health insurance coverage is not permitted by the terms of such policy, the Company shall reimburse the Employee in an amount equal to the cost to the Employee of purchasing such health insurance coverage under COBRA (29 U.S.C. ss.ss. 1161-1169) for a period of one year following effective date of termination. 7.2 Termination for Cause. ---------------------- (a) The Company shall have the right to terminate the Employee's employment hereunder at any time for "cause" upon written notice to the Employee. For purposes of this Agreement, "cause" shall mean: 5 (i) any material breach by the Employee of any material obligations under this Agreement, which breach has not been cured within thirty (30) days of written notice by the Company to the Employee; (ii) conduct of the Employee involving disloyalty to the Company or willful misconduct with respect to the Company, including without limitation fraud, embezzlement, theft or proven dishonesty in the course of the employment, which conduct or willful misconduct, if capable of cure, has not been cured within thirty (30) days of written notice by the Company to the Employee; or (iii) conviction of a felony or other criminal act, provided that in the case of such other criminal act the Employee is sentenced to a term of more than one (1) year in prison. (b) In the event of a termination of the Employee's employment hereunder pursuant to Section 7.2(a) hereof, the Employee shall be entitled to receive all accrued but unpaid (as of the effective date of such termination) Salary and such other benefits as are normally provided by the Company upon the death of an employee; provided that the Employee has complied with all of his obligations under this Agreement. All Salary and Benefits shall cease at the time of such termination, subject to the requirements of applicable law, and, except as specifically set forth in this Section 7.2, the Company shall have no further liability or obligation hereunder by reason of or subsequent to such termination. 7.3 Termination by the Employee. --------------------------- (a) Voluntary Termination. Notwithstanding anything --------------------- to the contrary set forth herein, the Employee shall have the right to terminate the Employee's employment hereunder at any time, for any reason or for no reason by giving the Company written notice of such termination no less than 180 days prior to the effective date of such termination as set forth in such written notice (the "Voluntary Termination Date"). In the event of a voluntary termination by the Employee of his employment hereunder, the Employee will be entitled to receive all accrued and unpaid (through the Voluntary Termination Date) Salary; provided that the Employee has complied with all of his obligations under this Agreement; and further provided that, upon receipt of such written notice of termination from the Employee, the Company shall have the right to accelerate the effective date of the Employee's termination to any date prior to Voluntary Termination Date, in which event the Employee shall continue to be entitled to receive his Salary and Benefits for the period through and including the Voluntary Termination Date. Except as specifically set forth in this Section 7.3(a) or as provided by applicable law, the Company shall have no further liability or obligation to the Employee for compensation or benefits hereunder by reason of or subsequent to such termination. (b) Termination by Death. In the event that the -------------------- Employee dies during the Term, the Employee's employment hereunder shall be terminated thereby and the Company shall pay to the Employee's executors, legal representatives or administrators an amount equal to all accrued and unpaid (as of the date of death) Salary and any such other benefits as are normally provided by the Company upon the death of an employee; provided that the Employee has complied with all of his obligations under this Agreement. Except as specifically set forth in this Section 7.3(b) or as provided by applicable law, the Company shall have no further liability or obligation hereunder to the Employee's executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through him by reason of or subsequent to the Employee's death. 7.4 Termination upon a Change of Control. ------------------------------------ (a) During the one (1) year period following a Change of Control, in the event of the termination of the Employee's employment hereunder pursuant to a Constructive 6 Termination (as defined in Section 7.4(b) hereof), in lieu of the severance pay described in Section 7.1(c) hereof, the Employee shall be entitled, as severance pay, to (A) continue to receive his Salary for a period of eighteen (18) months, subject to all applicable Taxes, calculated on the basis of the Salary in effect on the date of termination and paid in the same manner as Salary was then paid hereunder and (B) receive a lump sum payment in an amount equal to one and one-half times the average of the Bonus paid to the Employee for the two (2) fiscal years preceding the year in which the termination becomes effective, subject to all applicable Taxes, which lump sum amount shall be payable to the Employee within thirty (30) days following the date of termination. (b) For purposes of this Section 7.4, "Constructive Termination" shall mean the termination of the Employee's employment hereunder by the Employee within one year of a Change of Control as a result of any of the following: (i) the Employee is demoted; (ii) the Employee's duties hereunder are materially altered; (iii) the Salary is reduced; or (iv) the Employee's primary work location is changed to a location other than a location in Western Michigan. 8. Representations, Warranties and Covenants of the Employee. --------------------------------------------------------- (a) The Employee represents and warrants to the Company that: (i) to the best of the Employee's knowledge, there are no restrictions, agreements or understandings whatsoever to which the Employee is a party which would prevent or make unlawful the Employee's execution of this Agreement or the Employee's employment hereunder, or which is or would be inconsistent or in conflict with this Agreement or the Employee's employment hereunder, or would prevent, limit or impair in any way the performance by the Employee of the obligations hereunder; and (ii) the Employee has disclosed to the Company all restraints, confidentiality commitments or other employment restrictions that he has with any other employer, person or entity. (b) The Employee covenants that in connection with his provision of services to the Company, he shall not breach any obligation (legal, statutory, contractual or otherwise) to any former employer or other person, including, but not limited to obligations relating to confidentiality and proprietary rights. 9. Survival of Provisions. The provisions of this Agreement set ---------------------- forth in Sections 3.6, 4, 5, 6, 7, 8, 18 and 19 hereof shall survive the termination of the Employee's employment hereunder. 10. Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of and be binding upon the Company and the Employee and their respective successors, executors, administrators, heirs and/or assigns; provided that the Employee shall not make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the Company. 11. Notice. Any notice hereunder by either party shall be given by ------ personal delivery or by sending such notice by certified mail, return-receipt requested, or telecopied, addressed or telecopied, as the case may be, to the other party at its address set forth below or at such other address designated by notice in the manner provided in this section. Such notice shall be deemed to have been received upon the date of actual delivery if personally delivered or, in the case of mailing, two (2) days after deposit with the U.S. mail, or, in the case of facsimile transmission, when confirmed by the facsimile machine report. (a) if to the Company, to: 7 Paragon Technologies, Inc. 600 Kuebler Road P.O. Box 70 Easton, Pennsylvania 18040-9295 Attention: Chairman of the Board Telecopier: (610) 253-0254 with a copy to: Jeffrey P. Libson, Esquire Pepper Hamilton LLP 1235 Westlakes Drive - Suite 400 Berwyn, Pennsylvania 19312-2401 Telecopier: (610) 640-7835 (b) if to the Employee, to: Leon C. Kirschner 4855 N. Quail Crest Dr. Grand Rapids, MI 49546 Telecopier: 616-954-9663 with a copy to: ---------------------------------------- ---------------------------------------- ---------------------------------------- Telecopier: ----------------------------- 12. Entire Agreement; Amendments. This Agreement contains the entire ---------------------------- agreement and understanding of the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature between the parties hereto relating to the employment of the Employee with the Company. This Agreement may not be changed or modified, except by an agreement in writing signed by each of the parties hereto. 13. Waiver. The waiver of the breach of any term or provision of ------ this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. 14. Governing Law. This Agreement shall be construed and enforced ------------- in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the principles of conflicts of laws of any jurisdiction. 15. Invalidity. If any provision of this Agreement shall be ---------- determined to be void, invalid, unenforceable or illegal for any reason, the validity and enforceability of all of the remaining provisions hereof shall not be affected thereby. If any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such amendment to apply only to the operation of such provision in the particular jurisdiction in which such adjudication is made; provided that, if any provision contained in this Agreement shall be adjudicated to be invalid or unenforceable because such provision is held to be excessively broad as to duration, geographic scope, activity or subject, such provision shall be deemed amended by limiting and reducing it so as to be valid and enforceable to the maximum extent compatible with the applicable laws of such jurisdiction, such 8 amendment only to apply with respect to the operation of such provision in the applicable jurisdiction in which the adjudication is made. 16. Section Headings. The section headings in this Agreement are for ---------------- convenience only; they form no part of this Agreement and shall not affect its interpretation. 17. Number of Days. In computing the number of days for purposes of -------------- this Agreement, all days shall be counted, including Saturdays, Sundays and legal holidays; provided that, if the final day of any time period falls on a Saturday, Sunday or day which is a legal holiday in the Commonwealth of Pennsylvania, then such final day shall be deemed to be the next day which is not a Saturday, Sunday or legal holiday. 18. Specific Enforcement; Consent to Suit. The Employee acknowledges ------------------------------------- that the restrictions contained in Sections 4, 5 and 6 hereof are reasonable and necessary to protect the legitimate interests of the Company and its affiliates and that the Company would not have entered into this Agreement in the absence of such restrictions. The Employee also acknowledges that any breach by him of Sections 4, 5 or 6 hereof will cause continuing and irreparable injury to the Company for which monetary damages would not be an adequate remedy. The Employee shall not, in any action or proceeding to enforce any of the provisions of Section 4, 5 or 6 hereof, assert the claim or defense that an adequate remedy at law exists. In the event of such breach by the Employee, the Company shall have the right to enforce the provisions of Section 4, 5 or 6 hereof by seeking injunctive or other relief in any court, and this Agreement shall not in any way limit remedies of law or in equity otherwise available to the Company. Any legal proceeding to enforce the provisions of Section 4, 5 or 6 hereof shall be instituted in the Court of Common Pleas of Northampton County, Pennsylvania, or if such court does not have jurisdiction or will not accept jurisdiction, in any state or federal court of general jurisdiction in the Commonwealth of Pennsylvania, and, for such purpose, the Employee hereby consents to the personal and exclusive jurisdiction of such court and hereby waives any objection that the Employee may have to the laying of venue of any such proceeding and any claim or defense of inconvenient forum. Notwithstanding the foregoing to the contrary, the Company shall have the right to institute legal proceedings to enforce the provisions of Section 4, 5 or 6 hereof in any court with jurisdiction over the Employee. In any legal proceeding seeking to enforce or interpret the terms of Section 4, 5 or 6 hereof, each party shall be responsible for its own costs, expenses and disbursements, including attorneys' fees. 19. Arbitration. Subject to the last sentence of this Section 19, ----------- if any dispute arises over the terms of this Agreement between the parties to this Agreement, either the Employee or the Company shall submit the dispute to binding arbitration within thirty (30) days after such dispute arises, to be governed by the evidentiary and procedural rules of the American Arbitration Association (Commercial Arbitration). The Employee and the Company shall mutually select one (1) arbitrator within ten (10) days after a dispute is submitted to arbitration. In the event that the parties do not agree on the identity of the arbitrator within such period, the arbitrator shall be selected by the American Arbitration Association. The arbitrator shall hold a hearing on the dispute in Northampton County, Pennsylvania within thirty (30) days after having been selected and shall issue a written opinion within fifteen (15) days after the hearing. The arbitrator shall also decide on the allocation of the costs of the arbitration to the respective parties, but the Employee and the Company shall each be responsible for paying the fees of their own legal counsel, if legal counsel is obtained. Either the Employee or the Company, or both parties, may file the decision of the arbitrator as a final, binding and unappealable judgment in a court of appropriate jurisdiction. Notwithstanding the foregoing provisions of this Section 19 to the contrary, matters in which an equitable remedy or injunctive relief is sought by a party, including but not limited to the remedies referred to in Section 18 hereof, shall not be required to be submitted to arbitration, if the party seeking such remedy or relief objects thereto, but shall instead be subject to the provisions of Section 18 hereof. 9 20. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. [one signature page follows] 10 IN WITNESS WHEREOF, the parties have caused this Executive Employment Agreement to be executed the day and year first written above. PARAGON TECHNOLOGIES, INC. By: /s/ William R. Johnson ------------------------------------------------- William R. Johnson President and Chief Executive Officer /s/ Leon C. Kirschner ------------------------------------------------- Leon C. Kirschner EX-10 4 ex10-24.txt EX-10.24 Exhibit 10.24 ------------- SIXTH AMENDMENT TO LINE OF CREDIT NOTE AND LOAN AGREEMENT (LINE OF CREDIT) Paragon Technologies, Inc., formerly, SI Handling Systems, Inc. and Ermanco, Inc. 600 Kuebler Road Easton, Pennsylvania 18040 (Hereinafter referred to as "Borrower") Wachovia Bank, National Association 702 Hamilton Mall Allentown, Pennsylvania 18101 (Hereinafter referred to as "Bank") THIS SIXTH AMENDMENT TO LINE OF CREDIT NOTE AND LOAN AGREEMENT is entered into as of August 9, 2002 by and between Bank and Borrower. RECITALS Bank is the holder of a Line of Credit executed and delivered by Borrower, dated September 30, 1999, in the original principal amount of $6,000,000.00 (as amended, the Note); and certain other loan documents, including without limitation, a Loan Agreement, dated September 30, 1999 (as amended, the Loan Agreement"); Borrower and Bank have agreed to modify the terms of the Note and the Loan Agreement. In consideration of Bank's continued extension of credit and the agreements contained herein, the parties agree as follows: AGREEMENT ACKNOWLEDGMENT OF BALANCE. Borrower acknowledges that the most recent Commercial Loan Invoice sent to Borrower with respect to the Obligations under the Note is correct. MODIFICATIONS. 1. The Note and the Loan Agreement are hereby modified by decreasing the principal amount thereof from $6,000,000.00 to $2,000,000.00. 2. The section entitled REPAYMENT TERMS of the Note is hereby amended by extending the maturity date from September 30, 2002 to June 30, 2003. 3. The Loan Agreement is hereby modified by amending the provision regarding Availability as follows: Availability. Notwithstanding anything to the contrary contained herein, the aggregate outstanding principal balance of Advances (as defined in the Note) (the "Total Outstandings") at any one time shall not exceed the lesser of $2,000,000.00 or the Borrowing Base (as hereinafter defined). In the event that the Total Outstandings at any time exceeds the Borrowing Base, Borrower shall pay to Bank the amount of such excess immediately upon receipt by Borrower of written notice that the Borrowing Base has been exceeded. 1 4. The Loan Agreement is hereby modified by amending the provision regarding Funds Flow Coverage Ratio as follows: Funds Flow Coverage Ratio. Borrower shall, for the quarters ending September 30, 2002, December 31, 2002, March 31, 2003 and June 30, 2003, maintain a Funds Flow Coverage Ratio of not less than 1.00 to 1.00; and for the quarter ending September 30, 2003 and at all times thereafter, maintain a Funds Flow Coverage Ratio of not less than 1.25 to 1.00, to be measured quarterly on a rolling four quarters basis at each quarter's end. Funds Flow Coverage Ratio shall mean the sum of earnings (excluding earnings attributed to SI/Baker and SI-Egemin) before interest expense, taxes, depreciation and amortization, plus dividends distributed by SI/Baker and SI-Egemin divided by the sum of all current maturities of long term debt and capital lease obligations plus interest expense. 5. The Loan Agreement is hereby modified by adding the following provision as an additional Financial Covenant: Minimum Liquidity. Borrower shall, at all times, maintain not less than $5,000,000.00 in cash, measured at quarters end. 6. Attached hereto as Exhibit "A" is a revised Compliance Certificate which is hereby substituted for the prior Compliance Certificate in its place and stead. WAIVER. Borrower has failed to comply with the required Funds Flow Coverage Ratio for the quarter ending June 30, 2002. Borrower has requested Bank's waiver, and Bank does hereby waive this failure to meet the Funds Flow Coverage Ratio for the quarter ending June 30, 2002. This is a one-time waiver only. After the quarter ending June 30, 2002, the provision regarding Funds Flow Coverage Ratio shall remain in full force and effect. WAIVER FEE. Simultaneously with the execution of this Agreement by Borrower, Borrower shall deliver to Bank a modification fee in the amount of $10,000.00. ACKNOWLEDGMENTS AND REPRESENTATIONS. Borrower acknowledges and represents that the Note and other Loan Documents, as amended hereby, are in full force and effect without any defense, counterclaim, right or claim of set-off; that, after giving effect to this Agreement, no default or event that with the passage of time or giving of notice would constitute a default under the Loan Documents has occurred, all representations and warranties contained in the Loan Documents are true and correct as of this date, all necessary action to authorize the execution and delivery of this Agreement has been taken; and this Agreement is a modification of an existing obligation and is not a novation. MISCELLANEOUS. This Agreement shall be construed in accordance with and governed by the laws of the applicable state as originally provided in the Loan Documents, without reference to that state's conflicts of law principles. This Agreement and the other Loan Documents constitute the sole agreement of the parties with respect to the subject matter thereof and supersede all oral negotiations and prior writings with respect to the subject matter thereof. No amendment of this Agreement, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. The illegality, unenforceability or inconsistency of any provision of this Agreement shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this Agreement or the other Loan Documents. This Agreement and the other Loan Documents are intended to be consistent. However, in the event of any inconsistencies among this Agreement and any of the Loan Documents, the terms of this Agreement, and then the Note, shall control. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. Terms used in this Agreement which are capitalized and not otherwise defined herein shall have the meanings ascribed to such terms in the Note. 2 DEFINITIONS. The term "Loan Documents" used in this Agreement and other Loan Documents refers to all documents, agreements, and instruments executed in connection with any of the Obligations (as defined herein), and may include, without limitation, modification agreements, a commitment letter that survives closing, a loan agreement, any note, guaranty agreements, security agreements, security instruments, financing statements, mortgage instruments, letters of credit and any renewals or modifications, whenever any of the foregoing are executed, but does not include swap agreements (as defined in 11 U.S.C. ss. 101). The term "Obligations" used in this Agreement refers to any and all indebtedness and other obligations of every kind and description of the Borrower to the Bank or to any Bank affiliate, whether or not under the Loan Documents, and whether such debts or obligations are primary or secondary, direct or indirect, absolute or contingent, sole, joint or several, secured or unsecured, due or to become due, contractual, including, without limitation, swap agreements (as defined in 11 U.S.C. ss. 101), arising by tort, arising by operation of law, by overdraft or otherwise, or now or hereafter existing, including, without limitation, principal, interest, fees, late fees, expenses, attorneys' fees and costs that have been or may hereafter be contracted or incurred. Borrower reaffirms and restates the following with respect to the Note as modified herein: CONFESSION OF JUDGMENT. THE FOLLOWING PARAGRAPH SETS FORTH A POWER OF AUTHORITY FOR ANY ATTORNEY TO CONFESS JUDGMENT AGAINST BORROWER. IN GRANTING THIS WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST BORROWER, THE BORROWER, FOLLOWING CONSULTATION WITH (OR DECISION NOT TO CONSULT) SEPARATE COUNSEL FOR BORROWER AND WITH KNOWLEDGE OF THE LEGAL EFFECT HEREOF, HEREBY KNOWINGLY, INTENTIONALLY, VOLUNTARILY, INTELLIGENTLY AND UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS THE BORROWER HAS OR MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES OF AMERICA, COMMONWEALTH OF PENNSYLVANIA, OR ELSEWHERE INCLUDING, WITHOUT LIMITATION, A HEARING PRIOR TO GARNISHMENT AND ATTACHMENT OF THE BORROWER'S BANK ACCOUNT AND OTHER ASSETS. BORROWER ACKNOWLEDGES AND UNDERSTANDS THAT BY ENTERING INTO THIS AGREEMENT CONTAINING A CONFESSION OF JUDGMENT CLAUSE THAT BORROWER IS VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY GIVING UP ANY AND ALL RIGHTS, INCLUDING CONSTITUTIONAL RIGHTS, THAT BORROWER HAS OR MAY HAVE TO NOTICE AND A HEARING BEFORE JUDGMENT CAN BE ENTERED AGAINST BORROWER AND BEFORE THE BORROWER'S ASSETS, INCLUDING, WITHOUT LIMITATION, ITS BANK ACCOUNTS, MAY BE GARNISHED, LEVIED, EXECUTED UPON AND/OR ATTACHED. BORROWER UNDERSTANDS THAT ANY SUCH GARNISHMENT, LEVY, EXECUTION AND/OR ATTACHMENT SHALL RENDER THE PROPERTY GARNISHED, LEVIED, EXECUTED UPON OR ATTACHED IMMEDIATELY UNAVAILABLE TO BORROWER. IT IS SPECIFICALLY ACKNOWLEDGED BY BORROWER THAT THE BANK HAS RELIED ON THIS WARRANT OF ATTORNEY AND THE RIGHTS WAIVED BY BORROWER HEREIN IN RECEIVING THIS AGREEMENT AND AS AN INDUCEMENT TO GRANT FINANCIAL ACCOMMODATIONS TO THE BORROWER. If a Default occurs under the Note or any other Loan Documents, each Borrower hereby jointly and severally authorizes and empowers any attorney of any court of record or the prothonotary or clerk of any county in the Commonwealth of Pennsylvania, or in any jurisdiction where permitted by law or the clerk of any United States District Court, to appear for Borrower in any and all actions which may be brought hereunder and enter and confess judgment against the Borrower or any of them in favor of the Bank for such sums as are due or may become due hereunder or under any other Loan Documents, together with costs of suit and actual collection costs including, without limitation, reasonable attorney's fees equal to 5% of the Obligations then due and owing but in no event less than $5,000.00, with or without declaration, without prior notice, without stay of execution and with release of all procedural errors and the right to issue executions forthwith. To the extent permitted by law, Borrower waives the right of inquisition on any real estate levied on, voluntarily condemns the same, authorizes the prothonotary or clerk to enter upon the writ of execution this voluntary condemnation and agrees that such real estate may be sold on a writ of execution; and also waives any relief from any appraisement, stay or exemption law of any state now in force or hereafter enacted. Borrower further waives the right to any notice and hearing prior to the execution, levy, attachment or other type of enforcement of any judgment obtained hereunder, 3 including, without limitation, the right to be notified and heard prior to the garnishment, levy, execution upon and attachment of Borrower's bank accounts and other property. If a copy of the Agreement verified by affidavit of any officer of the Bank shall have been filed in such action, it shall not be necessary to file the original thereof as a warrant of attorney, any practice or usage to the contrary notwithstanding. The authority herein granted to confess judgment shall not be exhausted by any single exercise thereof, but shall continue and may be exercised from time to time as often as the Bank shall find it necessary and desirable and at all times until full payment of all amounts due hereunder and under any other Loan Documents. The Bank may confess one or more judgments in the same or different jurisdictions for all or any part of the Obligations arising hereunder or under any other Loan Documents to which Borrower is a party, without regard to whether judgment has theretofore been confessed on more than one occasion for the same Obligations. In the event that any judgment confessed against the Borrower is stricken or opened upon application by or on behalf of Borrower or any obligor for any reason, the Bank is hereby authorized and empowered to again appear for and confess judgment against Borrower for any part or all of the Obligations owing under the Note and/or for any other liabilities, as herein provided. ARBITRATION. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any claim or controversy arising out of or relating to the Loan Documents between parties hereto (a "Dispute") shall be resolved by binding arbitration conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and the Federal Arbitration Act. Disputes may include, without limitation, tort claims, counterclaims, a dispute as to whether a matter is subject to arbitration, claims brought as class actions, or claims arising from documents executed in the future. A judgment upon the award may be entered in any court having jurisdiction. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. Special Rules. All arbitration hearings shall be conducted in the city named in the address of Bank first stated above. A hearing shall begin within 90 days of demand for arbitration and all hearings shall conclude within 120 days of demand for arbitration. These time limitations may not be extended unless a party shows cause for extension and then for no more than a total of 60 days. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000.00. Arbitrators shall be licensed attorneys selected from the Commercial Financial Dispute Arbitration Panel of the AAA. The parties do not waive applicable Federal or state substantive law except as provided herein. Preservation and Limitation of Remedies. Notwithstanding the preceding binding arbitration provisions, the parties agree to preserve, without diminution, certain remedies that any party may exercise before or after an arbitration proceeding is brought. The parties shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale or under applicable law by judicial foreclosure including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Any claim or controversy with regard to any party's entitlement to such remedies is a Dispute. Waiver of Exemplary Damages. The parties agree that they shall not have a remedy of punitive or exemplary damages against other parties in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. Waiver of Jury Trial. THE PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A DISPUTE. 4 IN WITNESS WHEREOF, the undersigned have signed and sealed this Agreement the day and year first above written. PLACE OF EXECUTION AND DELIVERY. Borrower hereby certifies that this Agreement and the Loan Documents were executed in the Commonwealth of Pennsylvania and delivered to Bank in the Commonwealth of Pennsylvania. Wachovia Bank, National Association Paragon Technologies, Inc. By: /s/ William M. Hogan By: /s/ William R. Johnson -------------------------------- --------------------------------- William M. Hogan, Vice President William R. Johnson, President Ermanco Incorporated By: /s/ Ronald J. Semanick --------------------------------- Ronald J. Semanick, Treasurer 5 Exhibit A Compliance Certificate Borrower: Paragon Technologies, Inc. Account# -------------- Wachovia Bank, National Association No. ________________ 702 Hamilton Mall Allentown, Pennsylvania 18101 Date ________________ We hereby certify that as of ___________________________, the Borrower is in full and complete compliance with all terms, conditions and covenants contained in that certain Loan Agreement dated September 30, 1999 between First Union National Bank, now Wachovia Bank, National Association and the Borrower, as amended, and all Loan Documents as referenced therein, including without limitation, the following financial covenants: 1. Funds Flow Coverage Ratio is _________ to 1.00, calculated as follows: (a) Earnings before interest expense, taxes, depreciation and amortization . . . . $_______________ Minus earnings attributed to SI/Baker and SI-Egemin . . . . . . . . . . . . . $_______________ Plus dividends distributed by SI/Baker and SI-Egemin . . . . . . . . . . . . . $_______________ Total. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (b) Current maturities of long-term debt as of period end date . . . . . . . . . . $_______________ Current maturities of Capital Lease Obligations as of period end date. . . . . $_______________ Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (c) Total. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (a) Divided by (c) = ________ to 1.00 [prior to 9/30/03 not less than 1.00 to 1.00] [on and after 9/30/03 no less than 1.25 to 1.00] 2. Total Liabilities to Net Worth Ratio is ________ to 1.00, calculated as follows: (a) Total Assets. . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (b) Total Liabilities (excluding subordinated debt). . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (c) Net Worth (a less b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ Total Liabilities (excluding subordinated debt) to Net Worth Ratio (b divided by c) is __________ to 1.00 [must be not more than 1.75 to 1.00] 3. Current Ratio is __________ to 1.00, calculated as follows: (a) Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (b) Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (a) Divided by (b) = ________ to 1.00 [must be not less than 1.20 to 1.00] 4. Borrower's Aggregate Debt Borrower's Outstanding Debt (List) Obligations to Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ Obligations to Other Institutional Lenders . . . . . . . . . . . . . . . . . . $_______________ SI-Egemin Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ Obligations to Shareholders, Subsidiaries and Other Affiliates . . . . . . . . $_______________ Capital Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (a) Total Outstanding Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ Bank Obligations ($______________) SI-Egemin Investments ($___________) [not to exceed $525,000.00] Subordinated Notes to former Ermanco shareholders ($_____________) [not to exceed $3,000,000.00] (b) Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_______________ (a) minus (b) = $______________ [not to exceed $400,000.00] 5. Minimum Liquidity is $_________________ [must not be less than $5,000,000.00] I hereby certify to the best of the undersigned's knowledge, information, and belief, this above financial information, as derived from Borrower's accounting records, as true and correct, and that no material adverse change in the financial condition of Borrower has occurred since the date of this certification. Paragon Technologies, Inc. By: _________________________________________ Name:____________________________________ Title:___________________________________
EX-99 5 ex99-1.txt EX-99.1 Exhibit 99.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Paragon Technologies, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William R. Johnson ----------------------------------------------- William R. Johnson President and Chief Executive Officer November 14, 2002 /s/ Ronald J. Semanick ----------------------------------------------- Ronald J. Semanick Chief Financial Officer and Vice President - Finance and Treasurer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----