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Paragon Technologies' Chairman Sham Gad's Annual Letter To Stockholders

Ultimate Objective:  Maximizing Intrinsic Value per Share

The intrinsic value of any business is calculated by taking the sum of all cash flows into and out of the business and then discounting those cash flows by an appropriate interest rate.  Operating under the mandate of maximizing per share intrinsic value is important because that maximization ultimately leads to growth in shareholder value.  Our focus on intrinsic value maximization is crucially important for one very distinct reason:  earnings per share (EPS) growth does not necessarily lead to intrinsic value per share growth.  Earnings, with very little managerial effort and without running afoul of the law, can be readily altered to produce EPS growth.  For example, by simply offering its customers more liberal credit terms, a business can manufacture earnings growth.  Purchases on credit create a legitimate sale and corresponding profit.  Yet until such a profit is converted into cash flow upon collection of the corresponding receivable, there is no growth in intrinsic value.

The distinction between intrinsic value growth and earnings growth cannot be underestimated.  To understand and focus on increasing intrinsic value requires nothing less than a complete shift in focus from the business status quo.  Although Paragon's past management may have focused on earnings growth, going forward Paragon's financial mission will be to maximize free cash flow and return on invested capital.

As a byproduct of this mission, the intelligent allocation of capital is critical.  Simply put, our capital must be allocated in a manner that seeks to maximize return on invested capital.  To that end, Paragon has made some changes that will serve to ensure that both operational efficiency and disciplined capital allocation are the nucleus of our business.  First, we created a holding company structure whereby Paragon is the parent and our material handling business SI Systems is our wholly owned subsidiary.  Second, we have clearly defined the responsibilities of our most senior executives.  All operating decisions of subsidiary companies will be made by the managements of those subsidiaries.  Any and all capital allocation decisions will be made by the Board and me, your Chairman but more importantly the Company's largest shareholder.  This clear articulation of responsibilities will ensure that we remain intensely focused in fulfilling our obligation to shareholders – the maximization of per share intrinsic value.

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