-----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, MaBdHr4dVQoWA2ynRrDQS1s11ZO+CPruX/pfih2WdaAHMp9F7TSwkFsLJoaO3XOM tNAchzrHeint+TZu3N3W7Q== 0000090045-05-000020.txt : 20050812 0000090045-05-000020.hdr.sgml : 20050812 20050812155223 ACCESSION NUMBER: 0000090045-05-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050812 DATE AS OF CHANGE: 20050812 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15729 FILM NUMBER: 051021595 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 f10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2005 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 June 30, 2005 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, Pennsylvania 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 |_| Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| The number of shares outstanding of the Registrant's Common Stock as of August 5, 2005 was 4,300,885. [PARAGON TECHNOLOGIES, INC. LOGO] Paragon Technologies, Inc. TABLE OF CONTENTS
Page Number ---------- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets (Unaudited)............................ 1 Consolidated Statements of Operations (Unaudited).................. 3 Consolidated Statements of Cash Flows (Unaudited).................. 4 Notes to Consolidated Financial Statements (Unaudited)............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 25 Item 4. Controls and Procedures............................................... 25 PART II -- OTHER INFORMATION Item 1. Legal Proceedings..................................................... 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........... 26 Item 3. Defaults Upon Senior Securities....................................... 26 Item 4. Submission of Matters to a Vote of Security Holders................... 26 Item 5. Other Information..................................................... 26 Item 6. Exhibits.............................................................. 27 SIGNATURES.............................................................................. 28 EXHIBIT INDEX........................................................................... 29
PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Balance Sheets June 30, 2005 and December 31, 2004 (In Thousands, Except Share Data)
(UNAUDITED) June 30, December 31, 2005 2004 ------------------- ------------------ Assets - ------ Current assets: Cash and cash equivalents...................... $ 4,626 3,602 Receivables: Trade (net of allowance for doubtful accounts of $445 as of June 30, 2005 and $231 as of December 31, 2004)................................... 11,510 5,756 Notes and other receivables................... 115 244 ------ ------ Total receivables........................... 11,625 6,000 ------ ------ Costs and estimated earnings in excess of billings................................... 541 1,059 Inventories: Raw materials................................. 1,809 1,175 Work-in-process............................... 648 246 Finished goods................................ 171 195 ------ ------ Total inventories........................... 2,628 1,616 ------ ------ Deferred income tax benefits.................... 840 889 Prepaid expenses and other current assets....... 611 636 ------ ------ Total current assets........................ 20,871 13,802 ------ ------ Property, plant and equipment, at cost: Leasehold improvements.......................... 228 228 Machinery and equipment......................... 3,892 3,752 ------ ------ 4,120 3,980 Less: accumulated depreciation................. 2,798 2,744 ------ ------ Net property, plant and equipment............. 1,322 1,236 ------ ------ Goodwill........................................... 17,657 17,657 Other assets....................................... 10 10 ------ ------ Total assets....................................... $ 39,860 32,705 ====== ======
See accompanying notes to consolidated financial statements. 1 Item 1. Financial Statements (Continued) - ------- -------------------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Balance Sheets June 30, 2005 and December 31, 2004 (In Thousands, Except Share Data)
(UNAUDITED) June 30, December 31, 2005 2004 ------------------- ------------------ Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Accounts payable................................ $ 5,316 3,000 Customers' deposits and billings in excess of costs and estimated earnings ........................... 4,995 1,560 Accrued salaries, wages, and commissions................................... 593 428 Income taxes payable............................ 214 58 Accrued product warranty........................ 457 655 Deferred gain on sale-leaseback................. 165 165 Accrued other liabilities....................... 1,090 1,042 ------ ------ Total current liabilities................... 12,830 6,908 ------ ------ Long-term liabilities: Deferred gain on sale-leaseback................. 275 358 Deferred income taxes payable................... 2,375 2,131 ------ ------ Total long-term liabilities................. 2,650 2,489 ------ ------ Commitments and contingencies Stockholders' equity: Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 4,288,785 shares as of June 30, 2005 and 4,265,310 shares as of December 31, 2004.............. 4,289 4,265 Additional paid-in capital.................... 8,141 7,996 Retained earnings............................. 11,950 11,047 ------ ------ Total stockholders' equity.................. 24,380 23,308 ------ ------ Total liabilities and stockholders' equity.. $ 39,860 32,705 ====== ======
See accompanying notes to consolidated financial statements. 2 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 (In Thousands, Except Share and Per Share Data)
Three Months Ended Six Months Ended --------------------------------- ---------------------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 --------------- --------------- --------------- --------------- Net sales................. $ 18,687 9,638 28,995 20,214 Cost of sales............. 14,378 7,304 22,074 15,250 --------- --------- --------- --------- Gross profit on sales..... 4,309 2,334 6,921 4,964 --------- --------- --------- --------- Selling, general and administrative expenses............... 2,766 2,074 5,095 4,117 Product development costs.................. 41 133 84 205 Interest expense.......... - - 1 - Interest income........... (61) (40) (74) (51) Other expense (income), net............. 465 (53) 410 (99) --------- --------- --------- --------- 3,211 2,114 5,516 4,172 --------- --------- --------- --------- Earnings before income taxes........... 1,098 220 1,405 792 Income tax expense........ 389 91 502 322 --------- --------- --------- --------- Net earnings.............. $ 709 129 903 470 ========= ========= ========= ========= Basic earnings per share.............. $ .17 .03 .21 .11 ========= ========= ========= ========= Diluted earnings per share.............. $ .16 .03 .21 .11 ========= ========= ========= ========= Weighted average shares outstanding..... 4,272,629 4,281,961 4,269,871 4,280,090 Dilutive effect of stock options.......... 61,017 83,824 55,511 86,192 --------- --------- --------- --------- Weighted average shares outstanding assuming dilution...... 4,333,646 4,365,785 4,325,382 4,366,282 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 3 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2005 and 2004 (In Thousands, Except Share Data)
Six Months Ended ---------------------------------------- June 30, June 30, 2005 2004 ------------------- ------------------- Cash flows from operating activities: Net earnings ....................................... $ 903 470 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation of plant and equipment............. 234 214 Amortization of deferred gain on sale- leaseback..................................... (83) (83) Other non-cash items affecting earnings...................................... 9 - Change in operating assets and liabilities: Receivables................................. (5,625) 157 Costs and estimated earnings in excess of billings....................... 518 (15) Inventories................................. (1,012) (520) Deferred tax expenses....................... 293 808 Prepaid expenses and other current assets........................... 25 155 Accounts payable............................ 2,316 1,054 Customers' deposits and billings in excess of costs and estimated earnings................................. 3,435 (907) Accrued salaries, wages, and commissions.............................. 165 354 Income taxes payable........................ 156 (894) Accrued product warranty.................... (198) (114) Accrued other liabilities................... 48 (1,249) Deferred compensation....................... - 5 ------ ----- Net cash provided (used) by operating activities.............................. 1,184 (565) ------ ----- Cash flows from investing activities: Additions to property, plant and equipment.......... (320) (150) ------ ----- Net cash used by investing activities............... (320) (150) ------ -----
See accompanying notes to consolidated financial statements. 4 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) (Continued) For the Six Months Ended June 30, 2005 and 2004 (In Thousands, Except Share Data)
Six Months Ended ---------------------------------------- June 30, June 30, 2005 2004 ------------------- ------------------- Cash flows from financing activities: Sale of common shares in connection with employee incentive stock option plan............. 160 38 ------ ----- Net cash provided by financing activities......................... 160 38 ------ ----- Increase (decrease) in cash and cash equivalents................................. 1,024 (677) Cash and cash equivalents, beginning of period.............................. 3,602 5,591 ------ ----- Cash and cash equivalents, end of period.................................... $ 4,626 $ 4,914 ====== ====== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest..................................... $ 1 $ - ====== ====== Income taxes................................. $ 62 $ 611 ====== ======
See accompanying notes to consolidated financial statements. 5 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 (1) In the opinion of the management of Paragon Technologies, Inc. ("Paragon" or the "Company"), the unaudited 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 that was sold subsequent to the end of the reporting period, after elimination of intercompany balances and transactions. Results for interim periods are not necessarily indicative of results expected for the full 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 for the year ended December 31, 2004 as filed with the Securities and Exchange Commission. Refer to the Company's annual report on Form 10-K for the year ended December 31, 2004 for more complete financial information. See Note 11 of the Notes to Consolidated Financial Statements for further information regarding the sale of substantially all of the assets and liabilities of Ermanco. Use of Estimates ---------------- The preparation of the financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The judgments made in assessing the appropriateness of the estimates and assumptions utilized by management in the preparation of the financial statements are based on historical and empirical data and other factors germane to the nature of the risk being analyzed. Materially different results may occur if different assumptions or conditions were to prevail. Estimates and assumptions are mainly utilized to establish the appropriateness of the allowance for doubtful accounts, inventory reserve, warranty reserve, revenue recognition, and impairment of long-lived assets. (2) Accrued Product Warranty ------------------------ The Company's products are warranted against defects in materials and workmanship for varying periods of time depending on customer requirements and the type of system sold, with a typical warranty period of one year. The Company provides an accrual for estimated future warranty costs and potential product liability claims based upon a percentage of cost of sales, ranging from one to two percent depending on the type of system sold, and a detailed review of products still in the warranty period. A roll-forward of warranty activities is as follows (in thousands):
Beginning Ending Balance Balance January 1 Charge/(Credit) Spending June 30 ------------- ------------------ ----------------- ------------------ 2005................. $ 655 (55) (143) 457 2004................. $ 925 73 (187) 811
6 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 (3) Major Segments of Business -------------------------- Company Overview ---------------- Paragon provides a variety of material handling solutions, including systems, technologies, products, and services for material flow applications. The Company has gone to market with a multiple brand, multiple channel strategy under the SI Systems and Ermanco brands. The Company's capabilities include horizontal transportation, rapid dispensing, order fulfillment, computer software, sortation, integrating conveyors and conveyor systems, and aftermarket services. Operating segments are defined as components of an enterprise in which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company identified such segments based on both management responsibility and types of products offered for sale. The Company operates in two major market segments, and products are sold worldwide. SI Systems ---------- The Company's Easton, Pennsylvania operation (hereafter referred to as "SI Systems") is a specialized systems integrator supplying SI Systems branded automated material handling systems to manufacturing, assembly, order fulfillment, and distribution operations customers located primarily in North America, including the U.S. government. The automated material handling systems are marketed, designed, sold, installed, and serviced by its own staff or subcontractors as labor-saving devices to improve productivity, quality, and reduce costs. Integrated material handling solutions involve both standard and specially designed components and include integration of non-proprietary automated handling technologies so as to provide turnkey solutions for its customers' unique material handling needs. The engineering staff develops and designs computer control programs required for the efficient operation of the systems and for optimizing manufacturing, assembly, and fulfillment operations. Ermanco ------- The Company sold its interests in Ermanco subsequent to the reporting period. Ermanco, the Company's Spring Lake, Michigan operation (hereafter referred to as "Ermanco") was a manufacturer of Ermanco branded light to medium duty unit handling conveyor and sortation products, serving the material handling industry through a worldwide network of approximately 100 experienced material handling equipment distributors and one licensee. Ermanco also provided complete conveyor systems for a variety of applications, including distribution centers and automated manufacturing, utilizing primarily its own manufactured conveyor products, engineering services by its own staff or subcontractors, and subcontracted installation services. Ermanco supplied material handling systems and equipment to both national and international markets. Ermanco offered 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 were 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 six months ended June 30, 2005 and 2004 are as follows (in thousands): 7 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 For the three months ended June 30, 2005:
% of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Systems sales................. $ 2,979 14,441 17,420 93.2% Aftermarket sales............. 750 517 1,267 6.8% ------ ------ ------ ----- Total sales................... $ 3,729 14,958 18,687 100.0% ====== ====== ====== ===== As a % of total sales......... 20.0% 80.0% 100.0% For the three months ended June 30, 2004: % of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Systems sales................. $ 1,748 6,646 8,394 87.1% Aftermarket sales............. 748 496 1,244 12.9% ------ ------ ------ ----- Total sales................... $ 2,496 7,142 9,638 100.0% ====== ====== ====== ===== As a % of total sales......... 25.9% 74.1% 100.0% For the six months ended June 30, 2005: % of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Systems sales................. $ 6,016 20,428 26,444 91.2% Aftermarket sales............. 1,579 972 2,551 8.8% ------ ------ ------ ----- Total sales................... $ 7,595 21,400 28,995 100.0% ====== ====== ====== ===== As a % of total sales......... 26.2% 73.8% 100.0% For the six months ended June 30, 2004: % of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Systems sales................. $ 3,829 13,788 17,617 87.2% Aftermarket sales............. 1,580 1,017 2,597 12.8% ------ ------ ------ ----- Total sales................... $ 5,409 14,805 20,214 100.0% ====== ====== ====== ===== As a % of total sales......... 26.8% 73.2% 100.0% The Company's products are sold worldwide through its own sales personnel, along with a network of independent distributors and one licensee. Domestic and international sales by brand during the three and six months ended June 30, 2005 and 2004 are as follows (in thousands): For the three months ended June 30, 2005: % of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Domestic sales................ $ 3,679 14,629 18,308 98.0% International sales........... 50 329 379 2.0% ------ ------ ------ ----- Total sales................... $ 3,729 14,958 18,687 100.0% ====== ====== ====== ===== For the three months ended June 30, 2004: % of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Domestic sales................ $ 2,204 7,011 9,215 95.6% International sales........... 292 131 423 4.4% ------ ------ ------ ----- Total sales................... $ 2,496 7,142 9,638 100.0% ====== ====== ====== =====
8 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 For the six months ended June 30, 2005:
% of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Domestic sales................ $ 7,052 20,636 27,688 95.5% International sales........... 543 764 1,307 4.5% ------ ------ ------ ----- Total sales................... $ 7,595 21,400 28,995 100.0% ====== ====== ====== =====
For the six months ended June 30, 2004:
% of Total SI Systems Ermanco Total Sales -------------- ------------- -------------- -------------- Domestic sales................ $ 4,429 14,542 18,971 93.9% International sales........... 980 263 1,243 6.1% ------ ------ ------ ----- Total sales................... $ 5,409 14,805 20,214 100.0% ====== ====== ====== =====
The Company operates in two major market segments, and products are sold worldwide as follows:
For the Three Months Ended June 30, 2005 (In Thousands): SI Systems Ermanco Total - ------------------------------------------------ ------------- -------------- -------------- Sales.......................................... $ 3,729 14,958 18,687 Earnings (loss) before interest expense, interest income, and income taxes................................. (768) 1,805 1,037 Total assets................................... 7,653 32,207 39,860 Capital expenditures........................... 45 126 171 Depreciation and amortization expense.......... 20 101 121 For the Three Months Ended June 30, 2004 (In Thousands): SI Systems Ermanco Total - ------------------------------------------------ ------------- -------------- -------------- Sales.......................................... $ 2,496 7,142 9,638 Earnings (loss) before interest expense, interest income, and income taxes................................. (204) 384 180 Total assets................................... 3,538 29,168 32,706 Capital expenditures........................... 27 57 84 Depreciation and amortization expense.......... 29 75 104 For the Six Months Ended June 30, 2005 (In Thousands): SI Systems Ermanco Total - ------------------------------------------------ ------------- -------------- -------------- Sales.......................................... $ 7,595 21,400 28,995 Earnings (loss) before interest expense, interest income, and income taxes................................. (676) 2,008 1,332 Total assets................................... 7,653 32,207 39,860 Capital expenditures........................... 77 243 320 Depreciation and amortization expense.......... 42 192 234
9 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004
For the Six Months Ended June 30, 2004 (In Thousands): SI Systems Ermanco Total - ------------------------------------------------ ------------- -------------- -------------- SSales.......................................... $ 5,409 14,805 20,214 Earnings (loss) before interest expense, interest income, and income taxes................................. (241) 982 741 Total assets................................... 3,538 29,168 32,706 Capital expenditures........................... 52 98 150 Depreciation and amortization expense.......... 53 161 214
All of the Company's sales originate in the United States, and there are no long lived assets existing outside the United States. The Company's business is largely dependent upon a limited number of large contracts with a limited number of customers. This dependence can cause unexpected fluctuations in sales volume. Various external factors affect the customers' decision-making process on expanding or upgrading their current production or distribution sites. The customers' timing and placement of new orders is often affected by factors such as the current economy, current interest rates, and future expectations. The Company believes that its business is not subject to seasonality, although the rate of new orders can vary substantially from month to month. Since the Company recognizes sales on a percentage of completion basis for its systems contracts, fluctuations in the Company's sales and earnings occur with increases or decreases in major installations. (4) Recently Issued Accounting Pronouncements ----------------------------------------- In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 provides for certain fixed production overhead cost to be reflected as a period cost and not capitalized as inventory. FAS 151 is effective for the beginning of 2006. The adoption of FAS 151 is not expected to have a material impact on the Company's financial statements. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised) "Share-Based Payment" ("FAS 123R"). FAS 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock, and stock appreciation rights. It will require companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. The statement eliminates the intrinsic value-based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, that the Company currently uses. The Company is required to adopt FAS 123R beginning in 2006. The adoption of FAS 123R is not expected to have a material impact on the Company's financial statements. In May 2005, the Financial Accounting Standard Board issued SFAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3" ("FAS 154"). FAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect 10 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 of the change. This statement also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. FAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this statement was issued. The Company is required to adopt the provisions of this statement, as applicable, beginning in 2006. (5) Sale-Leaseback -------------- SI Systems' principal office is located in a 173,000 square foot, concrete, brick, and steel facility in Easton, Pennsylvania. In connection with the February 2003 sale of the Company's Easton, Pennsylvania facility, the Company entered into a leaseback arrangement for 25,000 square feet of office space for five years. The leasing agreement requires fixed monthly rentals of $18,234 (with annual increases of 3%). The terms of the lease also require the payment of a proportionate share of the facility's operating expenses. The lease expires on February 21, 2008. In accordance with SFAS 13 and SFAS 28, the leaseback does not meet the criteria for classification as a capital lease; hence, it is classified as an operating lease. The sale-leaseback resulted in a total gain of $2,189,000, of which $1,363,000 was recorded as a gain in 2003. The seller-lessee (Company) retained more than a minor part (25,000 square feet) but less than substantially all of the use of the property (173,000 square feet) through the leaseback and realized a profit on the sale in excess of the present value of the minimum lease payments over the lease term. The present value of the stream of lease payments utilizing the Company's incremental borrowing rate of 10.0% was $826,000. The $826,000 of deferred profit is amortized in equal amounts as a reduction in rent expense over the five-year term of the lease. During the three months ended June 30, 2005 and 2004, $41,000 and $42,000, respectively, of the deferred gain was recognized. During the six months ended June 30, 2005 and 2004, $83,000 and $83,000, respectively, of the deferred gain was recognized. (6) Line of Credit -------------- The Company has a line of credit facility which may not exceed $5,000,000, $4,800,000 is available and is to be used primarily for working capital purposes. Interest on the line of credit facility is at the LIBOR Market Index Rate plus 1.4%. Effective August 5, 2005, due to the issuance of a $2,000,000 letter of credit in connection with the sale of Ermanco, the amount of available line of credit was reduced to $2,800,000. The line of credit facility contains various non-financial covenants and is secured by all accounts receivables and inventory. The Company was in compliance with all covenants as of June 30, 2005. As of June 30, 2005, the Company did not have any borrowings under the line of credit facility, and the line of credit facility expires effective June 30, 2006. 11 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 (7) Pension Benefits ---------------- The Company maintains a defined benefit plan for employees covered by its collective bargaining agreement. Retirement benefits are based on the employee's years of service multiplied by the appropriate monthly benefit amount. Employee compensation does not impact pension benefits. The Company's policy is to fund retirement plans in compliance with applicable laws and regulations. Assets of the Company's defined benefit plan are primarily invested in publicly traded common stocks, corporate and government debt securities, mutual funds, and cash or cash equivalents. Components of Net Periodic Pension Expense ------------------------------------------ The Company uses the projected unit credit actuarial method to compute pension expense, which includes amortization of past service costs over the average remaining service lives of the employees expected to receive benefits. The net periodic pension expense for the three and six months ended June 30, 2005 and 2004 includes the following components (in thousands):
Three Months Ended Six Months Ended ---------------------------- -------------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Service cost-benefits earned during the period.................. $ 28 24 53 47 Interest cost on projected benefit obligation................ 14 11 27 22 Expected return on plan assets - increase................. (20) (15) (38) (29) Recognized net actuarial loss.............................. 1 1 3 2 ----- ----- ----- ----- Net periodic pension expense......... 23 21 45 42 ===== ===== ===== =====
Contributions ------------- The Company did not make any contributions to its defined benefit plan during the three and six months ended June 30, 2005. The Company expects total pension plan contributions to its defined benefit plan to approximate $90,000 for the year ended December 31, 2005. (8) Stock Repurchase Program ------------------------ In August 2004, the Company's Board of Directors approved a program to repurchase up to $1,000,000 of its outstanding common stock. As of June 30, 2005, the Company had repurchased 34,700 shares of common stock at a weighted average cost, including brokerage commissions, of $9.38 per share. Cash expenditures for the stock repurchases were $325,632. As of June 30, 2005, $674,368 remained available for repurchases under the stock repurchase program. Based on market conditions and other factors, additional repurchases may be made from time to time, in compliance with SEC regulations, in the open market or through privately negotiated transactions at the discretion of the Company. There is no expiration date with regards to the stock repurchase program. There were no repurchases in the three and six months ended June 30, 2005. In August 2005, the Company's Board of Directors amended its existing stock repurchase program by increasing the amount it has authorized management to repurchase from up to $1,000,000 of the Company's common stock to up to $5,000,000, of which approximately $4,675,000 remains available for repurchases under the stock repurchase program. 12 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 (9) Stock-Based Compensation ------------------------ The Company grants stock options for a fixed number of shares to employees and non-employee directors with an exercise price equal to the fair value of the shares at the date of grant. The Company has elected to continue to account for its stock-based compensation plans under the guidelines of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense on options granted to employees for the stock option grants. The Company recognizes compensation expense on options granted to non-employee directors. Additional disclosure as required under the guidelines of SFAS No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended by FAS 148, is included below. If the Company had elected to recognize stock-based compensation expense for options granted to employees based on the fair value of granted options at the grant date (as determined under FAS 123), net earnings (in thousands) and basic and diluted earnings per share for the three and six months ended June 30, 2005 and 2004, would have been as follows:
Three Months Ended Six Months Ended ---------------------------- -------------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net earnings, as reported............ $ 709 129 903 470 Deduct: total stock-based employee compensation determined under fair value method, net of related tax effects........................... (11) (29) (22) (63) --- --- --- --- Pro forma net earnings............... $ 698 100 881 407 === === === === Earnings per share: Basic -- as reported............... $ .17 .03 .21 .11 === === === === Basic -- pro forma................. $ .16 .02 .21 .10 === === === === Diluted -- as reported............. $ .16 .03 .21 .11 === === === === Diluted -- pro forma............... $ .16 .02 .20 .09 === === === ===
The above pro forma net earnings and basic and diluted earnings per share were computed using the fair value of granted options at the date of grant as calculated by the Black-Scholes option pricing method. No options were granted to employees during the three and six months ended June 30, 2005 and the year ended December 31, 2004. (10) Legal Proceedings ----------------- The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 13 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 (11) Sale of Ermanco --------------- On May 20, 2005, the Company and Ermanco entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with TGW Transportgerate GmbH, an Austrian corporation ("Buyer Parent"), and Malibu Acquisition, Inc., a Michigan corporation and wholly owned subsidiary of Buyer Parent ("Buyer"), pursuant to which Paragon agreed to sell to Buyer substantially all of the assets and liabilities of Ermanco, Paragon's conveyor and sortation subsidiary located in Spring Lake, Michigan. The terms of the Asset Purchase Agreement provided that Buyer pay cash in the amount of $23 million (subject to a working capital adjustment) and assume certain liabilities of Ermanco, as more fully described in the Asset Purchase Agreement, a copy of which was filed with the Securities and Exchange Commission on July 1, 2005. In approving the sale of the assets and liabilities of Ermanco, Paragon's Board of Directors received an opinion from its financial advisor, Boenning & Scattergood, Inc., that the consideration received by Paragon in the transaction was fair from a financial point of view to the stockholders of Paragon. Upon receiving approval from Paragon's stockholders at a Special Meeting of Stockholders held on August 3, 2005, the closing of the sale of the assets and liabilities of Ermanco occurred on August 5, 2005. The Company received cash consideration of approximately $23,055,000 (subject to a working capital adjustment) in connection with the sale of the assets and liabilities of Ermanco. Due to the fact that there is a final working capital adjustment, the final gain or loss on the transaction has not yet been determined. Ermanco's contribution to the Company's consolidated sales, net earnings, and basic earnings per share were $21,400,000, $1,316,000, and $.31, respectively, for the six months ended June 30, 2005. Ermanco and Paragon indemnified the Buyer and Buyer Parent for, among other things, a breach of any representation, warranty, covenant, or agreement set forth under the terms of the Asset Purchase Agreement. Paragon and Ermanco will have no liability to Buyer or Buyer Parent with respect to claims for breaches of representations and/or warranties until the aggregate amount of loss relating to such breaches exceeds $230,000, and then only for such amount that exceeds $230,000. The overall aggregate indemnification liability of Paragon and Ermanco shall not exceed $5,750,000. At the closing of the asset sale, Paragon delivered to the Buyer an irrevocable letter of credit issued by Wachovia Bank, National Association in the amount of $2 million as security for its indemnification obligations. The letter of credit shall remain in place for a period of one year following the closing of the asset sale or longer in the event of any pending dispute thereunder; provided, however, that if a dispute remains pending longer than the one year period following the closing of the asset sale, the amount of the letter of credit shall be reduced to an amount not less than an amount sufficient to resolve such dispute. If applicable, the reduced letter of credit shall remain in place following the one year anniversary of the closing of the asset sale until any pending dispute has been resolved. Ermanco and Paragon agreed that for a period of 3 years following the closing of the transaction, each will not solicit any employee, customer, or supplier of Buyer to leave Buyer's employment or alter its business dealings with the Buyer. ----------------------------- 14 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations ------------------------- The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements for the period ended June 30, 2005, and the cautionary statements and consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. The discussion and analysis contains "forward-looking statements" based on management's current expectations, assumptions, estimates, and projections. These forward-looking statements involve risks and uncertainties. The Company's actual results could differ materially from those included in these "forward-looking statements" as a result of risks and uncertainties, identified in connection with those forward-looking statements, including those factors identified herein, and in the Company's other publicly filed reports. ----------------------------- Business Overview - ----------------- Paragon Technologies, Inc. provides a variety of material handling solutions, including systems, technologies, products, and services for material flow applications. The Company has gone to market with a multiple brand, multiple channel strategy under the SI Systems and Ermanco brands. Founded in 1958, SI Systems material handling solutions are based on core technologies in horizontal transportation and order fulfillment and are aimed at improving productivity for manufacturing, assembly, and distribution center operations. Since 1964, Ermanco conveyor technologies and integrated conveyor systems are based on core technologies in transportation, accumulation, and sortation and continue to address the needs of the distribution, assembly, and manufacturing marketplace. Ermanco is known as the originator of the line-shaft-driven, live-roller conveyor. Subsequent to the reporting period, the Company completed the sale of substantially all of the assets and liabilities of Ermanco. The Company received cash consideration of approximately $23,055,000 (subject to a working capital adjustment) in connection with the sale of the assets and liabilities of Ermanco. Due to the fact that there is a final working capital adjustment, the final gain or loss on the transaction has not yet been determined. Ermanco's contribution to the Company's consolidated sales, net earnings, and basic earnings per share were $21,400,000, $1,316,000, and $.31, respectively, for the six months ended June 30, 2005. Following the sale of Ermanco, the Company will no longer sell Ermanco branded products and as such, the Company's future financial statements may be impacted. ----------------------------- 15 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- Key Performance Metrics Relevant to the Company - ----------------------------------------------- Capacity Utilization -------------------- Capacity Utilization, as documented in the Federal Reserve Statistical Release(1), is a key economic indicator that the Company follows as a barometer that may lead to capital spending for material handling systems. Capacity Utilization attempts to measure what percent of available capacity is actually being utilized. Management believes that when Capacity Utilization rises above 80%, as occurred in fiscal 2000, the Company may see an increase in rate of new orders, and therefore, an increase in backlog and sales may also occur. The backlog of orders represents the uncompleted portion of systems contracts along with the value of parts and services from customer purchase orders related to goods that have not been shipped or services that have not been rendered. Backlog is generally indicative of customer demand for the Company's products. As the demand for the Company's products increases, the backlog of orders, the rate of new orders, and sales also typically increases. The following table depicts the Company's backlog, orders, sales, and Capacity Utilization for the six months ended June 30, 2005, and for the years ended December 31, 2004, 2003, 2002, 2001, and 2000:
Six Months Ended Year Ended December 31, June 30, ------------------------------------------ (Dollars in Thousands) 2005 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- ---- Backlog of orders - Beginning.......... $ 11,206 10,525 6,924 13,342 22,913 23,685 Add: orders.......................... 42,361 42,936 40,896 31,806 41,181 63,534 Less: sales.......................... 28,995 42,255 37,295 38,224 50,752 64,306 ------ ------ ------ ------ ------ ------ Backlog of orders - Ending............. $ 24,572 11,206 10,525 6,924 13,342 22,913 ====== ====== ====== ====== ====== ====== Capacity Utilization(1).................. 79.4% 78.0% 74.9% 75.6% 77.4% 82.6%
The Company's backlog of orders as of June 30, 2005 associated with Ermanco and SI Systems was $16,799,000 and $7,773,000, respectively. Current Ratio ------------- The Company's current ratio, which is the ratio of current assets to current liabilities, has been relatively consistent. Management of the Company monitors the current ratio as a measure of determining liquidity and believes the current ratio illustrates that the Company's financial resources are adequate to satisfy its future cash requirements through the next year. The following table depicts the Company's current assets, current liabilities, and current ratio as of June 30, 2005 and as of December 31, 2004, 2003, 2002, 2001, and 2000:
As of As of December 31, June 30, ----------------------------------------------------- (Dollars in Thousands) 2005 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- ---- Current assets................ $ 20,871 13,802 14,691 15,444 19,200 22,850 ------ ------ ------ ------ ------ ------ Current liabilities........... 12,830 6,908 9,554 9,416 13,357 15,193 Current ratio................. 1.63 2.00 1.54 1.64 1.44 1.50
16 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- Debt to Equity Ratio -------------------- With an emphasis over the past several years on generating cash flows to eliminate the Company's senior and subordinated debt, the Company has eliminated its financial leverage as evidenced by its debt to equity ratio, which is the ratio of total debt to stockholders' equity. Management believes the absence of debt provides greater protection for its stockholders and enhances the Company's ability to obtain additional financing, if required. The following table illustrates the calculation of the debt to equity ratio as of June 30, 2005 and as of December 31, 2004, 2003, 2002, 2001, and 2000:
As of As of December 31, June 30, ----------------------------------------------------- (Dollars in Thousands) 2005 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- ---- Current installments of long-term debt....... $ - - - 1,437 2,305 1,521 Long-term debt.......... - - - 7,263 9,900 12,780 ------ ------ ------ ------ ------ ------ Total debt ............. - - - 8,700 12,205 14,301 ------ ------ ------ ------ ------ ------ Total stockholders' equity............... $ 24,380 23,308 22,061 17,885 16,912 16,980 ====== ====== ====== ====== ====== ====== Debt to equity ratio... - - - .49 .72 .84
----------------------------- Critical Accounting Policies and Estimates - ------------------------------------------ The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and other financial information, including the related disclosure of commitments and contingencies at the date of our financial statements. Actual results may, under different assumptions and conditions, differ significantly from our estimates. We believe that our accounting policies related to revenue recognition on system sales, warranty, inventories, allowance for doubtful accounts, and asset impairment as described below, are our "critical accounting policies." These policies have been reviewed with the Audit Committee of the Board of Directors and are discussed in greater detail below. Revenue Recognition on Systems Sales ------------------------------------ Revenues on systems contracts, accounted for in accordance with SOP 81-1 of the American Institute of Certified Public Accountants, are recorded on the basis of the Company's estimates of the percentage of completion of individual contracts. Gross margin is recognized on the basis of the ratio of aggregate costs incurred to date to the most recent estimate of total costs. As contracts may extend over one or more years, revisions in cost and profit estimates during the course of the work are reflected in the accounting periods in which the facts requiring revisions become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued. As of June 30, 2005, there are no contracts that are anticipated to result in a loss. 17 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- Revenue Recognition on Systems Sales (Continued) ------------------------------------ The Company believes that it has the ability to reasonably estimate the total costs and applicable gross profit margins at the inception of the contract for all of its systems contracts. However, where cost estimates change, there could be a significant impact on the amount of revenue recognized. The Company's failure to estimate accurately can result in cost overruns which will result in the loss of profits if the Company determines that it has significantly underestimated the costs involved in completing contracts. The Company has not had any significant cost overruns resulting in loss of profits during the three and six months ended June 30, 2005. Accrued Product Warranty ------------------------ The Company's products are warranted against defects in materials and workmanship for varying periods of time depending on customer requirements and the type of system sold, with a typical warranty period of one year. The Company provides an accrual for estimated future warranty costs and potential product liability claims based upon a percentage of cost of sales, ranging from one to two percent depending on the type of system sold, and a detailed review of products still in the warranty period. Historically, the level of warranty reserve has been appropriate based on management's assessment of estimated future warranty claims. However, if unanticipated warranty issues arise in the future, there could be a significant impact on the recorded warranty reserve. The recorded warranty reserve as of June 30, 2005 was $457,000. Inventories ----------- Inventories are valued at the lower of average cost or market. The Company provides an inventory reserve determined by a specific identification of individual slow moving items and other inventory items based on historical experience. The reserve is considered to be a write-down of inventory to a new cost basis. Upon disposal of inventory, the cost and related inventory reserve are removed from the accounts. Historically, the level of inventory reserve has been appropriate based on management's assessment of estimated future inventory disposals. Allowance for Doubtful Accounts ------------------------------- The Company provides an allowance for doubtful accounts determined by a specific identification of individual accounts and other accounts based on historical experience. The Company writes off receivables upon determination that no further collections are probable. Historically, receivable write-offs have not had a material impact on the Company's financial statements. Asset Impairment ---------------- During 2004, the Company performed the required impairment test of goodwill and determined that there was no impairment. In assessing the recoverability of the Company's goodwill, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of its reporting units. If these estimates or their related assumptions change, the Company may be required to record impairment charges in the future. The book value of goodwill as of June 30, 2005 was $17,657,000, all of which is attributable to Ermanco. See Note 11 of the Notes to Consolidated Financial Statements for further information regarding the sale of substantially all of the assets and liabilities of Ermanco. ----------------------------- 18 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- (a) Results of Operations - Six Months Ended June 30, 2005 Compared --------------------------------------------------------------- to the Six Months Ended June 30, 2004 ------------------------------------- Earnings Summary - ---------------- The Company had net earnings of $903,000 (or $0.21 basic earnings per share) for the six months ended June 30, 2005, compared to net earnings of $470,000 (or $0.11 basic earnings per share) for the six months ended June 30, 2004. The increase in net earnings was primarily due to an increase in sales and gross profit on sales related to sales to customers in the technology sector, partially offset by an increase in selling, general and administrative expenses and Ermanco subsidiary divestiture costs as mentioned below. Net Sales and Gross Profit on Sales - -----------------------------------
2005 2004 ------------------ ------------------ Net sales............................................ $ 28,995,000 20,214,000 Cost of sales........................................ 22,074,000 15,250,000 ---------- ---------- Gross profit on sales................................ $ 6,921,000 4,964,000 ========== ========== Gross profit as a percentage of sales................ 23.9% 24.6% ==== ====
The net sales increase was attributable to an increase in Ermanco branded sales of $6,595,000, complemented by an increase of $2,186,000 in SI Systems branded sales. The increase in Ermanco branded sales was primarily attributable to progress made on contracts received during the second quarter of 2005 from customers in the technology sector. The increase in SI Systems branded sales was associated with a larger backlog of SI Systems branded orders entering fiscal 2005 when compared to the backlog of SI Systems branded orders entering fiscal 2004. Contributing to the increase in SI Systems branded sales was progress made on contracts received prior to the start of the year and during the first half of 2005 in accordance with contract completion requirements. Gross profit, as a percentage of sales, for the six months ended June 30, 2005, when compared to the six months ended June 30, 2004, was unfavorably impacted by approximately 5.3% due to product mix and competitive pricing pressures, partially offset by approximately 4.6% due to a reduction in overhead costs. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses of $5,095,000 were higher by $978,000 for the six months ended June 30, 2005 than for the six months ended June 30, 2004. The increase was attributable to the addition of resources aimed at expanding the customer base and an increase in salaries and fringe benefits totaling $275,000, an increase in expenses related to revenue and profit performance totaling $345,000, and bad debt expense of $217,000 for accounts receivable recognized as potentially uncollectible. Also contributing to lower selling, general and administrative expenses in the prior year were collections of $172,000 during the second quarter of 2004 on accounts receivables previously recognized as potentially uncollectible. Product Development Costs - ------------------------- Product development costs, including patent expense, of $84,000 were lower by $121,000 for the six months ended June 30, 2005 than for the six months ended June 30, 2004. Development programs in the six months ended June 30, 2005 were aimed at enhancements to the Company's sortation and accumulation conveyor technologies. Development programs in the six months ended June 30, 2004 were aimed at enhancements to the Company's sortation and accumulation conveyor technologies, and improvements to the Company's Order Fulfillment systems technologies. 19 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- (a) Results of Operations - Six Months Ended June 30, 2005 Compared --------------------------------------------------------------- to the Six Months Ended June 30, 2004 (Continued) ------------------------------------- Other Expense (Income), Net - --------------------------- The unfavorable variance of $509,000 in other expense (income), net for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 was primarily attributable to Ermanco subsidiary divestiture costs of $527,000 which represented transaction expenses associated with professional fees incurred in connection with the sale of substantially all of the assets and liabilities of Ermanco. Income Tax Expense - ------------------ The Company recognized income tax expense of $502,000 during the six months ended June 30, 2005 compared to income tax expense of $322,000 during the six months ended June 30, 2004. Income tax expense was generally recorded at statutory federal and state tax rates. (b) Results of Operations - Three Months Ended June 30, 2005 Compared to the ------------------------------------------------------------------------- Three Months Ended June 30, 2004 -------------------------------- Earnings Summary - ---------------- The Company had net earnings of $709,000 (or $0.17 basic earnings per share) for the three months ended June 30, 2005, compared to net earnings of $129,000 (or $0.03 basic earnings per share) for the three months ended June 30, 2004. The increase in net earnings was primarily due to an increase in sales and gross profit on sales related to sales to customers in the technology sector, partially offset by an increase in selling, general and administrative expenses and Ermanco subsidiary divestiture costs as mentioned below. Net Sales and Gross Profit on Sales - -----------------------------------
2005 2004 ------------------ ------------------ Net sales............................................ $ 18,687,000 9,638,000 Cost of sales........................................ 14,378,000 7,304,000 ---------- --------- Gross profit on sales................................ $ 4,309,000 2,334,000 ========== ========= Gross profit as a percentage of sales................ 23.1% 24.2% ==== ====
The net sales increase was primarily attributable to an increase in Ermanco branded sales of $7,816,000, complemented by an increase of $1,233,000 in SI Systems branded sales. The increase in Ermanco branded sales was primarily attributable to progress made on contracts received during the second quarter of 2005 from customers in the technology sector. The increase in SI Systems branded sales was associated with a larger backlog of SI Systems branded orders entering the second quarter of 2005, when compared to the backlog of SI Systems branded orders entering the second quarter of 2004. Contributing to the increase in SI Systems branded sales was progress made on contracts received prior to the start of the second quarter of 2005 in accordance with contract completion requirements. Gross profit, as a percentage of sales, for the three months ended June 30, 2005, when compared to the three months ended June 30, 2004, was unfavorably impacted by approximately 9.0% due to product mix and competitive pricing pressures, partially offset by approximately 7.9% due to a reduction in overhead costs. 20 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- b) Results of Operations - Three Months Ended June 30, 2005 Compared to the ------------------------------------------------------------------------- Three Months Ended June 30, 2004 (Continued) -------------------------------- Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses of $2,766,000 were higher by $692,000 for the three months ended June 30, 2005 than for the three months ended June 30, 2004. The increase was attributable to the addition of resources aimed at expanding the customer base and an increase in salaries and fringe benefits totaling $258,000, an increase in expenses related to revenue and profit performance totaling $315,000, and bad debt expense of $117,000 for accounts receivable recognized as potentially uncollectible. Partially offsetting the aforementioned unfavorable variance was a decrease in marketing and public relations expenses primarily associated with trade shows, product promotion, and marketing research totaling $113,000. Also contributing to lower selling, general and administrative expenses in the prior year were collections of $172,000 during the second quarter of 2004 on accounts receivables previously recognized as potentially uncollectible. Product Development Costs - ------------------------- Product development costs, including patent expense, of $41,000 were lower by $92,000 for the three months ended June 30, 2005 than for the three months ended June 30, 2004. Development programs in the three months ended June 30, 2005 were aimed at enhancements to the Company's sortation and accumulation conveyor technologies. Development programs in the three months ended June 30, 2004 were aimed at enhancements to conveyor technologies, and improvements to the Company's Order Fulfillment systems technologies. Income Tax Expense - ------------------ The Company recognized income tax expense of $389,000 during the three months ended June 30, 2005 compared to income tax expense of $91,000 during the three months ended June 30, 2004. Income tax expense was generally recorded at statutory federal and state tax rates. ----------------------------- Liquidity and Capital Resources - ------------------------------- The Company's cash and cash equivalents increased to $4,626,000 at June 30, 2005 from $3,602,000 at December 31, 2004. The increase resulted from cash provided by operating activities totaling $1,184,000 and proceeds of $160,000 from the sale of common stock in connection with the Company's Equity Compensation Plan, partially offset by purchases of capital equipment of $320,000. Cash provided by operating activities during the six months ended June 30, 2005 was $1,184,000 as compared to cash used by operating activities during the six months ended June 30, 2004 of $565,000. Contributing to cash provided by operating activities during the six months ended June 30, 2005 primarily were net earnings of $903,000, an increase of $3,435,000 in customers' deposits and billings in excess of costs and estimated earnings, and an increase of $2,316,000 in accounts payable, partially offset by an increase of $5,625,000 in accounts receivable. Contributing to cash used by operating activities during the six months ended June 30, 2004 was the payment of settlement and legal costs of $1,197,000 associated with an action against the Company by a competitor relating to the Company's intellectual property, and the payment of $611,000 in income taxes, partially offset by an increase of $1,054,000 in accounts payable. 21 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- Liquidity and Capital Resources (Continued) - ------------------------------- The Company's line of credit facility may not exceed $5,000,000, $4,800,000 is available and is to be used primarily for working capital purposes. Effective August 5, 2005, due to the issuance of a $2,000,000 letter of credit in connection with the sale of Ermanco, the amount of available line of credit was reduced to $2,800,000. The line of credit facility contains various non-financial covenants and is secured by all accounts receivables and inventory. As of June 30, 2005, the Company did not have any borrowings under the line of credit facility, and the line of credit facility expires effective June 30, 2006. Subsequent to the reporting period, the Company received cash consideration of approximately $23,055,000 in connection with the sale of the assets and liabilities of Ermanco. The Company anticipates that its financial resources, consisting of cash generated from operations, its line of credit, and the subsequent sale of Ermanco will be adequate to satisfy its future cash requirements through the next year. Sales volume, as well as cash liquidity, may experience fluctuations due to the unpredictability of future contract sales, the subsequent sale of Ermanco, and the dependence upon a limited number of large contracts with a limited number of customers. The Company is currently exploring various business strategies designed to enhance the value of the Company's assets for its stockholders. The Company has retained the investment banking firm, Boenning & Scattergood, Inc., to advise the Company in evaluating its strategic options. The Company is continuing to evaluate and actively explore a range of possible options, including transactions intended to provide liquidity and maximize stockholder value, and consider the acquisition of complementary assets and/or businesses. The Company may not be able to effect any of these strategic options on favorable terms or at all. ----------------------------- Contractual Obligations - ----------------------- Ermanco's operations are located in a 94,000 square foot steel building in Spring Lake, Michigan. The building is leased from a limited liability company that is affiliated with the Company through a common director and officer of the Company, Messrs. Shulman and Kirschner. The leasing agreement, as amended, requires fixed monthly rentals of $29,310 (with annual increases of 2.5%). The terms of the lease require the payment by Ermanco of all taxes, insurance, and other ownership related costs of the property. The lease, as amended on April 1, 2004, expires on September 30, 2008. SI Systems' principal office is located in a 173,000 square foot, concrete, brick, and steel facility in Easton, Pennsylvania. In connection with the February 2003 sale of the Company's Easton, Pennsylvania facility, the Company entered into a leaseback arrangement for 25,000 square feet of office space for five years. The leasing agreement requires fixed monthly rentals of $18,234 (with annual increases of 3%). The terms of the lease also require the payment of a proportionate share of the facility's operating expenses. The lease expires on February 21, 2008. The Company also leases certain office equipment, computer equipment, and software under various operating leases with terms extending through September 2007. Future contractual obligations and commercial commitments at June 30, 2005 as noted above are as follows:
Payments Due by Period ------------------------------------------------------------------------------- Total 2005 2006 2007 2008 2009 ----- ---- ---- ---- ---- ---- Contractual obligations: Operating leases........ $ 1,804,000 289,000 591,000 606,000 318,000 - --------- ------- ------- ------- ------- ------- Total......... $ 1,804,000 289,000 591,000 606,000 318,000 - ========= ======= ======= ======= ======= =======
22 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- Contractual Obligations (Continued)
Amount of Commitment Expiration Per Period Total Amount ------------------------------------------------------------ Committed 2005 2006 2007 2008 2009 ------------ ---- ---- ---- ---- ---- Other commercial commitments: Letters of credit........ $ 200,000 - 200,000 - - -
Effective August 5, 2005, due to the issuance of a $2,000,000 letter of credit in connection with the sale of Ermanco, the amount of available line of credit was reduced to $2,800,000. In addition to the obligations noted above, the Company also has an employment agreement with Leon C. Kirschner, Chief Operating Officer of the Company and President of Ermanco Incorporated. Terms of the employment agreement include a base salary of $272,328 per year. Mr. Kirschner has the right to terminate the employment agreement voluntarily by giving the Company written notice of such termination no less than 180 days prior to the effective date of the termination. Under certain circumstances, the employment agreement provides for post termination severance payments. Off-Balance Sheet Arrangements - ------------------------------ As of June 30, 2005, the Company had no off-balance sheet arrangements in the nature of guarantee contracts, retained or contingent interests in assets transferred to unconsolidated entities (or similar arrangements serving as credit, liquidity, or market risk support to unconsolidated entities for any such assets), or obligations (including contingent obligations) arising out of variable interests in unconsolidated entities providing financing, liquidity, market risk, or credit risk support to the Company, or that engage in leasing, hedging, or research and development services with the Company. Recently Issued Accounting Pronouncements - ----------------------------------------- In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 provides for certain fixed production overhead cost to be reflected as a period cost and not capitalized as inventory. FAS 151 is effective for the beginning of 2006. The adoption of FAS 151 is not expected to have a material impact on the Company's financial statements. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised) "Share-Based Payment" ("FAS 123R"). FAS 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock, and stock appreciation rights. It will require companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. The statement eliminates the intrinsic value-based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, that the Company currently uses. The Company is required to adopt FAS 123R beginning in 2006. The adoption of FAS 123R is not expected to have a material impact on the Company's financial statements. In May 2005, the Financial Accounting Standard Board issued SFAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3" ("FAS 154"). FAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is 23 Item 2. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Continued) ------------------------- Recently Issued Accounting Pronouncements (Continued) - ----------------------------------------- impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. FAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this statement was issued. The Company is required to adopt the provisions of this statement, as applicable, beginning in 2006. 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 earnings, liquidity, financial condition, review of strategic alternatives, and other 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 factors over which the Company has no control, including the strength of domestic and foreign economies, sales growth, competition, and certain costs increases; or (3) if the factors on which the Company's conclusions are based do not conform to the Company's expectations. ----------------------------- 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------- ---------------------------------------------------------- The Company does not believe that its exposures to interest rate risk or foreign currency exchange risk, risks from commodity prices, equity prices and other market changes that affect market risk sensitive instruments are material to its results of operations. Item 4. Controls and Procedures - ------- ----------------------- (a) Evaluation of Disclosure Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company's management, including its Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the Company's disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of June 30, 2005. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is accumulated and communicated to the Company's management, including the Company's CEO and CFO, to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported as specified in Securities and Exchange Commission rules and forms. (b) Change in Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation of such controls that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. 25 PART II -- OTHER INFORMATION ---------------------------- Item 1. Legal Proceedings - ------- ----------------- The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - ------- ------------------------------------------------------------ The following table represents the periodic repurchases of equity securities made by the Company during the three months ended June 30, 2005:
- ------------------------------------------------------------------------------------------------------- Total Number Approximate Average of Shares Approximate Dollar Value Price Paid Repurchased Dollar Value of Shares Total Per Share as Part of a of Shares That May Yet Number (Including Publicly Purchased Be Purchased Fiscal of Shares Brokerage Announced Under the Under the Period Repurchased Commissions) Program Program Program - ------------------------------------------------------------------------------------------------------- 4/1/05 - 4/30/05 - $ - - $ - $ 674,368 5/1/05 - 5/31/05 - $ - - $ - $ 674,368 6/1/05 - 6/30/05 - $ - - $ - $ 674,368 - -------------------------------------------------------------------------------------------------------
In August 2004, the Company's Board of Directors approved a program to repurchase up to $1,000,000 of its outstanding common stock. As of June 30, 2005, the Company had repurchased 34,700 shares of common stock at a weighted average cost, including brokerage commissions, of $9.38 per share. Cash expenditures for the stock repurchases were $325,632. As of June 30, 2005, $674,368 remained available for repurchases under the stock repurchase program. Based on market conditions and other factors, additional repurchases may be made from time to time, in compliance with SEC regulations, in the open market or through privately negotiated transactions at the discretion of the Company. There is no expiration date with regards to the stock repurchase program. There were no repurchases in the three and six months ended June 30, 2005. In August 2005, the Company's Board of Directors amended its existing stock repurchase program by increasing the amount it has authorized management to repurchase from up to $1,000,000 of the Company's common stock to up to $5,000,000, of which approximately $4,675,000 remains available for repurchases under the stock repurchase program. Item 3. Defaults Upon Senior Securities - ------- ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- Not applicable. Item 5. Other Information - ------- ----------------- Not applicable. 26 Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- 10.31 Loan Agreement (Line of Credit) entered into June 20, 2005 by and between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia Bank, National Association (filed herewith). 10.32 Promissory Note related to the Line of Credit entered into June 20, 2005 by and between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia Bank, National Association (filed herewith). 10.33 Asset Purchase Agreement by and among TGW Transportgerate GmbH, Malibu Acquisition, Inc., Ermanco Incorporated, and Paragon Technologies, Inc. dated May 20, 2005 (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on May 23, 2005). 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Leonard S. Yurkovic, President and CEO (filed herewith). 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Ronald J. Semanick, Chief Financial Officer and Vice President - Finance and Treasurer (filed herewith). 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Leonard S. Yurkovic, President and CEO (filed herewith). 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Ronald J. Semanick, Chief Financial Officer and Vice President - Finance and Treasurer (filed herewith). 27 SIGNATURES ---------- 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/ Leonard S. Yurkovic ----------------------------------------------- Leonard S. Yurkovic President & CEO /s/ Ronald J. Semanick ----------------------------------------------- Ronald J. Semanick Chief Financial Officer Dated: August 12, 2005 ----------------------- 28 EXHIBIT INDEX ------------- Exhibits - -------- 10.31 Loan Agreement (Line of Credit) entered into June 20, 2005 by and between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia Bank, National Association (filed herewith). 10.32 Promissory Note related to the Line of Credit entered into June 20, 2005 by and between Paragon Technologies, Inc., Ermanco Incorporated, and Wachovia Bank, National Association (filed herewith). 10.33 Asset Purchase Agreementby and among TGW Transportgerate GmbH, Malibu Acquisition, Inc., Ermanco Incorporated, and Paragon Technologies, Inc. dated May 20, 2005 (incorporated by reference to Exhibit 10.1 to Form 8-K, filed on May 23, 2005). 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Leonard S. Yurkovic, President and CEO (filed herewith). 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Ronald J. Semanick, Chief Financial Officer and Vice President - Finance and Treasurer (filed herewith). 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Leonard S. Yurkovic, President and CEO (filed herewith). 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Ronald J. Semanick, Chief Financial Officer and Vice President - Finance and Treasurer (filed herewith). 29 EX-10 2 ex10-31.txt EXHIBIT 10.31 - LOAN AGREEMENT Exhibit 10.31 ------------- LOAN AGREEMENT Wachovia Bank, National Association 123 South Broad Street Philadelphia, Pennsylvania 19109 (Hereinafter referred to as the "Bank") Paragon Technologies, Inc. 600 Kuebler Road Easton, Pennsylvania 18040 Ermanco Incorporated 6870 Grand Haven Road Spring Lake, Michigan 49456 (Individually and collectively "Borrower") This Loan Agreement ("Agreement") is entered into /s/ June 20, 2005 by and ----------------- between Bank and Borrower. This Agreement amends and restates in its entirety that certain Loan Agreement dated August 6, 2004 and applies to the loan or loans (individually and collectively, the "Loan") evidenced by one or more promissory notes dated /s/ --- June 20, 2005 or other notes subject hereto, as modified from time to time - ------------- (whether one or more, the "Note"), the commercial letters of credit and standby letters of credit issued hereunder (each, a "Letter of Credit" and collectively, the "Letters of Credit") and all Loan Documents. The terms "Loan Documents" and "Obligations," as used in this Agreement, are defined in the Note. Relying upon the covenants, agreements, representations and warranties contained in this Agreement, Bank is willing to extend credit to Borrower upon the terms and subject to the conditions set forth herein, and Bank and Borrower agree as follows: LETTERS OF CREDIT. Upon the request of Borrower, Bank shall issue commercial Letters of Credit and standby Letters of Credit, provided, the aggregate amount available to be drawn under all commercial Letters of Credit plus the aggregate amount of unreimbursed drawings under all commercial Letters of Credit at any one time does not exceed $5,000,000.00, and the aggregate amount available to be drawn under all standby Letters of Credit plus the aggregate amount of unreimbursed drawings under all standby Letters of Credit at any one time does not exceed $5,000,000.00, and further provided, no commercial Letter of Credit shall expire more than 365 days after the date it is issued and no standby Letter of Credit shall expire more than 365 days after the date it is issued. Notwithstanding anything to the contrary contained herein, the aggregate outstanding principal balance of Advances (as defined in the line of credit Promissory Note in the amount of $5,000,000.00, dated /s/ June 20, 2005 plus the ----------------- aggregate amount available to be drawn under all Letters of Credit plus the aggregate amount of unreimbursed drawings under all Letters of Credit at any one time shall not exceed $5,000,000.00. The Letters of Credit are to be used by Borrower for any purpose. Bank's obligation to issue Letters of Credit shall terminate if Borrower is in default (however denominated) under the Note or the other Loan Documents, or in any case, if not sooner terminated, on June 30, 2006. LETTER OF CREDIT FEES. Borrower shall pay to Bank, at such times as Bank shall require, Bank's standard fees in connection with Letters of Credit, as in effect from time to time, and with respect to standby Letters of Credit, an additional fee equal to 1.00% per annum on the face amount of each standby Letter of Credit, payable annually, in advance, for so long as such Letter of Credit is outstanding. REPRESENTATIONS.?Borrower represents that from the date of this Agreement and until final payment in full of the Obligations: Accurate Information. All information now and hereafter furnished to Bank is and will be true, correct and complete. Any such information relating to Borrower's financial condition will accurately reflect Borrower's financial condition as of the date(s) thereof, (including all contingent liabilities of every type), and Borrower further represents that its financial condition has not changed materially or adversely since the date(s) of such documents. Authorization; Non-Contravention. The execution, delivery and performance by Borrower and any guarantor, as applicable, of this Agreement and other Loan Documents to which it is a party are within its power, have been duly authorized as may be required and, if necessary, by making appropriate filings with any governmental agency or unit and are the legal, binding, valid and enforceable obligations of Borrower and any guarantors; and do not (i) contravene, or constitute (with or without the giving of notice or lapse of time or both) a violation of any provision of applicable law, a violation of the organizational documents of Borrower or any guarantor, or a default under any agreement, judgment, injunction, order, decree or other instrument binding upon or affecting Borrower or any guarantor, (ii) result in the creation or imposition of any lien (other than the lien(s) created by the Loan Documents) on any of Borrowers or any guarantor's assets, or (iii) give cause for the acceleration of any obligations of Borrower or any guarantor to any other creditor. Asset Ownership. Borrower has good and marketable title to all of the properties and assets reflected on the balance sheets and financial statements supplied Bank by Borrower, and all such properties and assets are free and clear of mortgages, security deeds, pledges, liens, charges, and all other encumbrances, except as otherwise disclosed to Bank by Borrower in writing and approved by Bank ("Permitted Liens"). To Borrower's knowledge, no default has occurred under any Permitted Liens and no claims or interests adverse to Borrower's present rights in its properties and assets have arisen. Discharge of Liens and Taxes. Borrower has duly filed, paid and/or discharged all taxes or other claims that may become a lien on any of its property or assets, except to the extent that such items are being appropriately contested in good faith and an adequate reserve for the payment thereof is being maintained. Sufficiency of Capital. Borrower is not, and after consummation of this Agreement and after giving effect to all indebtedness incurred and liens created by Borrower in connection with the Note and any other Loan Documents, will not be, insolvent within the meaning of 11 U.S.C. ss. 101, as in effect from time to lime. Compliance with Laws. Borrower is in compliance in all respects with all federal, state and local laws, rules and regulations applicable to its properties, operations, business, and finances, including, without limitation, any federal or state laws relating to liquor (including 18 U.S.C. ss. 3617, et seq.) or narcotics (including 21 U.S.C. ss. 801. et seq.) and/or any commercial crimes; all applicable federal, state and local laws and regulations intended to protect the environment; and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), if applicable. Organization and Authority. Each corporation, partnership or limited liability company Borrower and/or guarantor, as applicable, is duly created, validly existing and in good standing under the laws of the state of its organization, and has all powers, governmental licenses, authorizations, consents and approvals required to operate its business as now conducted. Each corporation, partnership or limited liability company Borrower and/or guarantor, as applicable, is duly qualified, licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers, and in which the failure to so qualify or be licensed, as the case may be, in the aggregate, could have a material adverse effect on the business, financial position, results of operations, properties or prospects of Borrower or any such guarantor. No Litigation. There are no pending or threatened suits, claims or demands against Borrower or any guarantor that have not been disclosed to Bank by Borrower in writing, and approved by Bank. AFFIRMATIVE COVENANTS. Borrower agrees that from the date hereof and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, Borrower will: Access to Books and Records. Allow Bank, or its agents, during normal business hours, access to the books, records and such other documents of Borrower as Bank shall reasonably require, and allow Bank, at Bank's expense, to inspect, audit and examine the same and to make extracts therefrom and to make copies thereof. Business Continuity. Conduct its business in substantially the same manner and locations as such business is now and has previously been conducted. Certificate of Full Compliance From Accountant. Deliver to Bank, with the financial statements required herein, a certification that Borrower is in full compliance with the Loan Documents. Compliance with Other Agreements. Comply with all terms and conditions contained in this Agreement, and any other Loan Documents, and swap Page 2 agreements, if applicable, as defined in the 11 U.S.C. ss. 101, as in effect from time to time. Estoppel Certificate. Furnish, within 15 days after request by Bank, a written statement duly acknowledged of the amount due under the Loan and identifying each outstanding Letter of Credit, if any, and whether offsets or defenses exist against the Obligations. Insurance. Maintain adequate insurance coverage with respect to its properties and business against loss or damage of the kinds and in the amounts customarily insured against by companies of established reputation engaged in the same or similar businesses including, without limitation, commercial general liability insurance, workers compensation insurance, and business interruption insurance; all acquired in such amounts and from such companies as Bank may reasonably require. Maintain Properties. Maintain, preserve and keep its property in good repair, working order and condition, making all replacements, additions and improvements thereto necessary for the proper conduct of its business, unless prohibited by the Loan Documents. Notice of Default and Other Notices. (a) Notice of Default. Furnish to Bank immediately upon becoming aware of the existence of any condition or event which constitutes a Default (as defined in the Loan Documents) or any event which, upon the giving of notice or lapse of time or both, may become a Default, written notice specifying the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. (b) Other Notices. Promptly notify Bank in writing of (i) any material adverse change in its financial condition or its business; (ii) any default under any material agreement, contract or other instrument to which it is a party or by which any of its properties are bound, or any acceleration of the maturity of any indebtedness owing by Borrower; (iii) any material adverse claim against or affecting Borrower or any part of its properties; (iv) the commencement of, and any material determination in, any litigation with any third party or any proceeding before any governmental agency or unit affecting Borrower; and (v) at least 30 days prior thereto, any change in Borrower's name or address as shown above, and/or any change in Borrower's structure. Other Financial Information. Deliver promptly such other information regarding the operation, business affairs, and financial condition of Borrower which Bank may reasonably request. Payment of Debts. Pay and discharge when due, and before subject to penalty or further charge, and otherwise satisfy before maturity or delinquency, all obligations, debts, taxes, and liabilities of whatever nature or amount, except those which Borrower in good faith disputes. Reports and Proxies. Deliver to Bank, promptly, a copy of all financial statements, reports, notices, and proxy statements, sent by Borrower to stockholders, and all regular or periodic reports required to be filed by Borrower with any governmental agency or authority. NEGATIVE COVENANTS. Borrower agrees that from the date hereof and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, Borrower will not: Default on Other Contracts or Obligations. Default on any material contract with or obligation when due to a third party or default in the performance of any obligation to a third party incurred for money borrowed. Government Intervention. Permit the assertion or making of any seizure, vesting or intervention by or under authority of any governmental entity, as a result of which the management of Borrower or any guarantor is displaced of its authority in the conduct of its respective business or such business is curtailed or materially impaired. Judgment Entered. Permit the entry of any monetary judgment or the assessment against, the filing of any tax lien against, or the issuance of any writ of garnishment or attachment against any property of or debts due. ANNUAL FINANCIAL STATEMENTS. Borrower shall deliver to Bank, within 120 days after the close of each fiscal year, audited financial statements reflecting its operations during such fiscal year, including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting schedules and in reasonable detail, prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year. If audited statements are required, all such statements shall be examined by an independent certified public accountant acceptable to Bank. The opinion of such independent certified public accountant shall not be acceptable to Bank if qualified due to any limitations in scope imposed by Borrower or any other person or entity. Any other qualification of the opinion by the accountant shall render the acceptability of the financial statements subject to Bank's approval. PERIODIC FINANCIAL STATEMENTS.?Borrower shall deliver to Bank, within 75 days after the end of each fiscal quarter, unaudited management-prepared quarterly financial statements including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting Page 3 schedules; all in reasonable detail and prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year. Such statements shall be certified as to their correctness by a principal financial officer of Borrower and in each case, if audited statements are required, subject to audit and year-end adjustments. CONDITIONS PRECEDENT.?The obligations of Bank to make the loan and any advances and to issue any Letters of Credit pursuant to this Agreement are subject to the following conditions precedent: Letter of Credit Documents. Receipt by Bank of all documents required by Bank in connection with Letters of Credit, including without limitation, applications therefor, all in form satisfactory to Bank. Additional Documents. Receipt by Bank of such additional supporting documents as Bank or its counsel may reasonably request. IN WITNESS WHEREOF, Borrower and Bank, on the day and year first written above, have caused this Agreement to be executed under seal. Paragon Technologies, Inc. By: /s/ Leonard S. Yurkovic (SEAL) ------------------------------------------ Leonard S. Yurkovic, President/CEO Ermanco Incorporated By: /s/ Ronald J. Semanick (SEAL) ------------------------------------------ Ronald J. Semanick, Treasurer Wachovia Bank, National Association By: /s/ Willard Schnader, Vice President (SEAL) ------------------------------------------ Willard Schnader, Vice President Page 4 EX-10 3 ex10-32.txt EXHIBIT 10.32 - PROMISSORY NOTE Exhibit 10.32 ------------- PROMISSORY NOTE $5,000,000.00 /s/ June 20, 2005 ----------------- Paragon Technologies, Inc. 600 Kuebler Road Easton, Pennsylvania 18040 Ermanco Incorporated 6870 Grand Haven Road Spring Lake, Michigan 49456 (Individually and collectively "Borrower") Wachovia Bank, National Association 123 South Broad Street Philadelphia, Pennsylvania 19109 (Hereinafter referred to as "Bank") Borrower promises to pay to the order of Bank, in lawful money of the United States of America, at its office indicated above or wherever else Bank may specify, the sum of Five Million and No/100 Dollars ($5,000,000.00) or such sum as may be advanced and outstanding from time to time, with interest on the unpaid principal balance at the rate and on the terms provided in this Promissory Note (including all renewals, extensions or modifications hereof, this "Note"). RENEWAL/MODIFICATION. This Promissory Note renews, extends and/or modifies that certain Promissory Note dated August 6, 2004 (the "Original Promissory Note"), evidencing an original principal amount of $5,000.000.00. This Promissory Note is not a novation. LOAN AGREEMENT. This Note is subject to the provisions of that certain Loan Agreement between Bank and Borrower dated /s/ June 20, 2005 , as modified from ----------------- time to time. LINE OF CREDIT. Borrower may borrow, repay and reborrow, and, upon the request of Borrower, Bank shall advance and readvance under this Note from time to time until the maturity hereof (each an "Advance" and together the "Advances"), so long as the total principal balance outstanding under this Note at any one time does not exceed the principal amount stated on the face of this Note, subject to the limitations described in any loan agreement to which this Note is subject. Bank's obligation to make Advances under this Note shall terminate if Borrower is in Default. As of the date of each proposed Advance, Borrower shall be deemed to represent that each representation made in the Loan Documents is true as of such date. If Borrower subscribes to Bank's cash management services and such services are applicable to this line of credit, the terms of such service shall control the manner in which funds are transferred between the applicable demand deposit account and the line of credit for credit or debit to the line of credit. USE OF PROCEEDS. Borrower shall use the proceeds of the loan(s) evidenced by this Note for the commercial purposes of Borrower, as follows: for working capital. SECURITY. Borrower has granted Bank a security interest in the collateral described in the Loan Documents, including, but not limited to, personal property collateral described in that certain Security Agreement dated August 6, 2004. INTEREST RATE. Interest shall accrue on (the unpaid principal balance of this Note from the date hereof at the LIBOR Market Index Rate plus 1.4%, as that rate may change from day to day in accordance with changes in the LIBOR Market Index Rate ("Interest Rate"). "LIBOR Market Index Rate", for any day, means the rate for 1 month U.S dollar deposits as reported on Telerate page 3750 as of 11:00 a.m., London time, on such day, or if such day is not a London business day, then the immediately preceding London business day (or if not so reported, then as determined by Bank from another recognized source or interbank quotation). DEFAULT RATE. In addition to all other rights contained in this Note, if a Default (as defined herein) occurs and as long as a Default continues, all outstanding Obligations, other than Obligations under any swap agreements (as defined in 11 U.S.C. ss. 101, as in effect from time to time) between Borrower and Bank or its affiliates, shall bear interest at the Interest Rate plus 3% ("Default Rate"). The Default Rate shall also apply from acceleration until the Obligations or any judgment thereon is paid in full. INTEREST AND FEE(S) COMPUTATION (ACTUAL/360). Interest and fees, if any, shall be computed on the basis of a 360-day year for the actual number of days in the applicable period ("Actual/360 Computation"). The Actual/360 Computation determines the annual effective interest yield by taking the stated (nominal) rate for a year's period and then dividing said rate by 360 to determine the daily periodic rate to be applied for each day in the applicable period. Application of the Actual/360 Computation produces an annualized effective rate exceeding the nominal rate. REPAYMENT TERMS. This Note shall be due and payable in consecutive monthly payments of accrued interest only, commencing on July 1, 2005, and continuing on the same day of each month thereafter until fully paid. In any event, all principal and accrued interest shall be due and payable on June 30, 2006. AUTOMATIC DEBIT OF CHECKING ACCOUNT FOR LOAN PAYMENT. Borrower authorizes Bank to debit demand deposit account number 2100017073313 or any other account with Bank (routing number 031100869) designated in writing by Borrower, beginning July 1, 2005 for any payments due under this Note. Borrower further certifies that Borrower holds legitimate ownership of this account and preauthorizes this periodic debit as part of its right under said ownership. APPLICATION OF PAYMENTS. Monies received by Bank from any source for application toward payment of the Obligations shall be applied to accrued interest and then to principal. If a Default occurs, monies may be applied to the Obligations in any manner or order deemed appropriate by Bank. If any payment received by Bank under this Note or other Loan Documents is rescinded, avoided or for any reason returned by Bank because of any adverse claim or threatened action, the returned payment shall remain payable as an obligation of all persons liable under this Note or other Loan Documents as though such payment had not been made. DEFINITIONS. Loan Documents. The term "Loan Documents", as used in this Note and the other Loan Documents, refers to all documents executed in connection with or related to the loan evidenced by this Note and any prior notes which evidence all or any portion of the loan evidenced by this Note, and any letters of credit issued pursuant to any loan agreement to which this Note is subject, any applications for such letters of credit and any other documents executed in connection therewith or related thereto, and may include, without limitation, a commitment letter that survives closing, a loan agreement, this Note, guaranty agreements. security agreements, security instruments, financing statements, mortgage instruments, 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, as in effect from time to time). Obligations. The term "Obligations", as used in this Note and me other Loan Documents, refers to any and all indebtedness and other obligations under this Note, all other obligations under any other Loan Document(s), and all obligations under any swap agreements (as defined in 11 U.S.C. ss. 101, as in effect from time to time) between Borrower and Bank, or its affiliates, whenever executed. Certain Other Terms. All terms that are used but not otherwise defined in any of the Loan Documents shall have the definitions provided In the Uniform Commercial Code. Page 2 LATE CHARGE. If any payments are not timely made, Borrower shall also pay to Bank a late charge equal to 5% of each payment past due for 10 or more days. This late charge shall not apply to payments due at maturity or by acceleration hereof, unless such late payment is in an amount not greater than the highest periodic payment due hereunder, Acceptance by Bank of any late payment without an accompanying late charge shall not be deemed a waiver of Bank's right to collect such late charge or to collect a late charge for any subsequent late payment received. ATTORNEYS' FEES AND OTHER COLLECTION COSTS. Borrower shall pay all of Bank's reasonable expenses incurred to enforce or collect any of the Obligations including, without limitation, reasonable arbitration, paralegals', attorneys' and experts' fees and expenses, whether incurred without the commencement of a suit, in any trial, arbitration, or administrative proceeding, or in any appellate or bankruptcy proceeding. USURY. If at any time the effective Interest rate under this Note would, but for this paragraph, exceed the maximum lawful rate, the effective interest rate under this Note shall be the maximum lawful rate, and any amount received by Bank in excess of such rate shall be applied to principal and then to fees and expenses, or, if no such amounts are owing, returned to Borrower. GRACE/CURE PERIOD. Grace Period.?The failure of timely payment of the Obligations shall not be a Default until 5 days after such payment is due. Cure Period. Except as provided below, any Default, other than non-payment, may be cured within 10 days after written notice thereof is mailed to Borrower by Bank. Borrower's right to cure shall be applicable only to curable defaults and shall not apply, without limitation, to Defaults based upon False Warranty or Cessation; Bankruptcy. Borrower shall have the right to cure a Default only once during any 12 month period. Bank shall not exercise its remedies to collect the Obligations except as Bank reasonably deems necessary to protect its interest in collateral securing the Obligations during a cure period. DEFAULT. If any of the following occurs and is not cured within the applicable Cure Period, a default ("Default") under this Note shall exist: Nonpayment; Nonperformance. The failure of timely payment or performance of the Obligations or default, however denominated, under this Note or any other Loan Documents. False Warranty. A warranty or representation made or deemed made in the Loan Documents or furnished Bank in connection with the loan evidenced by this Note proves materially false, or if of a continuing nature, becomes materially false. Cross Default. At Bank's option, any default in payment or performance of any obligation under any other loans, contracts or agreements of Borrower, any Subsidiary or Affiliate of Borrower, any general partner of or the holder(s) of the majority ownership interests of Borrower with Bank or its affiliates ("Affiliate" shall have the meaning as defined in 11 U-S.C. ss. 101, as in effect from time to time, except that the term "Borrower" shall be substituted for the term "Debtor" therein; "Subsidiary" shall mean any business in which Borrower holds, directly or indirectly, a controlling interest). Cessation; Bankruptcy. The death of, appointment of a guardian for, dissolution of, termination of existence of, loss of good standing status by, appointment of a receiver for, assignment for the benefit of creditors of, or commencement of any bankruptcy or insolvency proceeding by or against Borrower, its Subsidiaries or Affiliates, if any, or any general partner of or the holder(s) of the majority ownership interests of Borrower, or any party to the Loan Documents. Material Capital Structure or Business Alteration. Without prior written consent of Bank, (i) a material alteration in the kind or type of Borrower's business or that of Borrower's Subsidiaries or Affiliates, if any; (ii) the sale of substantially all of the business or assets of Borrower, any of Borrower's Subsidiaries or Affiliates or any guarantor, or a material portion (10% or more) of such business or assets if such a sale is outside the ordinary course of business of Borrower, or any of Borrower's Subsidiaries or Affiliates or any guarantor, or more than 50% of the outstanding stock or voting power of or in any such entity in a single transaction or a series of transactions; (iii) the acquisition of substantially all of the business or assets or more than 50% of the outstanding stock or voting power of any other entity; or (iv) should any Borrower or any of Borrower's Subsidiaries or Affiliates or any guarantor enter into any merger or consolidation. Material Adverse Change. Bank determines in good faith, in its sole discretion, that the prospects for payment or Page 3 performance of the Obligations are impaired or there has occurred a material adverse change in the business or prospects of Borrower, financial or otherwise. REMEDIES UPON DEFAULT. If a Default occurs under this Note or any Loan Documents, Bank may at any time thereafter, take the following actions: Bank Lien. Foreclose its security interest or lien against Borrower's accounts without notice. Acceleration Upon Default. Accelerate the maturity of this Note and, at Bank's option, any or all other Obligations, other than Obligations under any swap agreements (as defined in 11 U.S.C. ss. 101, as in effect from time to time) between Borrower and Bank, or its affiliates, which shall be due in accordance with and governed by the provisions of said swap agreements; whereupon this Note and the accelerated Obligations shall be immediately due and payable; provided, however, if the Default is based upon a bankruptcy or insolvency proceeding commenced by or against Borrower or any guarantor or endorser of this Note, all Obligations (other than Obligations under any swap agreement as referenced above) shall automatically and immediately be due and payable. Cumulative. Exercise any rights and remedies as provided under the Note and other Loan Documents, or as provided by law or equity. FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information as Bank may reasonably request from time to time, including without limitation, financial statements and information pertaining to Borrower's financial condition. Such information shall be true, complete, and accurate. 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 NOTE 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 NOTE AND AS AN INDUCEMENT TO GRANT FINANCIAL ACCOMMODATIONS TO THE BORROWER. If a Default occurs under this 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 attorneys' 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 Page 4 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, 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 this Note 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 this Note and/or for any other liabilities, as herein provided. WAIVERS AND AMENDMENTS. No waivers, amendments or modifications of this Note and other Loan Documents shall be valid unless in writing and signed by an officer of Bank. No waiver by Bank of any Default shall operate as a waiver of any other Default or the same Default on a future occasion. Neither the failure nor any delay on the part of Bank in exercising any right, power, or remedy under this Note and other Loan Documents shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or remedy. Except to the extent otherwise provided by the Loan Documents or prohibited by law, each Borrower and each other person liable under this Note waives presentment, protest, notice of dishonor, demand for payment, notice of intention to accelerate maturity, notice of acceleration of maturity, notice of sale and all other notices of any kind. Further, each agrees that Bank may (i) extend, modify or renew this Note or make a novation of the loan evidenced by this Note, and/or (ii) grant releases, compromises or indulgences with respect to any collateral securing this Note, or with respect to any Borrower or other person liable under this Note or any other Loan Documents, all without notice to or consent of each Borrower and other such person, and without affecting the liability of each Borrower and other such person; provided, Bank may not extend, modify or renew this Note or make a novation of the loan evidenced by this Note without the consent of the Borrower, or if there is more than one Borrower, without the consent of at least one Borrower; and further provided, if there is more than one Borrower, Bank may not enter into a modification of this Note which increases the burdens of a Borrower without the consent of that Borrower. MISCELLANEOUS PROVISIONS. Assignment. This Note and the other Loan Documents shall inure to the benefit of and be binding upon the parties and their respective heirs, legal representatives, successors and assigns. Bank's interests in and rights under this Note and the other Loan Documents are freely assignable, in whole or in part, by Bank. In addition, nothing in this Note or any of the other Loan Documents shall prohibit Bank from pledging or assigning this Note or any of the other Loan Documents or any interest therein to any Federal Reserve Bank. Borrower shall not assign its rights and interest hereunder without the prior written consent of Bank, and any attempt by Borrower to assign without Bank's prior written consent is null and void. Any assignment shall not release Borrower from the Obligations. Applicable Law; Conflict Between Documents. This Note and, unless otherwise provided in any other Loan Document, the other Loan Documents shall be governed by and construed under the laws of the state named in Bank's address on the first page hereof without regard to that state's conflict of laws principles. If the terms of this Note should conflict with the terms of any loan agreement or any commitment letter that survives closing, the terms of this Note shall control. Borrower's Accounts. Except as prohibited by law, Borrower grants Bank a security interest in all of Borrowers accounts with Bank and any of its affiliates. Swap Agreements. All swap agreements (as defined in 11 U.S.C. ss. 101, as in effect from time to time), if any, between Borrower and Bank or its affiliates are independent Page 5 agreements governed by the written provisions of said swap agreements, which will remain in full force and effect, unaffected by any repayment, prepayment, acceleration, reduction, increase or change in the terms of this Note, except as otherwise expressly provided in said written swap agreements, and any payoff statement from Bank relating to this Note shall not apply to said swap agreements unless expressly referred to in such payoff statement. Jurisdiction. Borrower irrevocably agrees to non-exclusive personal jurisdiction in the state named in Bank's address on the first page hereof. Severability. If any provision of this Note or of the other Loan Documents shall be prohibited or invalid under applicable law, such provision shall be ineffective but only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note or other such document. Notices. Any notices to Borrower shall be sufficiently given, if in writing and mailed or delivered to the Borrower's address shown above or such other address as provided hereunder, and to Bank, if in writing and mailed or delivered to Wachovia Bank, National Association, Mail Code VA7628, P. O. Box 13327, Roanoke, VA 24040 or Wachovia Bank, National Association, Mail Code VA7628, 10 South Jefferson Street, Roanoke, VA 24011 or such other address as Bank may specify In writing from time to time. Notices to Bank must include the mail code. In the event that Borrower changes Borrower's address at any time prior to the date the Obligations are paid in full, Borrower agrees to promptly give written notice of said change of address by registered or certified mail, return receipt requested, all charges prepaid. Plural; Captions. All references in the Loan Documents to Borrower, guarantor, person, document or other nouns of reference mean both the singular and plural form, as the case may be, and the term "person" shall mean any individual, person or entity. The captions contained in the Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of the Loan Documents. Advances. Bank may, in its sole discretion, make other advances which shall be deemed to be advances under this Note, even though the stated principal amount of this Note may be exceeded as a result thereof. Posting of Payments. All payments received during normal banking hours after 2:00 p.m. local time at the office of Bank first shown above shall be deemed received at the opening of the next banking day. Joint and Several Obligations. If there is more than one Borrower, each is jointly and severally obligated. Fees and Taxes. Borrower shall promptly pay all documentary, intangible recordation and/or similar taxes on this transaction whether assessed at closing or arising from time to time. LIMITATION ON LIABILITY; WAIVER OF PUNITIVE DAMAGES. EACH OF THE PARTIES HERETO, INCLUDING BANK BY ACCEPTANCE HEREOF, AGREES THAT IN ANY JUDICIAL, MEDIATION OR ARBITRATION PROCEEDING OR ANY CLAIM OR CONTROVERSY BETWEEN OR AMONG THEM THAT MAY ARISE OUT OF OR BE IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENT OR DOCUMENT BETWEEN OR AMONG THEM OR THE OBLIGATIONS EVIDENCED HEREBY OR RELATED HERETO, IN NO EVENT SHALL ANY PARTY HAVE A REMEDY OF, OR BE LIABLE TO THE OTHER FOR, (1) INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OR (2) PUNITIVE OR EXEMPLARY DAMAGES. EACH OF THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES THEY MAY HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY SUCH PROCEEDING, CLAIM OR CONTROVERSY, WHETHER THE SAME IS RESOLVED BY ARBITRATION, MEDIATION, JUDICIALLY OR OTHERWISE. Patriot Act Notice. To help fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. For purposes of this section, account shall be understood to include loan accounts. FINAL AGREEMENT. This Note and the other Loan Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF BORROWER BY EXECUTION HEREOF AND BANK BY ACCEPTANCE HEREOF, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE, THE LOAN DOCUMENTS OR ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION WITH THIS NOTE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT TO BANK TO ACCEPT THIS NOTE. EACH OF THE PARTIES AGREES THAT THE TERMS HEREOF SHALL SUPERSEDE AND Page 6 REPLACE ANY PRIOR AGREEMENT RELATED TO ARBITRATION OF DISPUTES BETWEEN THE PARTIES CONTAINED IN ANY LOAN DOCUMENT OR ANY OTHER DOCUMENT OR AGREEMENT HERETOFORE EXECUTED IN CONNECTION WITH, RELATED TO OR BEING REPLACED, SUPPLEMENTED, EXTENDED OR MODIFIED BY, THIS NOTE. IN WITNESS WHEREOF, Borrower, on the day and year first above written, has caused this Note to be executed under seal. Paragon Technologies, Inc. By: /s/ Leonard S. Yurkovic (SEAL) -------------------------------------- Leonard S. Yurkovic, President/CEO Ermanco Incorporated By: /s/ Ronald J. Semanick (SEAL) -------------------------------------- Ronald J. Semanick, Treasurer Page 7 EX-31 4 ex31-1.txt EXHIBIT 31.1 - CERTIFICATIONS Exhibit 31.1 ------------ SECTION 302 CERTIFICATION I, Leonard S. Yurkovic, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Paragon Technologies, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: August 12, 2005 --------------------------------------- /s/ Leonard S. Yurkovic Leonard S. Yurkovic President and CEO EX-31 5 ex31-2.txt EXHIBIT 31.2 - CERTIFICATIONS Exhibit 31.2 ------------ SECTION 302 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: August 12, 2005 ------------------------------------------------------- /s/ Ronald J. Semanick Ronald J. Semanick Chief Financial Officer, and Vice President - Finance and Treasurer EX-32 6 ex32-1.txt EXHIBIT 31.1 - CERTIFICATIONS Exhibit 32.1 ------------ CERTIFICATION OF PRESIDENT AND CEO 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 ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Leonard S. Yurkovic, President and CEO 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, as amended; 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/ Leonard S. Yurkovic ---------------------------------------------- Leonard S. Yurkovic President and Chief Executive Officer August 12, 2005 EX-32 7 ex32-2.txt EXHIBIT 32.2 - CERTIFICATIONS Exhibit 32.2 ------------ CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald J. Semanick, Chief Financial Officer 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, as amended; 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/ Ronald J. Semanick ----------------------------------------------------- Ronald J. Semanick Chief Financial Officer and Vice President - Finance and Treasurer August 12, 2005 -----END PRIVACY-ENHANCED MESSAGE-----