-----------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-27190
PARAMOUNT FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3072768
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
ONE JERICHO PLAZA, JERICHO, NEW YORK 11753
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(516) 938-3400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS
(OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO
FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--------- --------
NUMBER OF SHARES OUTSTANDING AT SEPTEMBER 11, 1997:
7,940,000 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE.
-----------------------------------------------------------------
<PAGE>
PARAMOUNT FINANCIAL CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 . . . . . . 1
Consolidated Statements of Operations
Three Months Ended and Nine Months Ended
September 30, 1997 and 1996 . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Stockholders'
Equity Nine Months Ended September 30, 1997 . . . . . 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 . . . . 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 7-11
PART II - Other Information . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, SEPTEMBER 30,
ASSETS 1996 1997
------ ------------- ------------
(UNAUDITED)
Cash and cash $ 3,700,774 $ 850,589
equivalents . . . . .
Investments available 3,163,841 4,065,732
for sale . . . . . . .
Accounts receivable . . 2,260,013 792,159
Net investment in direct
finance and sales-type 20,942,542 43,785,739
leases . . . . . . . .
Assets held under
operating leases, net 21,103,033 6,188,925
of accumulated
depreciation . . . . .
Other assets . . . . . 391,317 639,750
------------- ------------
Total assets . . . . . $51,561,520 $56,322,894
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable . . . . . $ 18,384 $ 3,348,786
Accounts payable . . . 1,062,226 545,956
Accounts payable - 18,234,518 4,353,876
leases . . . . . . . .
Accrued expenses . . . 188,169 345,997
Obligations for financed 23,461,175 39,234,888
equipment - non-recourse
Deferred income taxes . 425,662 425,662
------------- -------------
Total liabilities . . . 43,390,134 48,255,165
------------ ------------
Shareholders' equity:
Preferred stock, $.01
par value; 5,000,000
shares authorized, none
outstanding . . . . . -- --
Common stock, $.01 par
value; 35,000,000
shares authorized,
3,500,000 and 7,990,000
shares issued,
respectively . . . . . 79,900 79,900
Additional paid-in 13,644,228 13,644,228
capital . . . . . . .
Accumulated deficit . . (5,552,742) (5,627,034)
Treasury stock, 50,000
shares at cost . . . . -- (29,365)
--------------- -------------
Total shareholders' 8,171,386 8,067,729
equity . . . . . . . . ------------- ------------
Total liabilities and $51,561,520 $56,322,894
shareholders' equity . ============= ============
See accompanying notes to financial statements.
-1-
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
UNAUDITED
---------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
1996 1997 1996 1997
---- ---- ---- ----
REVENUES:
Sales . . . . $ 528,544 $ 13,364,035 $ 22,612,437 $ 20,114,906
Lease revenue 986,678 2,764,898 2,433,049 8,188,263
Fee, interest
and other
income . . . 252,631 76,800 415,902 857,764
---------- ---------- ---------- ----------
Total
revenues 1,767,853 16,205,733 25,461,388 29,160,933
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 407,067 12,775,064 21,489,156 18,808,375
Lease expense 882,027 2,679,478 2,234,239 7,870,158
Selling,
general and
administra-
tive expenses 588,119 1,118,006 1,733,030 2,605,548
---------- ---------- ---------- ----------
Total costs
and
expenses 1,877,213 16,572,548 25,456,425 29,284,081
---------- ---------- ---------- ----------
(Loss) income
before
provision for
income taxes (109,360) (366,815) 4,963 (123,148)
PROVISION
(BENEFIT) FOR
INCOME TAXES 375,974 (146,565) 421,704 (48,856)
---------- ---------- ---------- ----------
Net loss . ($485,334) ($220,250) ($416,741) ($74,292)
========== ========== ========== ==========
Loss per
common
share . . ($0.06) ($0.03) ($0.05) ($0.01)
========== ========== ========== ==========
Weighted
average
common
shares
outstanding 7,990,000 7,946,304 7,749,927 7,972,711
========== ========== ========== ==========
See accompanying notes to financial statements.
-2-
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
COMMON STOCK
------------------
ADDITIONAL
PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT -CAPITAL (DEFICIT) STOCK TOTAL
------ ------ -------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER
31, 1996 . 7,990,000 $79,900 $13,644,228 ($5,552,742) $ -- $8,171,386
Net loss . -- -- -- (74,292) -- (74,292)
Purchase of
treasury
stock . . -- -- -- -- (29,365) (29,365)
--------- ------- ----------- ------------ -------- ----------
BALANCE,
SEPTEMBER
30, 1997 . 7,990,000 $79,900 $13,644,228 ($5,627,034) ($29,365) $8,067,729
========= ======= =========== =========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
UNAUDITED
---------
1996 1997
----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (416,741) $ (74,292)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Deferred tax liability 419,819 --
Depreciation 1,280,277 5,687,422
Amortization of discounts on
investments (118,285) (154,642)
Amortization of unearned
operating lease revenue
from sublease transactions (19,928) --
Amortization of prepaid operating
lease expense from sublease
transactions 25,067 --
Changes in operating assets and
liabilities:
Accounts receivable (847,962) 1,467,854
Other assets 273,521 (248,433)
Accounts payable (108,227) (516,270)
Accrued expenses (45,614) 157,828
----------- ----------
Net cash provided by operating 441,927 6,319,467
activities ----------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment for direct
finance leases and sales-type
leases (18,236,564) (37,470,321)
Termination of direct finance
leases 974,152 4,236,465
Proceeds applied to direct
finance leases and sales-type
leases 3,784,071 8,057,474
Purchase of equipment for
operating leases (19,121,819) (41,333)
Termination of operating
leases 12,749,549 6,972,505
Residual value sharing
arrangements -- 4,628,698
Purchases of investments (16,980,988) (14,187,250)
Proceeds from sale/maturity of
investments 14,008,924 13,440,000
-----------
Net cash used in investing (22,822,675) (14,363,762)
activities ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of common
stock in an initial public
offering, net of fees 8,413,801 --
Repurchase of common stock -- (29,365)
Proceeds from notes payable -- 3,578,697
Repayment of notes payable (1,592,829) (248,294)
See accompanying notes to financial statements.
-4-
<PAGE>
1996 1997
----------- -----------
Decrease in amounts due on
purchases of equipment for
leases 4,497,318 (13,880,642)
Increase in non-recourse lease
financing 34,895,847 32,501,416
Termination of non-recourse
lease financing (16,291,873) (3,220,910)
Repayments and interest
amortization applied to non- (5,196,245) (13,506,792)
recourse lease financing ----------- -----------
Net cash provided by financing
activities 24,726,019 5,194,110
----------- -----------
Net increase (decrease) in cash and
cash equivalents 2,345,271 (2,850,185)
CASH AND CASH EQUIVALENTS, 1,153,476 3,700,774
beginning of period ----------- -----------
CASH AND CASH EQUIVALENTS, end of $3,498,747 $ 850,589
period =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 49,366 $ 38,570
=========== ===========
Cash paid for interest $ 923,063 $2,221,754
=========== ===========
See accompanying notes to financial statements.
-5-
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions for
Form 10-Q and Regulation S-X related to interim period
financial statements and, therefore, do not include all
information and footnotes required by generally accepted
accounting principles. However, in the opinion of
management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair
presentation of the financial position of Paramount
Financial Corporation and subsidiary (the "Company") at
September 30, 1997 and its results of operations and cash
flows for the three and nine months ended September 30, 1996
and 1997, respectively, have been included. The results of
operations for the interim periods are not necessarily
indicative of the results that may be expected for the
entire year. Reference should be made to the annual
financial statements, including footnotes thereto, included
in the Company's Form 10-K for the fiscal year ended
December 31, 1996.
2. The financial statements for the three and nine months ended
September 30, 1997 are consolidated to include the results
of Paratech Resources Inc. All intercompany balances and
transactions have been eliminated.
3. Included in cash and cash equivalents is $600,000 of
restricted cash pledged as collateral under a letter of
credit arrangement.
4. In the second quarter of 1997, the Company granted a total
of 165,000 stock options to employees. The Company shall
continue to apply the Accounting Principles Board Opinion
No. 25 and will provide the year end disclosures as required
under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
5. In March 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings Per Share." This statement establishes
standards for computing and presenting earnings per share
("EPS") replacing the presentation of currently required
Primary EPS with a presentation of Basic EPS. For entities
with complex capital structures, the statement requires the
dual presentation of both Basic EPS and Diluted EPS on the
face of the statement of earnings. Under this new standard,
Basic EPS is computed based on weighted average common
shares outstanding and contingently issuable shares (which
satisfy certain conditions) and excludes any potential
dilution; Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock, or
from other contracts to issue common stock, and is similar
to the currently required Fully Diluted EPS. SFAS 128 is
effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and
earlier application is not permitted. When adopted, the
Company will be required to restate its EPS data for all
periods presented. The Company does not expect the impact
of adoption of this statement to be material to previously
reported EPS amount.
6. Certain prior year amounts have been reclassified to conform
with the 1997 presentation.
-6-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with and is qualified in its entirety by, the
unaudited financial statements, including the notes thereto,
appearing elsewhere in this 10-Q.
GENERAL
Paramount Financial Corporation ("Paramount" or the "Company")
is a comprehensive asset management and information technology
("IT") solution provider offering customers a wide range of
integrated services, including lease finance, IT consulting,
network design and implementation.
The operating results of Paramount are subject to quarterly
fluctuations resulting from a variety of factors, including new
product announcements by manufacturers, economic conditions,
interest rate fluctuations and variations in the mix of leases
written. In addition, the Company's sales volume fluctuates
significantly from quarter to quarter based on the closing date
and nature of each particular sales transaction. The mix of
leases written in a quarter is a result of a combination of
factors, including changes in customer demands and/or
requirements, new product announcements, price changes, changes
in delivery dates, changes in maintenance policies and pricing
policies of equipment manufacturers and price competition from
other lessors. Leasing transactions (other than sales type
leases), in general, do not provide for significant earnings in
the month of lease origination. Instead, revenue, expense and
profit from lease transactions are recorded over the life of the
asset and the lease. Lease revenue and lease expense recognition
is dependent upon a number of factors, including the term of the
lease, the accounting classification of the lease (i.e.
operating, direct finance, or sales type) and the commencement
date of the lease and the lease financing within a particular
period. See "Lease Accounting". Given the possibility of such
fluctuations, the Company believes that comparisons of the
results of its operations for preceding quarters are not
necessarily meaningful and that the results for one quarter
should not be relied upon as an indication of future performance.
During the quarter ended September 30, 1997, the Company
continued its evolution from a strict lease finance company into
a total technology solution provider. The key elements to this
strategy are the development and maturity of the Company's
systems integration and network design capabilities, and the
continued growth of the Company's portfolio of essential IT
equipment on lease to relationship based end-user customers. The
Company believes that this strategy will create financial
benefits over a continuum of time, since, unlike other equipment,
IT equipment is frequently upgraded and/or enhanced during the
term of its lease. As a lessor and solution provider, the
Company believes that it is well positioned to meet the ever
changing needs of its customers
The results of operations for the three and nine months ended
September 30, 1997 are presented on a consolidated basis
including the results of Paratech Resources Inc. ("Paratech"),
the Company's system integration subsidiary, which commenced
operations during the third quarter of 1996. The Company
believes that the addition of Paratech is a major step towards
establishing Paramount as a total high technology solution
provider. Paratech generates revenue from sales of desktop
computer and related systems and through sales of technical
support services. The third quarter of 1997 was once again a
period of significant expansion for Paratech, as the Company
greatly increased the size of its technical, sales and support
staff.
Paramount operates in a highly competitive and rapidly
changing marketplace. The Company believes that its ability to
adapt to changes and to evolve into a valued business partner for
its customers, offering a complete package of products in the
high technology area, is a key component to the Company's long
term growth strategy.
-7-
<PAGE>
LEASE ACCOUNTING
In accordance with Statement of Financial Accounting Standard
No. 13, "Accounting for Leases," the Company classifies its
leases as either operating leases or direct finance leases. The
allocation of income among accounting periods within a lease term
will vary depending upon the lease classification, as described
below.
Direct Finance Leases: Direct finance leases transfer
substantially all benefits and risks of equipment ownership to
the lessee. A lease is a direct finance lease if it meets one of
the following criteria: (1) the lease transfers ownership of the
equipment to the lessee by the end of the lease term; (2) the
lease contains a bargain purchase option; (3) the lease term at
inception is at least 75% of the estimated economic life of the
leased equipment; or (4) the present value of the minimum lease
payments is at least 90% of the fair value of the leased
equipment at lease inception.
At lease inception, the cost of equipment under a direct
finance lease is recorded as "Net investment in direct finance
leases." The difference between the gross lease payments
receivable, plus the estimated residual value of the equipment,
and the equipment cost is recognized as income over the life of
the lease using the interest method.
A lease transaction which meets all of the above criteria, and
in which the Company has made a dealer's profit, is recorded as a
sales type lease. A sales type lease is a type of direct finance
lease, but one in which the Company recognizes, at lease
inception, revenue and profit which arises from the difference
between the fair market value of the leased equipment and its
acquisition cost.
Operating Leases: All lease contracts which do not meet the
criteria of direct finance leases are accounted for as operating
leases. Monthly lease payments are recorded as operating lease
revenue. Leased equipment is recorded at the Company's cost and
depreciated on a straight-line basis over the lease term to the
estimated residual value at the expiration of the lease term.
The Company's portfolio of equipment on lease is further
divided into equipment owned by Paramount and equipment managed
by Paramount. As of September 30, 1997, the portfolio of
equipment on lease owned by Paramount had a combined net book
value on the balance sheet of $50.0 million and had an original
cost basis of $68.0 million. Equipment managed by Paramount is
equipment on lease to customers of Paramount which was
subsequently sold to investors, but with respect to which
Paramount remains the lessor and remarketing agent. The
portfolio of equipment managed by Paramount had an original cost
of $26.2 million. Thus, as of September 30, 1997, the portfolio
of equipment on lease owned and managed by Paramount had an
original acquisition cost of $94.2 million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1996
The Company recorded a net loss of $220,300 for the three
months ended September 30, 1997, as compared to a net loss of
$485,300 for the comparable period ended September 30, 1996. The
results for the quarter ended September 30, 1996 include a one
time, non-cash adjustment of $419,800 to Provision for Income
Taxes. This adjustment was necessitated by the change of the
Company's tax status from a Sub-Chapter S-Corporation to a C-
Corporation in connection with the Company's January 1996 initial
public offering and was made in accordance with Statement of
Financial Accounting Standards No.109. The amount of the
adjustment represents the cumulative deferred tax liability,
which arose primarily from temporary tax differences with respect
to depreciation, generated by the S-Corporation and payable in
the future by the C-Corporation.
-8-
<PAGE>
Lease revenue, comprised of rental income from operating
leases and interest income from direct finance and sales type
leases, increased by 180.2% to $2.8 million for the three months
ended September 30, 1997 from $986,700 for the comparable period
ended September 30, 1996. Lease expense, which includes
depreciation expense on operating leases, interest expense on
lease financing and sublease rent expense, increased by 203.8% to
$2.7 million for the three months ended September 30, 1997 from
$882,000 for the three months ended September 30, 1996. These
increases are a direct result of the Company's continuing efforts
to expand its leasing portfolio. See "General" and "Lease
Accounting."
During the three months ended September 30, 1997, the Company
recorded $13.4 million of sales revenue. This represents an
increase of $12.8 million over the $528,500 recorded during the
three months ended September 30, 1996. Included in the sales
revenue for the three months ended September 30, 1997, was $11.6
million of revenue from sales type leases of which there were
none during the three months ended September 30, 1996. See
"General."
During the three months ended September 30, 1997, the Company
generated $76,800 in fee, interest and other income, compared to
$253,000 for the comparable period last year. The Company
generates fee income from either the sale of equipment under a
direct finance lease to an investor or from commissions earned on
third party lease financing transactions. These transactions
generally come about as a result of the Company's relationship
with other lessors and financial institutions. The Company
cannot predict with any certainty the timing and nature of any
future such transactions. See "General." Interest income is
derived from the investment of the Company's cash balances in
interest bearing cash accounts, cash equivalents and marketable
securities.
Selling, general and administrative expenses ("SG&A") totaled
$1.1 million for the three months ended September 30, 1997,
representing an increase of 90.1% over the $588,100 recorded
during the three months ended September 30, 1996. The increase
in SG&A is a result of the expansion of the operations of
Paratech and the increased sales and support staff at the
Company. See "General."
The benefit from income taxes of $146,600 for the three months
ended September 30, 1997 reflects an effective tax rate of 40%
for federal and state taxes. The tax provision of $375,900 for
the three months ended September 30, 1996 represents the
cumulative adjustment of $419,800, described above, less a
benefit of $43,900, which reflects an effective rate of 40% for
federal and state taxes on the current period loss. Prior to
1996, the Company was an S-Corporation and not subject to a
corporate federal income tax.
During the three months ended September 30, 1997, the Company
entered into new lease transactions totaling $12.1 million of
equipment cost. Of this amount, $11.0 million were for sales
type leases for which the sale price and cost of equipment were
recorded as sales revenue and cost of sales, respectively. The
remaining $1.1 million were recorded as direct finance leases.
This compares with $5.4 million for the three months ended
September 30, 1996, of which $815,000 were recorded as direct
finance leases and $4.6 million were recorded as operating
leases. See "General" and "Lease Accounting." During the
quarter ended September 30, 1997, the Company entered into
$309,300 and terminated $2.3 million of non-recourse lease
financing arrangements, as compared with $2.0 million of non-
recourse lease arrangements, net of terminations, for the three
months ended September 30, 1996. See "Liquidity and Capital
Resources."
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1996
The Company recorded a net loss of $74,300 for the nine months
ended September 30, 1997, as compared to a net loss of $416,700
for the comparable period ended September 30, 1996. The results
for the nine months ended September 30, 1996 include a one time,
non-cash adjustment of $419,800 to Provision for Income Taxes.
-9-
<PAGE>
This adjustment was necessitated by the change of the Company's
tax status from a Sub-Chapter S-Corporation to a C-Corporation
in connection with the Company's January 1996 initial public
offering and was made in accordance with Statement of Financial
Accounting Standards No.109. The amount of the adjustment
represents the cumulative deferred tax liability, which arose
primarily from temporary tax differences with respect to
depreciation, generated by the S-Corporation and payable in the
future by the C-Corporation.
Lease revenue, comprised of rental income from operating
leases and interest income from direct finance and sales type
leases, increased by 236.5% to $8.2 million for the nine months
ended September 30, 1997 from $2.4 million for the comparable
period ended September 30, 1996. Lease expense, which includes
depreciation expense on operating leases, interest expense on
lease financing and sublease rent expense, increased by 252.3% to
$7.9 million for the nine months ended September 30, 1997 from
$2.2 for the nine months ended September 30, 1996. These
increases are a direct result of the Company's continuing efforts
to expand its leasing portfolio. See "General" and "Lease
Accounting."
For the nine months ended September 30, 1997, the Company
recorded sales revenue of $20.1 million, a decrease of 11.0% over
the $22.6 million recorded during the nine months ended September
30, 1996. Of the total sales revenue recorded during the nine
months ended September 30, 1997, approximately $2.6 million was
contributed by Paratech. This represents an increase of 420%
over the twelve months ended December 31, 1996. See "General."
During the nine months ended September 30, 1997, the Company
generated $857,800 in fee, interest and other income, compared to
$415,900 for the comparable period last year. The Company
generates fee income from either the sale of equipment under a
direct finance lease to an investor or from commissions earned on
third party lease financing transactions. These transactions
generally come about as a result of the Company's relationship
with other lessors and financial institutions. The Company
cannot predict with any certainty the timing and nature of any
future such transactions. See "General." Interest income is
derived from the investment of the Company's cash balances in
interest bearing cash accounts, cash equivalents and marketable
securities.
Selling, general and administrative expenses ("SG&A") totaled
$2.6 million for the nine months ended September 30, 1997,
representing an increase of 50.4% over the $1.7 million recorded
during the nine months ended September 30, 1996. The increase in
SG&A is a result of the expansion of the operations of Paratech,
and the increased sales and support staff at the Company. See
"General."
The benefit from income taxes of $48,900 for the nine months
ended September 30, 1997 reflects an effective tax rate of 40%
for federal and state taxes. The tax provision of $421,700 for
the nine months ended September 30, 1996 represents the
cumulative adjustment of $419,800, described above, plus $1,900
which reflects an effective rate of 40% for federal and state
taxes on the current period income. Prior to 1996, the Company
was an S-Corporation and not subject to a corporate federal
income tax.
During the nine months ended September 30, 1997, the Company
entered into new lease transactions totaling $37.5 million of
equipment cost as compared with $37.4 million for the nine months
ended September 30, 1996. See "General" and "Lease Accounting."
During the nine months ended September 30, 1997, the Company
entered into $29.3 million of non-recourse lease financing
arrangements, net of terminations resulting from lease extensions
and renewals, as compared with $18.6 million for the nine months
ended September 30, 1996. Of the total amount of non-recourse
debt entered into during the first nine months of 1997, $13.3
million related to leases that commenced in December 1996, but
for which the Company was not required to pay for the equipment
until January 1997. This amount was recorded as accounts
payable-leases on the Company's December 31, 1996 balance sheet.
-10-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had $4.9 million in
cash, cash equivalents and marketable securities, including
$600,000 of restricted cash pledged as additional collateral
under a Letter of Credit arrangement. Substantially all of this
amount was invested in interest-bearing savings accounts, money
market accounts established by major commercial banks, or in
United States Government or other AA rated obligations.
The Company finances substantially all of its leases by
discounting the payment streams on a non-recourse basis through
various banks and financial institutions. Thus, the only cash
required in these lease transactions is the residual value
investment by the Company. The Company believes that it
currently has sufficient resources to make the residual value
investments required to grow its lease portfolio. In addition,
the Company has numerous options available to it for the
financing of residual value investments, including sales of
equipment on lease to equipment investors, residual value sharing
arrangements, recourse loans and non-recourse loans. The Company
intends to use, on an opportunistic basis, all such available
resources in order to maximize its portfolio of equipment on
lease.
During the nine months ended September 30, 1997, the Company
entered into several residual value sharing and financing
arrangements with an equipment investor totaling $8.0 million.
This investor (i) purchased a portion of the Company's residual
value of equipment on lease in exchange for the right to share in
remarketing proceeds generated from the equipment on lease, and
(ii) provided recourse financing for the remaining portion of the
Company's residual value investment. The equipment on lease and
the related leases serve as collateral for these financings.
During the nine months ended September 30, 1997, in connection
with the early extension of leases, the Company repaid $247,000
of such loans using the proceeds of these extensions. The
Company expects to repay the balance of these loans through the
proceeds generated from remarketing the subject equipment in the
future. These transactions allow the Company to continue to grow
and expand its lease portfolio without significantly affecting
its current cash balances.
At September 30, 1997, the Company had two lines of credit
available. These credit lines allow the Company to borrow up to
$1.25 million in the aggregate and are secured by equipment and
contracts to sell or lease that equipment. Borrowings under
these lines bear interest at 1% above the prime rate. In
addition, one of these lines offers the Company the ability to
borrow up to $100,000 on an unsecured basis. The purpose of
these credit lines is to allow the Company to pay its suppliers
on a timely basis while waiting for the customer to pay or for
the non-recourse financing to occur. During the nine months
ended September 30, 1997, the Company had not borrowed any
amounts from these lines, and accordingly had nothing outstanding
as of September 30, 1997. As a result of its cash balances, the
Company has been able to internally bridge finance its equipment
purchases. The Company believes that its current cash balances
and existing credit lines are sufficient to meet the short-term
growth needs of the business.
During the nine months ended September 30, 1997, the Board of
Directors of the Company approved a plan that would allow for the
repurchase of up to $500,000 worth of common stock of the
Company. The repurchase program took effect immediately and is
authorized to continue for a period of two years. Subject to
applicable rules, the plan allows the Company to repurchase
shares at any time during the authorized period in any increments
it deems appropriate. As of September 30, 1997, the Company had
repurchased 50,000 shares for a cash purchase price of $29,400.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISK
Statements contained in this Form 10-Q which are not
historical facts are forward-looking statements. The forward-
looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements made herein
contain a number of risks and uncertainties that could cause
actual results to differ materially. These risks and
uncertainties include, but are not limited to, the specific
factors impacting the Company's business discussed under the
caption "General", as well as increased competition; the
availability of computer equipment; the ability of the Company to
expand its operations and attract and retain qualified sales
representatives experienced in the purchase, sale and lease of
new and used computer equipment; technological obsolescence of
the Company's portfolio of computer equipment; and general
economic conditions.
-11-
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None.
-12-
<PAGE>
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.
PARAMOUNT FINANCIAL CORPORATION
Date: November 13, 1997 By: /s/ Paul Vecker
------------------------------
Paul Vecker, Senior Vice
President and Chief Fiancial
Officer
-13-
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 851
<SECURITIES> 4,066
<RECEIVABLES> 792
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,323
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 80
<OTHER-SE> 7,988
<TOTAL-LIABILITY-AND-EQUITY> 56,323
<SALES> 13,364
<TOTAL-REVENUES> 16,206
<CGS> 12,775
<TOTAL-COSTS> 16,573
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (367)
<INCOME-TAX> (146)
<INCOME-CONTINUING> (220)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (220)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
