-----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, EevSSVriTtl88ExLed6f5eug2pzveuCnSaawxpTt4E2mfyNusl+E1IFx/UZfaBEq ODynH0T7L4XA2n3zSBTLEg== 0000090045-06-000055.txt : 20060810 0000090045-06-000055.hdr.sgml : 20060810 20060810124049 ACCESSION NUMBER: 0000090045-06-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060810 DATE AS OF CHANGE: 20060810 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: 061020350 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 - SECOND QUARTER ENDED JUNE 30 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q ----------------------- |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 2006 Commission File Number: 1-15729 PARAGON TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- (Exact Name Of Registrant As Specified In Its Charter) Delaware 22-1643428 - -------------------------------------------------- --------------------- (State or Other Jurisdiction of (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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X| Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| The number of shares of the Registrant's Common Stock, $1.00 par value, outstanding as of July 31, 2006 was 3,202,800. [PARAGON 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................................ 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 28 Item 4. Controls and Procedures............................................... 28 PART II -- OTHER INFORMATION Item 1. Legal Proceedings..................................................... 29 Item 1A. Risk Factors.......................................................... 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........... 29 Item 3. Defaults Upon Senior Securities....................................... 30 Item 4. Submission of Matters to a Vote of Security Holders................... 30 Item 5. Other Information..................................................... 30 Item 6. Exhibits.............................................................. 30 SIGNATURES.............................................................................. 31 EXHIBIT INDEX........................................................................... 32
PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Balance Sheets June 30, 2006 and December 31, 2005 (In Thousands, Except Share Data)
(UNAUDITED) June 30, December 31, 2006 2005 ------------------- ------------------ Assets - ------ Current assets: Cash and cash equivalents....................... $ 2,804 687 Short-term investments.......................... 13,000 16,710 ------------------- ------------------ Total cash and cash equivalents and short-term investments.................... 15,804 17,397 ------------------- ------------------ Receivables: Trade......................................... 2,042 2,029 Notes and other receivables................... 660 1,066 ------------------- ------------------ Total receivables........................... 2,702 3,095 ------------------- ------------------ Costs and estimated earnings in excess of billings................................... 570 616 Inventories: Raw materials................................. 82 108 Work-in-process............................... 137 26 Finished goods................................ 358 210 ------------------- ------------------ Total inventories........................... 577 344 ------------------- ------------------ Deferred income tax benefits.................... 358 353 Prepaid expenses and other current assets....... 245 329 ------------------- ------------------ Total current assets........................ 20,256 22,134 ------------------- ------------------ Property, plant and equipment, at cost: Machinery and equipment......................... 1,172 1,160 Less: accumulated depreciation................. 875 911 ------------------- ------------------ Net property, plant and equipment............. 297 249 ------------------- ------------------ Deferred income tax benefits....................... 184 203 Other assets....................................... 10 10 ------------------- ------------------ Total assets....................................... $ 20,747 22,596 =================== ==================
See accompanying notes to consolidated financial statements. 1 Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Balance Sheets June 30, 2006 and December 31, 2005 (In Thousands, Except Share Data)
(UNAUDITED) June 30, December 31, 2006 2005 ------------------- ------------------ Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Accounts payable................................ $ 1,447 1,391 Customers' deposits and billings in excess of costs and estimated earnings ........................... 1,865 2,044 Accrued salaries, wages, and commissions................................... 148 102 Income taxes payable............................ 591 650 Accrued product warranty........................ 249 189 Deferred gain on sale-leaseback................. 165 165 Accrued other liabilities....................... 777 796 --------------------- ------------------- Total current liabilities................... 5,242 5,337 --------------------- ------------------- Long-term liabilities: Deferred gain on sale-leaseback................. 110 193 --------------------- ------------------- Total long-term liabilities................. 110 193 --------------------- ------------------- Commitments and contingencies Stockholders' equity: Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 3,342,000 shares as of June 30, 2006 and 3,539,019 shares as of December 31, 2005................ 3,342 3,539 Additional paid-in capital....................... 6,588 7,004 Retained earnings................................ 5,465 6,523 --------------------- ------------------- Total stockholders' equity.................. 15,395 17,066 --------------------- ------------------- Total liabilities and stockholders' equity.. $ 20,747 22,596 ===================== ===================
See accompanying notes to consolidated financial statements. 2 Item 1. Financial Statements - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2006 and 2005 (In Thousands, Except Share and Per Share Data)
Three Months Ended Six Months Ended ---------------------------------- ---------------------------------- June 30, June 30, June 30, June 30, 2006 2005 2006 2005 ---------------- ---------------- ---------------- ---------------- Net sales........................... $ 4,823 3,729 9,043 7,595 Cost of sales....................... 3,315 2,839 6,248 5,613 ----------------- ----------------- ------------------------------------ Gross profit on sales............... 1,508 890 2,795 1,982 ----------------- ----------------- ------------------------------------ Selling, general and administrative expenses.......... 1,429 1,147 2,801 2,184 Product development costs........... 60 19 216 23 Interest expense.................... - - 1 1 Interest income..................... (148) (61) (276) (74) Other income, net................... (47) (36) (76) (76) ----------------- ----------------- ------------------------------------ 1,294 1,069 2,666 2,058 ----------------- ----------------- ------------------------------------ Income (loss) from continuing operations before income taxes..................... 214 (179) 129 (76) Income tax expense (benefit)........ 43 (69) (43) (30) ----------------- ----------------- ------------------------------------ Income (loss) from continuing operations............ 171 (110) 172 (46) Income from discontinued operations, net of income taxes..................... - 819 - 949 ----------------- ----------------- ------------------------------------ Net income.......................... $ 171 709 172 903 ================= ================= ==================================== Basic earnings (loss) per share: Income (loss) from continuing operations.......... $ .05 (.03) .05 (.01) Income from discontinued operations........ - .20 - .22 ----------------- ----------------- ------------------------------------ Net income....................... $ .05 .17 .05 .21 ================= ================= ==================================== Diluted earnings (loss) per share: Income (loss) from continuing operations.......... $ .05 (.03) .05 (.01) Income from discontinued operations........ - .19 - .22 ----------------- ----------------- ------------------------------------ Net income....................... $ .05 .16 .05 .21 ================= ================= ==================================== Weighted average shares outstanding............... 3,495,389 4,272,629 3,514,088 4,269,871 Dilutive effect of stock options.................... 7,190 61,017 7,569 55,511 ----------------- ----------------- ------------------------------------ Weighted average shares outstanding assuming dilution................ 3,502,579 4,333,646 3,521,657 4,325,382 ================= ================= ====================================
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, 2006 and 2005 (In Thousands, Except Share Data)
Six Months Ended ---------------------------------------- June 30, June, 30, 2006 2005 ------------------- ------------------- Cash flows from operating activities: Net income.......................................... $ 172 903 Less: Income from discontinued operations.......... - 949 ------------------- ------------------- Income (loss) from continuing operations............ 172 (46) Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation of plant and equipment............. 47 42 Loss on disposition of equipment................ 2 - Deferred tax expenses........................... 14 80 Amortization of deferred gain on sale- leaseback..................................... (83) (83) Stock-based compensation........................ 18 9 Change in operating assets and liabilities: Receivables................................. 393 (414) Costs and estimated earnings in excess of billings....................... 46 (325) Inventories................................. (233) (10) Prepaid expenses and other current assets........................... 84 52 Accounts payable............................ 56 556 Customers' deposits and billings in excess of costs and estimated earnings................................. (179) 267 Accrued salaries, wages, and commissions.............................. 46 50 Income taxes payable........................ (59) 148 Accrued product warranty.................... 60 (203) Accrued other liabilities................... (19) 13 Net cash provided by operating activities of discontinued operations.................... - 1,048 ------------------- ------------------- Net cash provided by operating activities.............................. 365 1,184 ------------------- ------------------- Cash flows from investing activities: Proceeds from sales of short-term investments....................................... 4,210 250 Purchases of short-term investments................. (500) (400) Purchases of property, plant and equipment.......... (97) (77) Net cash used by investing activities of discontinued operations........................ - (243) ------------------- ------------------- Net cash provided (used) by investing activities........................................ 3,613 (470) ------------------- -------------------
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, 2006 and 2005 (In Thousands, Except Share Data)
Six Months Ended ---------------------------------------- June 30, June 30, 2006 2005 ------------------- ------------------- Cash flows from financing activities: Sale of common shares in connection with employee incentive stock option plan............. - 160 Repurchase and retirement of common stock..................................... (1,861) - ------------------- ------------------- Net cash provided (used) by financing activities......................... (1,861) 160 ------------------- ------------------- Increase in cash and cash equivalents................................. 2,117 874 Cash and cash equivalents, beginning of period.............................. 687 1,702 ------------------- ------------------- Cash and cash equivalents, end of period.................................... $ 2,804 2,576 =================== =================== Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest..................................... $ 1 1 =================== =================== Income taxes................................. $ (371) 62 =================== ===================
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, 2006 and 2005 (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 comparative financial information for the period ended June 30, 2005 includes the accounts of the Company and Ermanco Incorporated ("Ermanco"), a wholly owned subsidiary company that was sold on August 5, 2005, after elimination of intercompany balances and transactions. Certain prior year amounts have been reclassified to conform to the current year's presentation. 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, 2005 as filed with the Securities and Exchange Commission on March 30, 2006. Refer to the Company's annual report on Form 10-K for the year ended December 31, 2005 for more complete financial information. See Discontinued Operations - Sale of Ermanco in Note 2 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 inventory reserve, warranty reserve, and revenue recognition. (2) Discontinued Operations -- 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 an accounts receivable adjustment) and assume certain liabilities of Ermanco, as more fully described in the Asset Purchase Agreement, a copy of which was filed as an attachment to the Company's definitive proxy statement with the Securities and Exchange Commission on July 1, 2005. At a Special Meeting of Stockholders held on August 3, 2005, the Company received approval from its stockholders to sell substantially all of the assets and liabilities of Ermanco. On August 5, 2005, the Company completed the sale of substantially all of the assets and liabilities of Ermanco, and received cash consideration of $23,055,000 (subject to a working capital adjustment and an accounts receivable adjustment). Transaction costs associated with the sale of the assets and liabilities of Ermanco were approximately $1,038,000. During the fourth quarter of 2005, the Company paid approximately $448,000 to the Buyer in connection with the working capital 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, 2006 and 2005 adjustment and $61,000 in connection with the accounts receivable adjustment. Therefore, the Company received cash consideration of $21,508,000, net of transactions costs and the working capital and accounts receivable adjustments in connection with the sale of the assets and liabilities of Ermanco, thereby resulting in a pre-tax loss on the sale of approximately $964,000. 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 in the amount of $2 million as security for its indemnification obligations. The letter of credit remained in place through August 4, 2006, the one-year anniversary of the closing of the asset sale. There was no claim under the letter of credit during its existence. 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. The results of operations for Ermanco's business activities are reported as a discontinued operation. The following are the condensed results of operations for Ermanco for the three and six months ended June 30, 2005 (in thousands):
Three Months Six Months Ended Ended ----------------------------------------------- June 30, 2005 June 30, 2005 ---------------------- ---------------------- Net sales...................................... $ 14,958 21,400 ====================== ====================== Income from operations before income taxes................................ $ 1,277 1,481 Income tax expense............................. 458 532 ---------------------- ---------------------- Income from discontinued operations, net of income taxes......................... $ 819 949 ====================== ======================
(3) Short-Term Investments ---------------------- The Company's short-term investments are comprised of a certificate of deposit and debt securities, all classified as trading, that are carried at cost, which approximates fair value of the investments at period end. The debt securities include state and municipal bonds, are on deposit with a major financial institution, and are supported by letters of credit. 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, 2006 and 2005 (4) Accrued Product Warranty ------------------------ The Company's products are warranted against defects in materials and workmanship for varying periods of time depending on customer requirements and the type of system sold, with a typical warranty period of one year. The Company provides an accrual for estimated future warranty costs and potential product liability claims based upon a percentage of cost of sales, typically two percent of the cost of the system being sold, and a detailed review of products still in the warranty period is performed each quarter. A roll-forward of warranty activities is as follows (in thousands):
Additions (Reductions) Beginning Charged to Ending Balance Costs and Balance January 1 Expenses Deductions June 30 -------------- ----------------- --------------- -------------------- 2006................... $ 189 91 31 249 2005................... $ 490 (163) 40 287
(5) Business Operations ------------------- Company Overview ---------------- Paragon provides a variety of material handling solutions, including systems, technologies, products, and services for material flow applications. The Company's capabilities include horizontal transportation, rapid dispensing, order fulfillment, computer software, sortation, integrating conveyors and conveyor systems, and aftermarket services. The Company'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. SI Systems is brought to market as two individual brands, SI Systems' Order Fulfillment Systems (hereafter referred to as "SI Systems OFS") and SI Systems' Production & Assembly Systems (hereafter referred to as "SI Systems PAS"). Each brand has its own focused sales force, utilizing the products and services currently available or under development within the Company. The SI Systems OFS sales force focuses on providing order fulfillment systems to order processing and distribution operations, which may incorporate the Company's proprietary DISPEN-SI-MATIC(R) and automated order fulfillment solutions and specialized software from the SINTHESIS(TM) Software Suite. SINTHESIS(TM) is comprised of eight proprietary software groups, with 26 extendible software modules that continually assess real-time needs and deploy solutions to accurately facilitate and optimize planning, warehousing, inventory, routing, and order fulfillment within the distribution process. The SI Systems PAS sales force focuses on providing automated material handling systems to manufacturing and assembly operations and the U.S. government, which may incorporate the Company's proprietary LO-TOW(R) and CARTRAC(R) horizontal transportation technologies. 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, 2006 and 2005 The Company's automated material handling systems are marketed, designed, sold, installed, and serviced by its own staff or subcontractors as labor-saving devices to improve productivity, quality, and reduce costs. The Company's integrated material handling solutions involve both standard and specially designed components and include integration of non-proprietary automated handling technologies so as to provide turnkey solutions for its customers' unique material handling needs. The Company's engineering staff develops and designs computer control programs required for the efficient operation of the systems and for optimizing manufacturing, assembly, and fulfillment operations. Following the sale of Ermanco, the Company has continued to review opportunities with the goal of maximizing resources, increasing stockholder value, and considering strategies and transactions intended to provide liquidity. At this time, the Company believes that an increase in stockholder value will be best obtained through a redeployment of assets from Ermanco to the Company's remaining business, through increases in the Company's internal technology base, strengthening the Company's sales and marketing capabilities, growth of the Company's continuing operations and other higher growth markets, in particular, by the enhancement of the Company's products with advanced proprietary software capabilities through research and development efforts and/or possible acquisitions, mergers, and joint ventures. Although the Company enters into preliminary discussions and non-disclosure agreements from time to time, the Company does not have any material definitive agreements in place. There is no assurance that the Company will be able to consummate any such acquisition at all or an acquisition on terms that the Company would consider reasonable. ----------------------------------- The Company's systems vary in configuration and capacity. Historically, system prices across the Company's product lines have ranged from $100,000 to several million dollars per system. Systems and aftermarket sales during the three and six months ended June 30, 2006 and 2005 are as follows (in thousands): For the three months ended June 30, 2006 and 2005:
June 30, 2006 June 30, 2005 ------------------------------ ------------------------------ % of Total % of Total Sales Sales Sales Sales -------------- ------------- -------------- -------------- Systems sales................. $ 4,140 85.8% $ 2,978 79.9% Aftermarket sales............. 683 14.2% 758 20.1% -------------- ------------- -------------- -------------- Total sales................ $ 4,823 100.0% $ 3,729 100.0% ============== ============= ============== ==============
For the six months ended June 30, 2006 and 2005:
June 30, 2006 June 30, 2005 ------------------------------ ------------------------------ % of Total % of Total Sales Sales Sales Sales -------------- ------------- -------------- -------------- Systems sales................. $ 7,431 82.2% $ 6,016 79.2% Aftermarket sales............. 1,612 17.8% 1,579 20.8% -------------- ------------- -------------- -------------- Total sales................ $ 9,043 100.0% $ 7,595 100.0% ============== ============= ============== ==============
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, 2006 and 2005 The Company's products are sold worldwide through its own sales personnel. Domestic and international sales during the three and six months ended June 30, 2006 and 2005 are as follows (in thousands): For the three months ended June 30, 2006 and 2005:
June 30, 2006 June 30, 2005 ------------------------------ ------------------------------ % of Total % of Total Sales Sales Sales Sales -------------- ------------- -------------- -------------- Domestic sales................ $ 4,712 97.7% $ 3,679 98.7% International sales........... 111 2.3% 50 1.3% -------------- ------------- -------------- -------------- Total sales................ $ 4,823 100.0% $ 3,729 100.0% ============== ============= ============== ==============
For the six months ended June 30, 2006 and 2005:
June 30, 2006 June 30, 2005 ------------------------------ ------------------------------ % of Total % of Total Sales Sales Sales Sales -------------- ------------- -------------- -------------- Domestic sales................ $ 8,901 98.4% $ 7,053 92.9% International sales........... 142 1.6% 542 7.1% -------------- ------------- -------------- -------------- Total sales................ $ 9,043 100.0% $ 7,595 100.0% ============== ============= ============== ==============
All of the Company's sales originate in the United States, and there are no long-lived assets existing outside the United States. The Company's backlog of orders at June 30, 2006 and June 30, 2005 were $8,292,000 and $7,773,000, respectively. The Company's business is largely dependent upon a limited number of large contracts with a limited number of customers. This dependence can cause unexpected fluctuations in sales volume. Various external factors affect the customers' decision-making process on expanding or upgrading their current production or distribution sites. The customers' timing and placement of new orders is often affected by factors such as the current economy, current interest rates, and future expectations. The Company believes that its business is not subject to seasonality, although the rate of new orders can vary substantially from month to month. Since the Company recognizes sales on a percentage of completion basis for its systems contracts, fluctuations in the Company's sales and earnings occur with increases or decreases in major installations. (6) 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 did not have a material impact on the Company's financial statements. 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, 2006 and 2005 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 and nonvested stock, and stock appreciation rights. It requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. 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 used prior to January 1, 2006. The Company adopted FAS 123R on January 1, 2006. In May 2005, the Financial Accounting Standards 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 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 effected 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. The Company adopted the provisions of this statement, as applicable, on January 1, 2006, and there was no impact of the adoption. In November 2005, the Financial Accounting Standards Board issued FSP No. FAS 123(R)-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." This FSP provides an elective alternative transition method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R. Companies may take up to one year from the effective date of the FSP to evaluate the available transition alternatives and make a one-time election as to which method to adopt. The Company is currently in the process of evaluating the alternative methods. In June 2006, the Financial Accounting Standards Board issued FIN 48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109, Accounting for Income Taxes, which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective beginning January 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on the financial statements. 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, 2006 and 2005 (7) Sale-Leaseback -------------- The Company's 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 $18,781 (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 leasing agreement is secured with a $200,000 letter of credit. The lease expires on February 21, 2008. In accordance with SFAS No. 13 and SFAS No. 28, the leaseback does not meet the criteria for classification as a capital lease; hence, it is classified as an operating lease. The sale-leaseback resulted in a total gain of $2,189,000, of which $1,363,000 was recorded as a gain in 2003. The seller-lessee (Company) retained more than a minor part (25,000 square feet) but less than substantially all of the use of the property (173,000 square feet) through the leaseback and realized a profit on the sale in excess of the present value of the minimum lease payments over the lease term. The present value of the stream of lease payments utilizing the Company's incremental borrowing rate of 10.0% was $826,000. The $826,000 of deferred profit 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, 2006 and 2005, $41,000 and $41,000, respectively, of the deferred gain was recognized. During the six months ended June 30, 2006 and 2005, $83,000 and $83,000, respectively, of the deferred gain was recognized. (8) Line of Credit -------------- The Company has a line of credit facility which may not exceed $5,000,000 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 the Company issued a $2,000,000 letter of credit in connection with the sale of substantially all of the assets and liabilities of Ermanco, thereby reducing the amount of available line of credit to $2,800,000. The letter of credit remained in place through August 4, 2006, the one-year anniversary of the closing of the asset sale. There was no usage under the letter of credit during its existence. As of August 5, 2006, the amount of available line of credit was $4,800,000. As of June 30, 2006, the Company did not have any borrowings under the line of credit facility, and the line of credit facility expires effective June 30, 2007. 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, 2006. (9) Stock Repurchase Program ------------------------ On August 12, 2004, the Company's Board of Directors approved a program to repurchase up to $1,000,000 of its outstanding common stock. The Company's Board of Directors amended its existing stock repurchase program on several occasions during 2005 and in 2006 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 $12,000,000. There were no repurchases during the three months ended March 31, 2006. During the three and six months ended June 30, 2006, the Company repurchased 209,519 shares of common stock at a weighted average cost, including brokerage commissions, of $8.88 per share. Cash expenditures for the stock repurchases during the three and six months ended June 30, 2006 were $1,861,470. Through June 30, 2006, the Company repurchased 1,068,319 shares of 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, 2006 and 2005 common stock at a weighted average cost, including brokerage commissions, of $9.61 per share. Cash expenditures for the stock repurchases since the inception of the program were $10,267,984. As of June 30, 2006, $1,732,016 remained available for repurchases under the stock repurchase program. Based on market conditions and other factors, additional repurchases may be made from time to time, in compliance with SEC regulations, in the open market or through privately negotiated transactions at the discretion of the Company. There is no expiration date with regards to the stock repurchase program. The purchase price for the shares of the Company's common stock repurchased was reflected as a reduction to stockholders' equity. The Company allocates the purchase price of the repurchased shares as a reduction to common stock for the par value of the shares repurchased, with the excess of the purchase price over par value being allocated between additional paid-in capital and retained earnings. All shares of common stock that were repurchased by the Company since the inception of the program were subsequently retired. In July 2006, 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 $12,000,000 of the Company's common stock to up to $14,000,000, of which approximately $2,515,619 remains available for repurchases under the stock repurchase program. (10) Stock-Based Compensation ------------------------ Effective January 1, 2006, the Company adopted SFAS No. 123R and related interpretations and began expensing the grant-date fair value of employee stock options over the related requisite service period. Prior to January 1, 2006, the Company applied Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense was recognized in net income for employee stock options, as options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company recognized compensation expense on options granted to non-employee directors. The estimated impact of adopting SFAS No. 123R in 2006 is approximately $7,000 and is not expected to have a significant impact on basic and diluted earnings per share for the year. The pro forma impact of expensing employee stock options in 2005 would have been $27,000 or a reduction of basic and diluted earnings per share by approximately $.01 for the year based on the disclosures required by SFAS No. 123. The Company adopted SFAS No. 123R using the modified prospective transition method and therefore has not restated prior periods. Under this transition method, compensation cost associated with employee stock options recognized in 2006 includes attribution of the fair value related to the remaining unvested portion of stock option awards granted prior to January 1, 2006, and attribution related to new awards granted after January 1, 2006. The expense associated with stock-based compensation arrangements is a non-cash charge. In the Consolidated Statements of Cash Flows, stock-based compensation expense is an adjustment to reconcile net income to cash provided (used) by operating activities. 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, 2006 and 2005 Prior to the adoption of SFAS No. 123R, the Company presented tax benefits, if any, resulting from stock-based compensation as operating cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123R requires that certain cash flows resulting from tax deductions in excess of compensation cost recognized in the financial statements be classified as financing cash flows. For the first six months of 2006, no excess tax benefits were generated. SFAS No. 123R modified the disclosure requirements related to stock-based compensation. Accordingly, the disclosures prescribed by SFAS No. 123R are included below. For stock options granted prior to the adoption of SFAS No. 123R, the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to its stock option plan would have been as follows:
Three Months Six Months Ended Ended June 30, 2005 June 30, 2005 ------------------ ------------------- Net income, as reported.................................... $ 709 $ 903 Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects.......... (11) (22) ------------------ ------------------- Pro forma net income....................................... $ 698 $ 881 ================== =================== Basic earnings per share: As reported............................................. $ .17 $ .21 Pro forma............................................... $ .16 $ .21 Diluted earnings per share: As reported............................................. $ .16 $ .21 Pro forma............................................... $ .16 $ .20
In November 2005, the FASB issued FSP No. FAS 123(R)-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." This FSP provides an elective alternative transition method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R. Companies may take up to one year from the effective date of the FSP to evaluate the available transition alternatives and make a one-time election as to which method to adopt. The Company is currently in the process of evaluating the alternative methods. 1997 Equity Compensation Plan The Company has a stock-based compensation program, the 1997 Equity Compensation Plan ("ECP"), which will expire in July 2007. The ECP provides for grants of stock options, restricted and nonvested stock, and stock appreciation rights to selected key employees, key advisors who perform valuable services, and directors of the Company. In addition, the ECP provides for grants of performance units to employees and key advisors. The ECP, as amended by stockholders in August 2000 and June 2001, authorizes up to 1,012,500 shares of common stock for issuance pursuant to the terms of the plan. Under the Company's ECP, officers, directors, and key employees have been granted options to purchase shares of common stock at the market price at the date of grant. Options become exercisable 14 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, 2006 and 2005 in increments of 25% on the anniversary date of the grant; thus, at the end of four years, the options are fully exercisable. Vested stock option awards may be exercised through payment of cash, exchange of mature shares, or through a broker. As of June 30, 2006, 51,035 options are outstanding under the plan, and all options have a term of five or seven years. The compensation cost charged against income during the three and six months ended June 30, 2006 for stock-based compensation programs was $10,000 and $18,000, respectively. Stock-based compensation costs during the three and six months ended June 30, 2006 consisted of expensing $2,000 and $3,000, respectively, for employee stock options, and $0 and $4,000, respectively, for directors' stock options, and $8,000 and $11,000, respectively, for nonvested stock. All of the compensation cost recognized was a component of selling, general and administrative expenses. Stock Options On March 8, 2006, the Board of Directors of the Company granted 12,500 stock options to its executive officers. The fair value of options granted in the first quarter of 2006 was estimated using the Black Scholes option valuation model that used the assumptions noted in the table below. Expected volatility and expected dividend yield are based on actual historical experience of the Company's stock and dividends over the historical period equal to the option term. The dividend yield on the Company's common stock is assumed to be zero since the Company has not paid any cash dividends since 1999 and has no present intention to declare cash dividends. The expected life represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method. The assumptions given below results from certain groups of employees exhibiting different behavior. Separate groups of employees that have similar historical exercise behavior were considered separately for valuation purposes. The Company does not expect to have any forfeitures of its recent stock option awards based on the historical experience of the group of employees that received the stock option awards. The risk-free rate is based on the U. S. Treasury Securities with terms equal to the expected time of exercise as of the grant date.
-------------------------------------------------------------------------------------------- Expected volatility............................................. 18.0% Expected dividend yield......................................... 0.0% Expected life (in years)........................................ 4.75 Risk-free interest rate......................................... 4.75% --------------------------------------------------------------------------------------------
The grant-date fair value of options granted during the first quarter of 2006 was $2.60 per option. 15 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, 2006 and 2005 A summary of stock option activity is presented below:
Weighted Average Weighted Remaining Average Contractual Aggregate Exercise Term Intrinsic Options Price (In Years) Value ------------- --------------- ---------------- --------------- Outstanding at January 1, 2006........... 38,535 $ 7.86 Granted................................ 12,500 10.01 Exercised.............................. - - Forfeited.............................. - - ------------- --------------- Outstanding at June 30, 2006............. 51,035 $ 8.39 2.1 $ 128,000 ============= =============== Exercisable at June 30, 2006............. 38,535 $ 7.86 .5 $ 95,000
There were no stock options exercised during the three and six months ended June 30, 2006. The compensation cost charged against income during the three and six months ended June 30, 2006 for stock options was $2,000 and $7,000, respectively. Compensation cost is recognized on a straight-line basis over the stated vesting period consistent with the terms of the arrangement. As of December 31, 2005, there were no unvested employee stock options. Therefore, no compensation cost related to stock options granted to employees prior to January 1, 2006 will be recognized. Nonvested Stock The grant-date fair value of nonvested stock is determined on the date of grant based on the market price of the stock, and compensation cost is generally amortized to expense on a straight-line basis over the vesting period during which employees perform related services. On March 8, 2006, the Company issued 12,500 shares of nonvested stock to its executive officers. Participants are entitled to cash dividends and to vote their respective shares. The shares are subject to forfeiture if employment is terminated prior to March 8, 2010. A summary of restricted stock activity is presented below:
Restricted Grant Date Shares Fair Value -------------- ------------------ Nonvested at January 1, 2006.............................. - $ - Granted................................................ 12,500 10.01 Vested................................................. - - Forfeited.............................................. - - -------------- ------------------ Nonvested at June 30, 2006................................ 12,500 $ 10.01 ============== ==================
The compensation cost charged against income during the three and six months ended June 30, 2006 for restricted stock awards was $8,000 and $11,000, respectively. The total compensation cost is expected to be recognized over the four-year vesting period. 16 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, 2006 and 2005 (11) Income Taxes ------------ Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognized income tax expense of $43,000 and an income tax benefit of $43,000, respectively, during the three and six months ended June 30, 2006 compared to an income tax benefit of $69,000 and $30,000, respectively, during the three and six months ended June 30, 2005. Income tax expense for the three months ended June 30, 2006 was lower than the statutory federal and state tax rates due primarily to tax-exempt interest on certain investments, while the income tax benefit for the six months ended June 30, 2006 was higher than statutory federal and state tax rates due primarily to the reversal of accruals for the expiration of tax return statutes and tax-exempt interest on certain investments. The income tax benefit for the three and six months ended June 30, 2005 was generally recorded at statutory federal and state tax rates. (12) 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. 17 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, 2006, 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, 2005. 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. Founded in 1958, the Company's material handling solutions are based on core technologies in horizontal transportation and order fulfillment and are aimed at improving productivity for manufacturing, assembly, and distribution center operations. On August 5, 2005, the Company completed the sale of substantially all of the assets and liabilities of Ermanco, and received cash consideration of $23,055,000 (subject to a working capital adjustment and an accounts receivable adjustment). Transaction costs associated with the sale of the assets and liabilities of Ermanco were approximately $1,038,000. During the fourth quarter of 2005, the Company paid $448,000 to the Buyer in connection with the working capital adjustment and $61,000 in connection with the accounts receivable adjustment. Therefore, the Company received cash consideration of $21,508,000, net of transaction costs and the working capital and accounts receivable adjustments in connection with the sale of the assets and liabilities of Ermanco, thereby resulting in a pre-tax loss of approximately $964,000. See Note 2 of the Notes to Consolidated Financial Statements for further information regarding the sale of substantially all of the assets and liabilities of Ermanco. The discussion that follows reflects the operations of the Company following 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) --------------------- 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 and falls, the Company may see a corresponding change in rate of new orders, and therefore, a corresponding change 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, 2006, and for the years ended December 31, 2005, 2004, 2003, 2002, and 2001:
Six Months Ended Year Ended December 31, June 30, ----------------------------------------------- (Dollars in Thousands) 2006 2005 2004 2003 2002 2001 ------------------ ----------------------------------------------- Backlog of orders - Beginning............ $ 6,918 5,514 4,052 4,834 7,666 16,353 Add: orders........................... 10,417 18,080 13,164 11,301 12,074 10,321 Less: sales........................... 9,043 16,676 11,702 12,083 14,906 19,008 ------------------ ----------------------------------------------- Backlog of orders - Ending............... $ 8,292 6,918 5,514 4,052 4,834 7,666 ================== =============================================== Capacity Utilization(1).................. 81.6% 80.0% 78.6% 75.7% 75.1% 76.3%
Current Ratio ------------- Management of the Company monitors the current ratio as a measure of determining liquidity and believes the current ratio illustrates that the Company's financial resources are adequate to satisfy its future cash requirements through the next year. The following table depicts the Company's current assets, current liabilities, and current ratio as of June 30, 2006 and as of December 31, 2005, 2004, 2003, 2002, and 2001:
As of As of December 31, June 30, -------------------------------------------------------------- (Dollars in Thousands) 2006 2005 2004 2003 2002 2001 ------------------- ---------- ---------- ---------- ---------- ---------- Current assets............... $ 20,256 22,134 14,249 14,720 15,444 19,200 ------------------- ---------- ----------- ----------- ---------- ---------- Current liabilities.......... $ 5,242 5,337 7,355 9,583 9,416 13,357 Current ratio................ 3.86 4.15 1.94 1.54 1.64 1.44
19 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, 2006 and as of December 31, 2005, 2004, 2003, 2002, and 2001 and also includes the number of shares outstanding at the end of each fiscal period:
As of As of December 31, June 30, ---------------------------------------------------------------------- (Dollars in Thousands) 2006 2005 2004 2003 2002 2001 ------------ ------------ ------------- ------------- ------------ ------------- Current installments of long-term debt............. $ - - - - 1,437 2,305 Long-term debt............... - - - - 7,263 9,900 ------------ ------------ ------------- ------------- ------------ ------------- Total debt................... - - - - 8,700 12,205 ------------ ------------ ------------- ------------- ------------ ------------- Total stockholders' equity (1)................. $ 15,395 17,066 23,308 22,061 17,885 16,912 ============ ============ ============= ============= ============ ============= Debt to equity ratio......... - - - - .49 .72 Number of shares outstanding at the end of the fiscal period..................... 3,342,000 3,539,019 4,265,310 4,277,595 4,256,098 4,221,635
(1) During the year ended December 31, 2005, the Company repurchased 824,100 shares of common stock at a weighted average cost, including brokerage commissions, of $9.81 per share. Cash expenditures for the stock repurchases during the year ended December 31, 2005 were $8,080,882. During the six months ended June 30, 2006, the Company repurchased 209,519 shares of common stock at a weighted average cost, including brokerage commissions, of $8.88 purchase. Cash expenditures for the stock repurchases during the six months ended June 30, 2006 were $1,861,470. See Stock Repurchase Program in Note 9 of the Notes to Consolidated Financial Statements regarding the Company's Stock Repurchase Program. ----------------------------------- 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, and inventories 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. 20 Item 2. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (Continued) --------------------- 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, 2006, there are no contracts that are anticipated to result in a loss. The Company believes that it has the ability to reasonably estimate the total costs and applicable gross profit margins at the inception of the contract for all of its systems contracts. However, where cost estimates change, there could be a significant impact on the amount of revenue recognized. The Company's failure to estimate accurately can result in cost overruns which will result in the loss of profits if the Company determines that it has significantly underestimated the costs involved in completing contracts. The Company has not had any significant cost overruns resulting in loss of profits during the three and six months ended June 30, 2006. Accrued Product Warranty ------------------------ The Company's products are warranted against defects in materials and workmanship for varying periods of time depending on customer requirements and the type of system sold, with a typical warranty period of one year. The Company provides an accrual for estimated future warranty costs and potential product liability claims based upon a percentage of cost of sales, typically two percent of the cost of the system being sold, and a detailed review of products still in the warranty period is performed each quarter. Historically, the level of warranty reserve has been appropriate based on management's assessment of estimated future warranty claims. However, if unanticipated warranty issues arise in the future, there could be a significant impact on the recorded warranty reserve. The recorded warranty reserve as of June 30, 2006 was $249,000. 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 new cost basis is removed from the accounts. ----------------------------------- 21 Item 2. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (Continued) --------------------- (a) Results of Operations - Six Months Ended June 30, 2006 Compared to the ---------------------------------------------------------------------- Six Months Ended June 30, 2005 ------------------------------ Net Sales and Gross Profit on Sales - -----------------------------------
2006 2005 ------------------ ------------------ Net sales............................................ $ 9,043,000 7,595,000 Cost of sales........................................ 6,248,000 5,613,000 ------------------ ------------------ Gross profit on sales................................ $ 2,795,000 1,982,000 ================== ================== Gross profit as a percentage of sales................ 30.9% 26.1% ================== ==================
The increase in sales was associated with a larger backlog of orders entering fiscal 2006 when compared to the backlog of orders entering fiscal 2005. Contributing to the increase in sales was progress made on contracts received during the first half of 2006 in accordance with contract completion requirements associated with customers in the entertainment and retail marketplace as a result of a demand for the Company's products in these industry sectors. Gross profit, as a percentage of sales, for the six months ended June 30, 2006, when compared to the six months ended June 30, 2005, was favorably impacted by 4.3% as a result of a reduction in overhead costs as a percentage of sales due to the higher sales volume to cover fixed overhead costs during the six months ended June 30, 2006. Also contributing to the aforementioned favorable variance by .5% was the impact of product mix and the favorable performance on the Company's contracts that were completed or nearing completion in the six months ended June 30, 2006 as compared to the six months ended June 30, 2005. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses of $2,801,000 were higher by $617,000 for the six months ended June 30, 2006 than for the six months ended June 30, 2005. 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 of $199,000 in marketing expenses primarily associated with product promotion, marketing research, and participation in trade shows, and an increase of $102,000 in professional fees and shareholder relations expenditures. Product Development Costs - ------------------------- Product development costs, including patent expense, of $216,000 were higher by $193,000 for the six months ended June 30, 2006 than for the six months ended June 30, 2005. Development programs in the six months ended June 30, 2006 were primarily aimed at improvements to the Company's Order Fulfillment and Production & Assembly systems technologies. Development efforts during the six months ended June 30, 2006 included DISPEN-SI-MATIC(R) hardware and software enhancements aimed at promoting workplace efficiencies for the Company's customers and LO-TOW(R) product enhancements. Interest Income - --------------- Interest income of $276,000 was higher by $202,000 for the six months ended June 30, 2006 than for the six months ended June 30, 2005. The increase in interest income was attributable to the higher level of funds available for investment as a result of the cash proceeds from the sale of substantially all of the assets and liabilities of Ermanco. 22 Item 2. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (Continued) --------------------- (a) Results of Operations - Six Months Ended June 30, 2006 Compared to the Six -------------------------------------------------------------------------- Months Ended June 30, 2005 (Continued) -------------------------- Income Tax Expense (Benefit) - --------------------------- The Company recognized an income tax benefit of $43,000 during the six months ended June 30, 2006 compared to an income tax benefit of $30,000 during the six months ended June 30, 2005. The income tax benefit for the six months ended June 30, 2006 was higher than the statutory federal and state tax rates primarily due to the reversal of accruals for the expiration of tax return statutes and tax-exempt interest on certain investments. The income tax benefit for the six months ended June 30, 2005 was generally recorded at statutory federal and state tax rates. (b) Results of Operations - Three Months Ended June 30, 2006 Compared to the ------------------------------------------------------------------------ Three Months Ended June 30, 2005 -------------------------------- Net Sales and Gross Profit on Sales - -----------------------------------
2006 2005 ------------------ ------------------ Net sales............................................ $ 4,823,000 3,729,000 Cost of sales........................................ 3,315,000 2,839,000 ------------------ ------------------ Gross profit on sales................................ $ 1,508,000 890,000 ================== ================== Gross profit as a percentage of sales................ 31.3% 23.9% ================== ==================
The increase in sales was associated with a larger backlog of orders entering fiscal 2006 when compared to the backlog of orders entering fiscal 2005. Contributing to the increase in sales was progress made on contracts received during the first half of 2006 in accordance with contract completion requirements associated with customers in the entertainment and retail marketplace as a result of a demand for the Company's products in these industry sectors. Gross profit, as a percentage of sales, for the three months ended June 30, 2006, when compared to the three months ended June 30, 2005, was favorably impacted by 4.0% as a result of a reduction in overhead costs as a percentage of sales due to the higher sales volume to cover fixed overhead costs in the three months ended June 30, 2006. Also contributing to the aforementioned favorable variance by 3.4% was the impact of product mix and the favorable performance on the Company's contracts that were completed or nearing completion in the three months ended June 30, 2006 as compared to the three months ended June 30, 2005. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses of $1,429,000 were higher by $282,000 for the three months ended June 30, 2006 than for the three months ended June 30, 2005. The increase was attributable to the addition of resources aimed at expanding the customer base and an increase in salaries and fringe benefits totaling $82,000, an increase of $128,000 in marketing expenses primarily associated with product promotion, marketing research, and participation in trade shows, and an increase of $47,000 in professional fees and shareholder relations expenditures. 23 Item 2. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (Continued) --------------------- (b) Results of Operations - Three Months Ended June 30, 2006 Compared to the ------------------------------------------------------------------------ Three Months Ended June 30, 2005 (Continued) -------------------------------- Product Development Costs - ------------------------- Product development costs, including patent expense, of $60,000 were higher by $41,000 for the three months ended June 30, 2006 than for the three months ended June 30, 2005. Development programs in the three months ended June 30, 2006 were primarily aimed at improvements to the Company's Order Fulfillment and Production & Assembly systems technologies. Development efforts during the three months ended June 30, 2006 included DISPEN-SI-MATIC(R) software enhancements aimed at promoting workplace efficiencies for the Company's customers and LO-TOW(R) product enhancements. Interest Income - --------------- Interest income of $148,000 was higher by $87,000 for the three months ended June 30, 2006 than for the three months ended June 30, 2005. The increase in interest income was attributable to the higher level of funds available for investment as a result of the cash proceeds from the sale of substantially all of the assets and liabilities of Ermanco. Other Income, Net - ----------------- The favorable variance of $11,000 in other income, net for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005 was primarily attributable to an increase in royalty income from a license agreement related to material handling equipment sales. Income Tax Expense (Benefit) - --------------------------- The Company recognized income tax expense of $43,000 during the three months ended June 30, 2006 compared to an income tax benefit of $69,000 during the three months ended June 30, 2005. Income tax expense for the three months ended June 30, 2006 was lower than the statutory federal and state tax rates primarily due to tax-exempt interest on certain investments. The income tax benefit for the three months ended June 30, 2005 was generally recorded at statutory federal and state tax rates. ----------------------------------- Liquidity and Capital Resources - ------------------------------- The Company's cash and cash equivalents and short-term investments at June 30, 2006 were $15,804,000, representing 76.2% of total assets, down from $17,397,000, or 77.0% of total assets, at December 31, 2005. The decrease was primarily due to the repurchase and retirement of common stock of $1,861,000, partially offset by cash provided by operating activities totaling $365,000. Cash provided by operating activities totaling $365,000 during the six months ended June 30, 2006 was primarily due to the following factors: o a decrease in receivables in the amount of $393,000 primarily associated with the collection of an income tax refund. The Company's cash and cash equivalents and short-term investments at June 30, 2005 rose to $4,626,000 from $3,602,000 at December 31, 2004. The increase resulted primarily from cash provided by operating activities totaling $1,184,000. 24 Item 2. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- Cash provided by operating activities totaling $1,184,000 during the six months ended June 30, 2005 was primarily due to the following factors: o an increase in net cash provided by operating activities of discontinued operations of $1,048,000; o an increase in accounts payable in the amount of $556,000 associated with purchases of goods and services rendered in accordance with job completion requirements; o an increase in customers' deposits and billings in excess of costs and estimated earnings in the amount of $267,000 in accordance with contractual requirements associated with customers in the vehicle assembly marketplace; and o an increase in income taxes payable in the amount of $148,000 primarily associated with the Company's fiscal 2005 profitability. Partially offset by the following factors: o an increase in receivables in the amount of $414,000 in accordance with contractual requirements associated with customers in the vehicle assembly marketplace; o an increase in costs and estimated earnings in excess of billings in the amount of $325,000 in accordance with contractual requirements associated with customers in the vehicle assembly and the healthcare marketplace; and o a decrease in accrued product warranty in the amount of $203,000 primarily associated with the reversal of unused, expired accrued product warranties for contracts that were no longer in the warranty period. The Company's line of credit facility may not exceed $5,000,000 and is to be used primarily for working capital purposes. Effective August 5, 2005, the Company issued a $2,000,000 letter of credit in connection with the sale of substantially all of the assets and liabilities of Ermanco, thereby reducing the amount of available line of credit to $2,800,000. The letter of credit remained in place through August 4, 2006, the one-year anniversary of the closing of the asset sale. There was no claim under the letter of credit during its existence. As of August 5, 2006, the amount of available line of credit was $4,800,000. The line of credit facility contains various non-financial covenants and is secured by all accounts receivables and inventory. As of June 30, 2006, the Company did not have any borrowings under the line of credit facility, and the line of credit facility expires effective June 30, 2007. The Company anticipates that its financial resources, consisting of cash generated from operations, its line of credit, and the 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 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 is continuing to evaluate and actively explore a range of possible options, including transactions intended to provide liquidity and maximize stockholder value, and consideration of 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. ----------------------------------- 25 Item 2. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (Continued) --------------------- Contractual Obligations - ----------------------- The Company's leases 25,000 square feet in Easton, Pennsylvania for use as its principal office. The leasing agreement requires fixed monthly rentals of $18,781 (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 leasing agreement is secured with a $200,000 letter of credit. The lease expires on February 21, 2008. Future contractual obligations and commercial commitments at June 30, 2006 as noted above are as follows:
Payments Due by Period ----------------------------------------------------------------- Total 2006 2007 2008 2009 2010 --------------- ----------- ----------- ------------- ----------- ---------- Contractual obligations: Operating leases........... $ 378,000 113,000 231,000 34,000 - - --------------- ----------- ----------- ------------- ----------- ---------- Total...................... $ 378,000 113,000 231,000 34,000 - - =============== =========== =========== ============= =========== ==========
Amount of Commitment Expiration Per Period Total Amounts ---------------------------------------------------------------------- Committed 2006 2007 2008 2009 2010 ------------------- -------------- ------------ ------------- ----------- ---------- Other commercial commitments: Letters of credit..... $ 2,200,000 2,000,000 200,000 - - -
Off-Balance Sheet Arrangements - ------------------------------ As of June 30, 2006 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 did not 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 and nonvested stock, and stock appreciation rights. It requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. 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 used prior to January 1, 2006. The Company adopted FAS 123R on January 1, 2006. 26 Item 2. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (Continued) --------------------- Recently Issued Accounting Pronouncements (Continued) - ----------------------------------------- In May 2005, the Financial Accounting Standards 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 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 effected 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. The Company adopted the provisions of this statement, as applicable, on January 1, 2006, and there was no impact of the adoption. In November 2005, the Financial Accounting Standards Board issued FSP No. FAS 123(R)-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." This FSP provides an elective alternative transition method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R. Companies may take up to one year from the effective date of the FSP to evaluate the available transition alternatives and make a one-time election as to which method to adopt. The Company is currently in the process of evaluating the alternative methods. In June 2006, the Financial Accounting Standards Board issued FIN 48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109, Accounting for Income Taxes, which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective beginning January 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on the financial statements. 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. 27 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, 2006. 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. 28 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 1A. Risk Factors - -------- ------------ Item 1A, "Risk Factors," of our 2005 Form 10-K includes a detailed discussion of our risk factors. 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, 2006:
- ------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------- 4/1/06 - 4/30/06 - $ - - $ - $ 1,593,486 5/1/06 - 5/31/06 25,000 $ 9.56 25,000 $ 239,100 $ 1,354,386 6/1/06 - 6/30/06 184,519 $ 8.79 184,519 $ 1,622,370 $ 1,732,016 -------------------------------------------------------------- 209,519 $ 8.88 209,519 $ 1,861,470 - -------------------------------------------------------------------------------------------------------
On August 12, 2004, the Company's Board of Directors approved a program to repurchase up to $1,000,000 of its outstanding common stock. The Company's Board of Directors amended its existing stock repurchase program on several occasions during 2005 and in 2006 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 $12,000,000. There were no repurchases during the three months ended March 31, 2006. During the three and six months ended June 30, 2006, the Company repurchased 209,519 shares of common stock at a weighted average cost, including brokerage commissions, of $8.88 per share. Cash expenditures for the stock repurchases during the three and six months ended June 30, 2006 were $1,861,470. Through June 30, 2006, the Company repurchased 1,068,319 shares of common stock at a weighted average cost, including brokerage commissions, of $9.61 per share. Cash expenditures for the stock repurchases since the inception of the program were $10,267,984. As of June 30, 2006, $1,732,016 remained available for repurchases under the stock repurchase program. Based on market conditions and other factors, additional repurchases may be made from time to time, in compliance with SEC regulations, in the open market or through privately negotiated transactions at the discretion of the Company. There is no expiration date with regards to the stock repurchase program. The purchase price for the shares of the Company's common stock repurchased was reflected as a reduction to stockholders' equity. The Company allocates the purchase price of the repurchased shares as a reduction to common stock for the par value of the shares repurchased, with the excess of the purchase price over par value being allocated between additional paid-in capital and retained earnings. All shares of common stock that were repurchased by the Company since the inception of the program were subsequently retired. 29 In July 2006, 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 $12,000,000 of the Company's common stock to up to $14,000,000, of which approximately $2,515,619 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. Item 6. Exhibits - ------- -------- 10.36 Loan Agreement (Line of Credit) entered into June 20, 2006 by and between Paragon Technologies, Inc. and Wachovia Bank, National Association (filed herewith). 10.37 Promissory Note related to the Line of Credit entered into June 20, 2006 by and between Paragon Technologies, Inc. and Wachovia Bank, National Association (filed herewith). 10.38 Security Agreement related to the Line of Credit entered into June 20, 2006 by and between Paragon Technologies, Inc. and Wachovia Bank, National Association (filed herewith). 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Joel L. Hoffner, 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 Joel L. Hoffner, 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). 30 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/ Joel L. Hoffner ----------------------------------------------- Joel L. Hoffner President & CEO /s/ Ronald J. Semanick ----------------------------------------------- Ronald J. Semanick Chief Financial Officer Dated: August 10, 2006 -------------------------- 31 EXHIBIT INDEX ------------- Exhibits 10.36 Loan Agreement (Line of Credit) entered into June 20, 2006 by and between Paragon Technologies, Inc. and Wachovia Bank, National Association (filed herewith). 10.37 Promissory Note related to the Line of Credit entered into June 20, 2006 by and between Paragon Technologies, Inc. and Wachovia Bank, National Association (filed herewith). 10.38 Security Agreement related to the Line of Credit entered into June 20, 2006 by and between Paragon Technologies, Inc. and Wachovia Bank, National Association (filed herewith). 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Joel L. Hoffner, 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 Joel L. Hoffner, 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). 32 EX-31 2 ex31-1.txt EXHIBIT 31.1 - CERTIFICATION Exhibit 31.1 ------------ SECTION 302 CERTIFICATION I, Joel L. Hoffner, 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 10, 2006 ------------------------------------------------------- /s/ Joel L. Hoffner - -------------------------------------------------------------- Joel L. Hoffner President and CEO EX-31 3 ex31-2.txt EXHIBIT 31.2 - CERTIFICATION 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 10, 2006 ------------------------------------------------------- /s/ Ronald J. Semanick - -------------------------------------------------------------- Ronald J. Semanick Chief Financial Officer, and Vice President - Finance and Treasurer EX-32 4 ex32-1.txt EXHIBIT 32.1 - CERTIFICATION 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, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joel L. Hoffner, 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/ Joel L. Hoffner ---------------------------------------------------- Joel L. Hoffner President and Chief Executive Officer August 10, 2006 EX-32 5 ex32-2.txt EXHIBIT 32.2 - CERTIFICATION 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, 2006 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 10, 2006 EX-10 6 ex10-36.txt EXHIBIT 10.36 - LOAN AGREEMENT Exhibit 10.36 ------------- 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 (Individually and collectively "Borrower") This Loan Agreement ("Agreement") is entered into June 20, 2006, by and between Bank and Borrower. This Agreement amends and restates in its entirety that certain Loan Agreement dated June 20, 2005 and applies to the loan or loans (individually and collectively, the "Loan") evidenced by one or more promissory notes of even date herewith 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 June 20, 2006) 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, 2007. 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 Borrower's 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 time. 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 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 Page 2 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 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. Page 3 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/ Joel L. Hoffner (SEAL) ------------------------------------------------ Joel L. Hoffner, President/CEO Wachovia Bank, National Association By: /s/ William Hogan (SEAL) ----------------------------------------------- William Hogan, Vice President Page 4 EX-10 7 ex10-37.txt EXHIBIT 10.37 - PROMISSORY NOTE Exhibit 10.37 ------------- PROMISSORY NOTE $5,000,000.00 /s/ June 20, 2006 ------------------------------- Paragon Technologies, Inc. 600 Kuebler Road Easton, Pennsylvania 18040 (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 June 20, 2005 (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 of even date herewith, 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 of even date herewith. 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, 2006, 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, 2007. AUTOMATIC DEBIT OF CHECKING ACCOUNT FOR LOAN PAYMENT. Borrower authorizes Bank to debit demand deposit account number or any other account with Bank (routing number) designated in writing by Borrower, beginning July 1, 2006 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 the 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. 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. Page 2 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 anytime 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 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 Page 3 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 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 Page 4 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 Borrower's 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 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. Page 5 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 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. Page 6 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/ Joel L. Hoffner (SEAL) ---------------------------------------------- Joel L. Hoffner, President/CEO Page 7 EX-10 8 ex10-38.txt EXHIBIT 10.38 - SECURITY AGREEMENT Exhibit 10.38 ------------- SECURITY AGREEMENT /s/ June 20, 2006 --------------------------- Paragon Technologies, Inc. 600 Kuebler Road Easton, Pennsylvania 18040 (Individually and collectively "Debtor") Wachovia Bank, National Association 123 South Broad Street Philadelphia, Pennsylvania 19109 (Hereinafter referred to as `Bank') This Security Agreement amends and restates that certain Security Agreement dated August 6, 2004. For value received and to secure payment and performance of any and all obligations of Debtor (also referred to herein as "Borrower") to Bank however created, arising or evidenced, whether direct or indirect, absolute or contingent, now existing or hereafter arising or acquired, including swap agreements (as defined in 11 U.S.C. ss. 101, as in effect from time to time), future advances, and all costs and expenses incurred by Bank to obtain, preserve, perfect and enforce the security interest granted herein and to maintain, preserve and collect the property subject to the security interest (collectively, "Obligations"), Debtor hereby grants to Bank a continuing security interest in and lien upon the following described property, whether now owned or hereafter acquired, and any additions, replacements, accessions, or substitutions thereof and all cash and non-cash proceeds and products thereof (collectively, "Collateral'): All accounts, chattel paper, instruments, and general intangibles. All inventory, all documents and all accessions to such inventory. Debtor hereby represents and agrees that: OWNERSHIP. Debtor owns the Collateral or Debtor will purchase and acquire rights in the Collateral within ten days of the date advances are made under the Loan Documents. If Collateral is being acquired with the proceeds of an advance under the Loan Documents, Debtor authorizes Bank to disburse proceeds directly to the seller of the Collateral. The Collateral is free and clear of all liens, security interests, and claims except those previously reported in writing to and approved by Bank, and Debtor will keep the Collateral free and clear from all liens, security interests and claims, other than those granted to or approved by Bank. NAME AND OFFICES; JURISDICTION OF ORGANIZATION. The name and address of Debtor appearing at the beginning of this Agreement are Debtors exact legal name and the address of its chief executive office. There has been no change in the name of Debtor, or the name under which Debtor conducts business, within the five years preceding the date hereof except as previously reported in writing to Bank. Debtor has not moved its chief executive office within the five years preceding the date hereof except as previously reported in writing to Bank. Debtor is organized under the laws of the State of Delaware and has not changed the jurisdiction of its organization within the five years preceding the date hereof except as previously reported in writing to Bank. TITLE/TAXES. Debtor has good and marketable title to Collateral and will warrant and defend same against all claims. Debtor will not transfer, sell, or lease Collateral (except in the ordinary course of business). Debtor agrees to pay promptly all taxes and assessments upon or for the use of Collateral and on this Security Agreement. At its option, Bank may discharge taxes, liens, security interests or other encumbrances at any time levied or placed on Collateral. Debtor agrees to reimburse Bank, on demand, for any such payment made by Bank. Any amounts so paid shall be added to the Obligations. WAIVERS. Debtor agrees not to assert against Bank as a defense (legal or equitable), as a set-off, as a counterclaim, or otherwise, any claims Debtor may have against any seller or lessor that provided personal property or services relating to any part of the Collateral or against any other party liable to Bank for all or any part of the Obligations. Debtor waives all exemptions and homestead rights with regard to the Collateral. Debtor waives any and all rights to any bond or security which might be required by applicable law prior to the exercise of any of Bank's remedies against any Collateral. All rights of Bank and security interests hereunder, and all obligations of Debtor hereunder, shall be absolute and unconditional, not discharged or impaired irrespective of (and regardless of whether Debtor receives any notice of): (i) any lack of validity or enforceability of any Loan Document; (ii) any change in the time, manner or place of payment or performance, or in any term, of all or any of the Obligations or the Loan Documents or any other amendment or waiver of or any consent to any departure from any Loan Document; or (iii) any exchange, insufficiency, unenforceability, enforcement release, impairment or non-perfection of any collateral, or any release of or modifications to or insufficiency, unenforceability or enforcement of the obligations of any guarantor or other obligor. To the extent permitted by law, Debtor hereby waives any rights under any valuation, stay, appraisement, extension or redemption laws now existing or which may hereafter exist and which, but for this provision, might be applicable to any sale or disposition of the Collateral by Bank; and any other circumstance which might otherwise constitute a defense available to, or a discharge of any party with respect to the Obligations. NOTIFICATIONS; LOCATION OF COLLATERAL. Debtor will notify Bank in writing at least 30 days prior to any change in: (i) Debtor's chief place of business and/or residence; (ii) Debtor's name or identity; (iii) Debtor's corporate/organizational structure; or (iv) the jurisdiction in which Debtor is organized. In addition, Debtor shall promptly notify Bank of any claims or alleged claims of any other person or entity to the Collateral or the institution of any litigation, arbitration, governmental investigation or administrative proceedings against or affecting the Collateral. Debtor will keep Collateral at the location(s) previously provided to Bank until such time as Bank provides written advance consent to a change of location. Debtor will bear the cost of preparing and filing any documents necessary to protect Bank's liens. COLLATERAL CONDITION AND LAWFUL USE. Debtor represents that the Collateral is in good repair and condition and that Debtor shall use reasonable care to prevent Collateral from being damaged or depreciating, normal wear and tear excepted. Debtor shall immediately notify Bank of any material loss or damage to Collateral. Debtor shall not permit any item of Collateral to become a fixture to real estate or an accession to other personal property unless such property is also Collateral hereunder. Debtor represents it is in compliance in all respects with all laws, rules and regulations applicable to the Collateral and its properties, operations, business, and finances. RISK OF LOSS AND INSURANCE. Debtor shall bear all risk of loss with respect to the Collateral. The injury to or loss of Collateral, either partial or total, shall not release Debtor from payment or other performance hereof. Debtor agrees to obtain and keep in force property insurance on the Collateral with a Lender's Loss Payable Endorsement in favor of Bank and commercial general liability insurance naming Bank as Additional Insured and such other insurance as Bank may require from time to time. Such insurance is to be in form and amounts satisfactory to Bank and issued by reputable insurance carriers satisfactory to Bank with a Best Insurance Report Key Rating of at least "A-". All such policies shall provide to Bank a minimum of 30 days written notice of cancellation. Debtor shall furnish to Bank such policies, or other evidence of such policies satisfactory to Bank. If Debtor fails to obtain or maintain in force such insurance or fails to furnish such evidence, Bank is authorized, but not obligated, to purchase any or all insurance or "Single Interest Insurance" protecting such interest as Bank deems appropriate against such risks and for such coverage and for such amounts, including either the loan amount or value of the Collateral, all at its discretion, and at Debtor's expense. In such event, Debtor agrees to reimburse Bank for the cost of such insurance and Bank may add such cost to the Obligations. Debtor shall bear the risk of loss to the extent of any deficiency in the effective insurance coverage with respect to loss or damage to any of the Collateral. Debtor hereby assigns to Bank the proceeds of all property insurance covering the Collateral up to the amount of the Obligations and directs any insurer to make payments directly to Bank. Debtor hereby appoints Bank its attorney-in-fact, which appointment shall be irrevocable and coupled with an interest for so long as Obligations are unpaid, to file proof of loss Page 2 and/or any other forms required to collect from any insurer any amount due from any damage or destruction of Collateral, to agree to and bind Debtor as to the amount of said recovery, to designate payee(s) of such recovery, to grant releases to insurer, to grant subrogation rights to any insurer, and to endorse any settlement check or draft. Debtor agrees not to exercise any of the foregoing powers granted to Bank without Bank's prior written consent. FINANCING STATEMENTS, CERTIFICATES OF TITLE, POWER OF ATTORNEY. No financing statement (other than any filed or approved by Bank) covering any Collateral is on file in any public filing office. Debtor authorizes the filing of one or more financing statements covering the Collateral in form satisfactory to Bank, and without Debtor's signature where authorized by law, and will pay all costs and expenses of filing or applying for the same or of filing this Security Agreement in all public filing offices, where filing is deemed by Bank to be desirable. Debtor hereby constitutes and appoints Bank the true and lawful attorney of Debtor with full power of substitution to take any and all appropriate action and to execute any and all documents, instruments or applications that may be necessary or desirable to accomplish the purpose and carry out the terms of this Security Agreement. The foregoing power of attorney is coupled with an interest and shall be irrevocable until all of the Obligations have been paid in full. Neither Bank nor anyone acting on its behalf shall be liable for acts, omissions, errors in judgment, or mistakes in fact in such capacity as attorney-in-fact absent gross negligence or willful misconduct. Debtor ratifies all acts of Bank as attorney-in-fact absent gross negligence or willful misconduct. Debtor agrees to take such other actions, at Debtor's expense, as might be requested for the perfection, continuation and assignment, in whole or in part of the security interests granted herein and to assure and preserve Bank's intended priority position. If certificates, passbooks, or other documentation or evidence is/are issued or outstanding as to any of the Collateral, Debtor will cause the security interests of Bank to be properly protected, including perfection by notation thereon or delivery thereof to Bank. LANDLORD/MORTGAGEE WAIVERS. Debtor shall cause each mortgagee of real property owned by Debtor and each landlord of real property leased by Debtor to execute and deliver instruments satisfactory in form and substance to Bank by which such mortgagee or landlord subordinates its rights, if any, in the Collateral. CONTROL. Debtor will cooperate with Bank in obtaining control with respect to Collateral consisting of electronic chattel paper. CHATTEL PAPER, ACCOUNTS, GENERAL INTANGIBLES. Debtor warrants that Collateral consisting of chattel paper, accounts, or general intangibles is (i) genuine and enforceable in accordance with its terms; (ii) not subject to any defense, set-off, claim or counterclaim of a material nature against Debtor except as to which Debtor has notified Bank in writing; and (iii) not subject to any other circumstances that would impair the validity, enforceability, value, or amount of such Collateral except as to which Debtor has notified Bank in writing. Debtor shall not amend, modify or supplement any lease, contract or agreement contained in Collateral or waive any provision therein except in the ordinary course of business, without prior written consent of Bank. Debtor will not create any tangible chattel paper without placing a legend on the chattel paper acceptable to Bank indicating that Bank has a security interest in the chattel paper. Debtor will not create any electronic chattel paper without taking all steps deemed necessary by Bank to confer control of the electronic chattel paper upon Bank in accordance with the UCC. ACCOUNT INFORMATION. From time to time, at Bank's request Debtor shall provide Bank with schedules describing all accounts, including customers' addresses, created or acquired by Debtor and at Bank's request shall execute and deliver written assignments of contracts and other documents evidencing such accounts to Bank. Together with each schedule, Debtor shall, if requested by Bank, furnish Bank with copies of Debtor's sales journals, invoices, customer purchase orders or the equivalent, and original shipping or delivery receipts for all goods sold, and Debtor warrants the genuineness thereof. ACCOUNT DEBTORS. If a Default should occur, Bank shall have the right to notify the account debtors obligated on any or all of the Collateral to make payment thereof directly to Bank and Bank may take control of all proceeds of any such Collateral, which rights Bank may exercise at any time, The cost of Page 3 such collection and enforcement, including attorneys' fees and expenses, shall be borne solely by Debtor whether the same is incurred by Bank or Debtor. If a Default should occur or upon demand of Bank, Debtor will, upon receipt of all checks, drafts, cash and other remittances in payment on Collateral, deposit the same in a special bank account maintained with Bank, over which Bank also has the power of withdrawal. If a Default should occur, no discount, credit, or allowance shall be granted by Debtor to any account debtor and no return of merchandise shall be accepted by Debtor without Bank's consent. Bank may, after Default, settle or adjust disputes and claims directly with account debtors for amounts and upon terms that Bank considers advisable, and in such cases Bank will credit the Obligations with the net amounts received by Bank, after deducting all of the expenses incurred by Bank. Debtor agrees to indemnify and defend Bank and hold it harmless with respect to any claim or proceeding arising out of any matter related to collection of Collateral. GOVERNMENT CONTRACTS. If any Collateral covered hereby arises from obligations due to Debtor from any governmental unit or organization, Debtor shall immediately notify Bank in writing and execute all documents and take all actions deemed necessary by Bank to ensure recognition by such governmental unit or organization of the rights of Bank in the Collateral. INVENTORY. So long as no Default has occurred, Debtor shall have the right in the regular course of business, to process and sell Debtor's inventory. If a Default should occur or upon demand of Bank, Debtor will, upon receipt of all checks, drafts, cash and other remittances, in payment of Collateral sold, deposit the same in a special bank account maintained with Bank, over which Bank also has the power of withdrawal. Debtor agrees to notify Bank immediately in the event that any inventory purchased by or delivered to Debtor is evidenced by a bill of lading, dock warrant, dock receipt, warehouse receipt or other document of title and to deliver such document to Bank upon request. INSTRUMENTS, CHATTEL PAPER, DOCUMENTS. Any Collateral that is, or is evidenced by, instruments, chattel paper or negotiable documents will be properly assigned to and the originals of any such Collateral in tangible form deposited with and held by Bank, unless Bank shall hereafter otherwise direct or consent in writing. Bank may, without notice, before or after maturity of the Obligations, exercise any or all rights of collection, conversion, or exchange and other similar rights, privileges and options pertaining to such Collateral, but shall have no duty to do so. COLLATERAL DUTIES. Bank shall have no custodial or ministerial duties to perform with respect to Collateral pledged except as set forth herein; and by way of explanation and not by way of limitation, Bank shall incur no liability for any of the following: (i) loss or depreciation of Collateral (unless caused by its willful misconduct or gross negligence), (ii) failure to present any paper for payment or protest, to protest or give notice of nonpayment, or any other notice with respect to any paper or Collateral. TRANSFER OF COLLATERAL. Bank may assign its rights in Collateral or any part thereof to any assignee of the Obligations who shall thereupon become vested with all the powers and rights herein given to Bank with respect to the property so transferred and delivered, and Bank shall thereafter be forever relieved and fully discharged from any liability with respect to such property so transferred, but with respect to any property not so transferred, Bank shall retain all rights and powers hereby given. INSPECTION, BOOKS AND RECORDS. Debtor will at all times keep accurate and complete records covering each item of Collateral, including the proceeds therefrom. Bank, or any of its agents, shall have the right, at intervals to be determined by Bank and without hindrance or delay, at Bank's expense unless there is an event of default, to inspect, audit and examine the Collateral and to make copies of and extracts from the books, records, journals, orders, receipts, correspondence and other data relating to Collateral, Debtor's business or any other transaction between the parties hereto. Debtor will at its expense furnish Bank copies thereof upon request. All such inspections, audits, examinations, copies and extracts shall be at Bank's expense unless there occurs a Default hereunder or under any of the other Loan Documents or if a Default is detected in the course of such inspection, audit and examination. Upon and after such Default, all such inspections, audits, examinations, copies and extracts shall be at Debtor's Page 4 expense. For the further security of Bank, it is agreed that Bank has and is hereby granted a security interest in all books and records of Debtor pertaining to the Collateral, COMPLIANCE WITH LAW. Debtor will comply with all federal, state and local laws and regulations, applicable to it, including without limitation, environmental and labor laws and regulations, in the creation, use, operation, manufacture and storage of the Collateral and the conduct of its business, REGULATION U. None of the proceeds of the credit secured hereby shall be used directly or indirectly for the purpose of purchasing or carrying any margin stock in violation of any of the provisions of Regulation U of the Board of Governors of the Federal Reserve System ("Regulation U"), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry margin stock or for any other purchase which might render the Loan a "Purpose Credit" within the meaning of Regulation U. CROSS COLLATERALIZATION LIMITATION. As to any other existing or future consumer purpose loan made by Bank to Debtor, within the meaning of the Federal Consumer Credit Protection Act, Bank expressly waives any security interest granted herein in Collateral that Debtor uses as a principal dwelling and household goods. ATTORNEYS' FEES AND OTHER COSTS OF COLLECTION. Debtor shall pay all of Bank's reasonable expenses incurred in enforcing this Security Agreement and in preserving and liquidating Collateral, including but not limited to, reasonable arbitration, paralegals', attorneys' and experts' fees and expenses, whether incurred with or without the commencement of a suit, trial, arbitration, or administrative proceeding, or in any appellate or bankruptcy proceeding. DEFAULT. If any of the following occurs, a default ("Default") under this Security Agreement shall exist: Loan Document Default. A default under any Loan Document which is not cured within any applicable cure period. Collateral Loss or Destruction. Any loss, theft, substantial damage, or destruction of Collateral not fully covered by insurance, or as to which insurance proceeds are not remitted to Bank within 30 days of the loss. Collateral Sale, Lease or Encumbrance. Any sale, lease, or encumbrance of any Collateral not specifically permitted herein without prior written consent of Bank. Levy, Seizure or Attachment. The making of any levy, seizure, or attachment on or of Collateral which is not removed within 10 days. Unauthorized Termination. Any attempt to terminate, revoke, rescind, modify, or violate the terms of this Security Agreement without the prior written consent of Bank. REMEDIES ON DEFAULT (INCLUDING POWER OF SALE). If a Default occurs Bank shall have all the rights and remedies of a secured party under the Uniform Commercial Code. Without limitation thereto, Bank shall have the following rights and remedies: (i) to take immediate possession of Collateral, without notice or resort to legal process, and for such purpose, to enter upon any premises on which Collateral or any part thereof may be situated and to remove the same therefrom, or, at its option, to render Collateral unusable or dispose of said Collateral on Debtor's premises; (ii) to require Debtor to assemble the Collateral and make it available to Bank at a place to be designated by Bank; (iii) to exercise its right of set-off or bank lien as to any monies of Debtor deposited in accounts of any nature maintained by Debtor with Bank or affiliates of Bank, without advance notice, regardless of whether such accounts are general or special; (iv) to dispose of Collateral, as a unit or in parcels, separately or with any real property interests also securing the Obligations, in any county or place to be selected by Bank, at either private or public sale (at which public sale Bank may be the purchaser) with or without having the Collateral physically present at said sale. Any notice of sale, disposition or other action by Bank required by law and sent to Debtor at Debtor's address shown above, or at such other address of Debtor as may from time to time be shown on the records of Bank, at least 10 days prior to such action, shall constitute reasonable notice to Debtor. Notice shall be deemed given or sent when mailed postage prepaid to Debtor's address as provided herein. Bank shall be entitled to apply the proceeds of any sale or other disposition of the Collateral, and the payments received by Bank with respect to any of the Collateral, to Obligations in such order and manner as Bank may determine. Collateral that is subject to rapid declines in value and is customarily sold in Page 5 recognized markets may be disposed of by Bank in a recognized market for such collateral without providing notice of sale. Debtor waives any and all requirements that the Bank sell or dispose of all or any part of the Collateral at any particular time, regardless of whether Debtor has requested such sale or disposition. REMEDIES ARE CUMULATIVE. No failure on the part of Bank to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by Bank or any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law, in equity, or in other Loan Documents. INDEMNIFICATION. Debtor shall protect, indemnify and save harmless Bank from and against all losses, liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) (collectively, "Damages") imposed upon, incurred by or asserted against Bank on account of (i) the Loan Documents or any failure or alleged failure of Debtor to comply with any of the terms or representations of this Agreement; (ii) any claim of loss or damage to the Collateral or any injury or claim of injury to, or death of, any person or property that may be occasioned by any cause whatsoever pertaining to the Collateral or the use, occupancy or operation thereof, (iii) any failure or alleged failure of Debtor to comply with any law, rule or regulation applicable to the Collateral or the use, occupancy or operation of the Collateral (including, without limitation, the failure to pay any taxes, fees or other charges), (iv) any Damages whatsoever by reason of any alleged action, obligation or undertaking of Bank relating in any way to or any matter contemplated by the Loan Documents, or (v) any claim for brokerage fees or such other commissions relating to the Collateral or any other Obligations; provided that such indemnity shall be effective only to the extent of any Damages that may be sustained by Bank in excess of any net proceeds received by it from any insurance of Debtor (other than self-insurance) with respect to such Damages. Nothing contained herein shall require Debtor to indemnify Bank for any Damages resulting from Bank's gross negligence or its willful misconduct. The indemnity provided for herein shall survive payment of the Obligations and shall extend to the officers, directors, employees and duly authorized agents of Bank. In the event Bank incurs any Damages arising out of or in any way relating to the transaction contemplated by the Loan Documents (including any of the matters referred to in this section), the amounts of such Damages shall be added to the Obligations, shall bear interest, to the extent permitted by law, at the interest rate borne by the Obligations from the date incurred until paid and shall be payable on demand. MISCELLANEOUS. (i) Amendments and Waivers. No waiver, amendment or modification of any provision of this Security Agreement shall be valid unless in writing and signed by Debtor and an officer of Bank. No waiver by Bank of any Default shall operate as a waiver of any other Default or of the same Default on a future occasion. (ii) Assignment. All rights of Bank hereunder are freely assignable, in whole or in part, and shall inure to the benefit of and be enforceable by Bank, its successors, assigns and affiliates. Debtor shall not assign its rights and interest hereunder without the prior written consent of Bank, and any attempt by Debtor to assign without Bank's prior written consent is null and void. Any assignment shall not release Debtor from the Obligations. This Security Agreement shall be binding upon Debtor, and the heirs, personal representatives, successors, and assigns of Debtor. (iii) Applicable Law; Conflict Between Documents. This Security Agreement shall be governed by and construed under the law of the jurisdiction named in the address of the Bank shown on the first page hereof (the "Jurisdiction") without regard to that Jurisdiction's conflict of laws principles, except to the extent that the UCC requires the application of the law of a different jurisdiction. If any terms of this Security Agreement conflict with the terms of any commitment letter or loan proposal, the terms of this Security Agreement shall control. (iv) Jurisdiction. Debtor irrevocably agrees to non-exclusive personal jurisdiction in the state identified as the Jurisdiction above. (v) Severability. If any provision of this Security Agreement shall be prohibited by 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 Security Agreement. (vi) Notices. Any notices to Debtor shall be sufficiently given, if in writing and mailed or delivered to the address of Debtor 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 Page 6 Code VA7391, P. O. Box 13327, Roanoke, VA 24040 or Wachovia Bank, National Association, Mail Code VA7391, 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 Debtor changes Debtor's mailing address at any time prior to the date the Obligations are paid in full, Debtor agrees to promptly give written notice of said change of address by registered or certified mail, return receipt requested, all charges prepaid. (vii) Captions. The captions contained herein are inserted for convenience only and shall not affect the meaning or interpretation of this Security Agreement or any provision hereof. The use of the plural shall also mean the singular, and vice versa. (viii) Joint and Several Liability. If more than one party has signed this Security Agreement, such parties are jointly and severally obligated hereunder. (ix) Binding Contract. Debtor by execution and Bank by acceptance of this Security Agreement, agree that each party is bound by all terms and provisions of this Security Agreement. DEFINITIONS. Loan Documents. The term "Loan Documents" refers to all documents, including this Agreement, whether now or hereafter existing, executed in connection with or related to the Obligations, and may include, without limitation and whether executed by Debtor or others, commitment letters that survive closing, loan agreements, promissory notes, guaranty agreements, deposit or other similar agreements, other security agreements, letters of credit and applications for letters of credit, 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). UCC. "UCC" means the Uniform Commercial Code as presently and hereafter enacted in the Jurisdiction. Terms defined in the UCC. Any term used in this Agreement and in any financing statement filed in connection herewith which is defined in the UCC and not otherwise defined in this Agreement or any other Loan Document has the meaning given to the term in the UCC. IN WITNESS WHEREOF, Debtor, on the day and year first written above, has caused this Security Agreement to be executed under seal. Paragon Technologies, Inc. By: /s/ Joel L. Hoffner (SEAL) ------------------------------------------- Joel L. Hoffner, President/CEO Page 7 -----END PRIVACY-ENHANCED MESSAGE-----