UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
______________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 0-27190
PARAMOUNT FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-3072768
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
ONE JERICHO PLAZA
JERICHO, NEW YORK 11753
(Address of Principal
Executive Offices)
(516) 938-3400
(Registrant's Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Units, each consisting of two shares of
Common Stock and two Class A Warrants
-------------------------------------
(Title of class)
Class A Warrants, each to purchase one share of Common Stock
------------------------------------------------------------
(Title of class)
Common Stock, $0.01 par value per share
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(Title of class)
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__
--
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock (Common
Stock) held by non-affiliates of the Registrant on March 19, 1997
was approximately $2,845,260, based on the closing sales price of
such stock on such date, as reported by the Nasdaq SmallCap
Market.
The number of shares outstanding of the Registrant's Common
Stock, as of March 19, 1997 was: 7,990,000 shares of Common
Stock, $0.01 par value.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement relating to the
Registrant's 1997 Annual Meeting of Stockholders, to be filed by
the Registrant with the Securities and Exchange Commission on or
before April 30, 1997, is hereby incorporated by reference into
Part III of this Annual Report on Form 10-K.
<PAGE>
PARAMOUNT FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1 - BUSINESS . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . 1
Industry Background . . . . . . . . . . . . . . . . 2
Sales and Leasing Business . . . . . . . . . . . . 2
Trading Business . . . . . . . . . . . . . . . . . 4
Paratech Resources Inc. . . . . . . . . . . . . . . 4
Joint Venture . . . . . . . . . . . . . . . . . . . 5
Lease Financing Sources . . . . . . . . . . . . . . 5
Certain Risks Associated with Expansion of Lease
Portfolio . . . . . . . . . . . . . . . . . . . . . 6
Distribution and Maintenance . . . . . . . . . . . 6
Customer Concentration . . . . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . 7
Employees . . . . . . . . . . . . . . . . . . . . . 8
Government Regulation . . . . . . . . . . . . . . . 8
ITEM 2 - PROPERTIES . . . . . . . . . . . . . . . . . . 8
ITEM 3 - LEGAL PROCEEDINGS . . . . . . . . . . . . . . . 8
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-
HOLDERS . . . . . . . . . . . . . . . . . . 8
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . 9
ITEM 6 - SELECTED FINANCIAL DATA . . . . . . . . . . . . 10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . 12
General . . . . . . . . . . . . . . . . . . . . . . 12
Lease Accounting . . . . . . . . . . . . . . . . . 13
Results of Operations . . . . . . . . . . . . . . . 14
Liquidity and Capital Resources . . . . . . . . . . 17
Forward Looking Statements and Associated Risk . . 18
Effect of New Accounting Standards . . . . . . . . 18
Inflation . . . . . . . . . . . . . . . . . . . . . 19
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . 19
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . 19
PART III
ITEM 10 - ITEM 13 - DOCUMENTS INCORPORATED BY
REFERENCE . . . . . . . . . . . . 19
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 21
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . F-1
-i-
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PART I
ITEM 1 - BUSINESS
GENERAL
Paramount Financial Corporation ("Paramount" or the
"Company") is a comprehensive information technology ("IT") asset
management and solution provider offering customers a wide range
of integrated services, including lease finance, network design
and implementation. The Company works with its customers to
develop strategies governing when to acquire IT equipment, when
to upgrade existing equipment and when to order new equipment to
take advantage of current technology. The Company also has the
ability to act as an outlet for the IT equipment being displaced.
The Company is not tied to any one manufacturer and thus can
provide customers with available technical and financial
alternatives regardless of the specific hardware platform.
Paramount commenced operations in July of 1991 as a
wholesale trader of used computer hardware. From inception
through the end of 1995, the Company generated most of its
revenue from this activity (generally referred to as "broker-to-
broker" trading). In 1992, the Company began developing a
complimentary business leasing new and used computer equipment to
corporate end-user customers. The Company has always believed
that the development of a portfolio of high quality, essential IT
equipment on lease to relationship-based end-user customers was a
key element to its long term business success, since, unlike
other assets, IT equipment is frequently upgraded and/or enhanced
during the term of its lease. As a result, an owner of a
portfolio of IT equipment, such as the Company, can realize
significant financial benefits over a continuum of time as it
works closely with its end-user customers to meet their ever
changing computing needs.
Thus, beginning in 1993, the Company adopted a strategy to
aggressively expand its leasing operations. This expansion,
however, was restricted by the Company's cash position which
limited its ability to invest in the IT equipment's "residual
value," a key element in developing a portfolio of this type.
The residual value of IT equipment represents the difference
between the cost of the equipment and the cash, representing the
discounted net present value of the equipment's lease rental
stream, received by the Company at the commencement of the lease
by leveraging the lease on a non-service basis with bank lenders
or other financial institutions. However, as a result of the
Company's January 1996 initial public offering (the "IPO"), the
Company has been able to significantly expand its leasing
operations. For the year ended December 31, 1996, the Company
originated leasing transactions for IT equipment with an original
cost of $53.7 million. This compares to the $7.7 million
generated during the year ended December 31, 1995, and gives the
Company a total portfolio of both owned and managed leases with
an original cost of over $75 million at the end of 1996. As a
result of this expansion, the majority of the Company's revenues
for fiscal 1996 were from leasing and lease related transactions.
In 1996, the Company also aggressively expanded its
operations to address the many changes in the computer industry
during the past several years. Chief among these changes has
been the emergence of high powered alternatives to the
traditional mainframe computer and its associated applications.
Although it is unclear exactly where these changes will lead, the
Company believes that the traditional mainframe will continue to
be the primary platform for large organizations with data-
intensive applications. However, it is a reality of the industry
that the power of computing for small to mid-size companies is
moving away from the mainframe and onto the desktop. In response
to this, and in recognition of the Company's need to provide its
customers with a broader range of value added services, in 1996
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the Company commenced operations of a new wholly owned
subsidiary, Paratech Resources Inc. ("Paratech"). Paratech
offers customers system design, integration and other value added
support services for the local area and wide area network (LAN
and WAN) environments. The Company believes that the addition of
Paratech will help establish Paramount as a total solution
provider in the IT market. The Company believes that it is now
positioned to offer its customers comprehensive IT asset
management and solutions, from the technology itself, through a
plan for keeping that technology current and a financial package
to effectively acquire that technology. The addition of
Paratech, the Company believes, will not only enhance the
services that Paramount can offer to its existing customers, but
will also enable the Company to obtain significant numbers of new
customers who need the types of products and service that the
Company can offer now.
The Company is a member in good standing of the American
Society of Computer Dealers International and the Equipment
Lessors Association.
INDUSTRY BACKGROUND
The computer industry has been characterized by frequent
technological advances resulting in cost reductions, increases in
computer processing capacity and broadened user applications. The
introduction of new models generally does not result in equipment
then in service becoming technologically obsolete, but usually
causes the price of existing equipment to decrease, reflecting
the increased performance and cost-effectiveness of the newer
equipment. Users frequently replace or upgrade equipment as their
existing equipment becomes inappropriate for their needs or as
increased data processing capacity is required.
Many end-users prefer to lease, rather than purchase,
computer equipment because leasing provides the flexibility to
upgrade, add or replace equipment during or at the end of the
initial lease term; provides financing advantages, such as the
elimination of initial cash outlays and lower monthly payments;
does not result in a preference item for purposes of the
alternative minimum tax; places the risk of loss of value on the
lessor rather than the lessee; and permits the lessee to account
for operating leases as off-balance-sheet financing thereby
leaving the lessee's borrowing ability, debt to equity ratio and
current liabilities unscathed.
As more end-users become aware of the economic benefits of
leasing, they often turn to independent leasing companies.
Independent lessors offer tailored financing and flexible
delivery, and can deliver financing for mixed systems from
different vendors. Responding to customers' demands, leasing
companies are increasingly becoming more flexible in terms of
lease duration, equipment upgrades and payment options. By more
accurately assessing the residual value associated with the price
of equipment, lessors have become better able to fine tune the
fixed monthly payment amount. Lessors have also found that the
value of leasing increases with the ability of lessees to
transfer risks and responsibilities to lessors.
SALES AND LEASING BUSINESS
The Company's retail sales and leasing operations were
established by Glenn Nortman, Co-Chief Executive of Paramount, in
June 1992, making the year ended December 31, 1993 the first full
year of operation for this business . Retail sales and leasing
involves the selling or leasing of new or used IT equipment to
computer end-users nationwide. The majority of the Company's end-
user customers are Fortune 1000 and equivalent companies with
large data processing needs. The Company offers its customers a
variety of choices for their data processing needs, including
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equipment manufactured by International Business Machines Corp.
("IBM"), Hitachi Data Systems, Amdahl Corporation, EMC
Corporation, Sun Microsystems Inc., Hewlett-Packard Co., Storage
Technology Corp. and Xerox Corp., and includes mainframe and
midrange central processing units, peripheral devices, upgrades
and component parts; client servers; LAN and WAN networking
equipment; telecommunications equipment; point of sale terminals;
and personal computers.
The Company's objective is to conduct its leasing business
with customers whose creditworthiness permits the Company to
obtain long-term, non-recourse, fixed rate financing for its
lease transactions. All of the Company's equipment leases are
noncancellable, place the risk of damage or destruction to the
equipment on the lessee, have original terms typically ranging
from 24 to 60 months and are governed by a master lease agreement
(the "Master Lease"). The specific terms of each Master Lease
vary, but each creates a triple net lease obligation on the part
of the lessee. A Master Lease is an important marketing tool for
Paramount because it allows for multiple lease transactions with
the same customer without having to re-execute a new lease
agreement. Instead, each lease is documented by an equipment
schedule which incorporates the terms of the Master Lease,
providing customers of Paramount with an easy and efficient means
of leasing equipment over time.
To minimize its cash investment in lease transactions, the
Company typically enters into non-recourse, fixed rate lease
financing with banks or other financial institutions. In
connection with such loans, the Company will (i) directly assign
to the lender providing financing the rental stream from the
lease, and (ii) grant that lender a security interest in the
equipment subject to the lease. In exchange for these
assignments, the Company receives up front from the lender a lump
sum payment equal to the discounted present value of the lease
payments, based on an interest rate commensurate with the
lessee's credit rating. In the event of the lessee's default, the
lender can look only to the lessee and the equipment for
repayment and not to the Company, unless the Company is in breach
of a material representation or warranty under the loan. Since
its inception, none of the Company's lessees have defaulted under
their leases. Throughout the term of the lease, the Company
retains title to the equipment.
In connection with its leasing of IT equipment to its
end-user customers and depending on the type of equipment
involved, the Company's relationship with the end-user and the
term of the lease, the Company may make a "residual value"
investment in these leased assets. A residual value investment
represents the difference between the acquisition cost of the
leased asset to the Company and the discounted present value of
the rental stream from the lessee. The Company plans to maximize
the return on its residual value investments through creative and
diligent remarketing activities, including mid-term extensions,
upgrades and early terminations. See "Certain Risks Associated
with Expansion of Lease Portfolio."
Prior to or at the expiration of the initial lease term, a
lessee will often reassess and evaluate its high technology
needs. To this end, the Company consistently works with its
customers to develop strategies governing when to acquire IT
equipment, upgrade existing equipment and order new equipment to
take advantage of current technology. On many occasions, the
lessee will renew or extend its lease and add to or otherwise
enhance the original equipment configuration. As a result, a
substantial portion of the Company's transactions are with repeat
customers.
The Company's remarketing strategy is to keep its IT
equipment in place at the end of the initial lease term in order
to maximize revenues and residual return. Accordingly, prior to
the expiration of the original lease term, the Company initiates
the remarketing process for the related equipment with the
existing lessee. Typically, remarketing IT equipment in place
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produces better residual returns than equipment sold or leased to
a third party. In addition, leased IT equipment is frequently
upgraded and enhanced during the term of the lease, and the
Company looks to extend the term of the lease while providing
these upgrades.
The focus of the Company's activities with respect to
particular models of IT equipment changes periodically as a
result of changes in market conditions and advances in computer
technology. New product introductions and deliveries have
historically created opportunities to arrange leases, re-market
displaced equipment and provide upgrades.
TRADING BUSINESS
The Company's IT equipment trading business is run by
Jeffrey Nortman, Co-Chief Executive of Paramount. IT equipment
trading is characterized by two features: (i) the equipment being
traded is generally used (pre-owned) rather than new, and
(ii) Paramount's trading partner in the transaction is not the
ultimate end-user of the equipment. Typically Paramount will buy
equipment from a computer leasing and trading company (the
"Broker") and resell that equipment to a different Broker. The
IT equipment that Paramount purchases generally will either be
from the selling Broker's lease portfolio or have been purchased
by the Broker from an end-user or another Broker. Depending on
market opportunities, Paramount may purchase one piece of
equipment and resell it, or may package the piece of equipment
with other equipment to resell as a package. In turn, the Broker
to whom Paramount sells the IT equipment may be purchasing it for
lease or sale to an end-user, sale to another Broker, or as a
speculative purchase for later sale. These types of trades are
generally referred to as broker-to-broker transactions.
Historically, the largest part of the Company's trading
activities had been on a broker-to-broker basis.
Early on during the year ended December 31, 1996, the
Company determined that as a result of new product announcements
and increased competition among equipment manufacturers, the
market for broker-to-broker transactions was changing and offered
limited opportunities for the current year. The Company decided
to significantly reduce its activities in this area and focus
more on the growth of its leasing portfolio and the expansion of
its services business. However, as the Company's portfolio of
equipment on lease begins to mature, the Company must be in
position to re-market this equipment, either to its own end-user
customers or into the broker-to-broker market. The Company
believes, therefore, that as it carries out its corporate
strategy of expanding its leasing activities, the Company's
trading business will continue to be important.
PARATECH RESOURCES INC.
During the third quarter of 1996 the Company commenced
operations of a new wholly owned subsidiary, Paratech, to offer
comprehensive information technology solutions, including network
design and integration, software applications, training and
value-added support services such as Help Desk. Paramount
executives have assumed a hands-on role in the development and
operation of Paratech, which is based at the corporation's
headquarters in Jericho, New York. With this new subsidiary,
Paramount believes that it can establish itself as a total IT
solutions company, providing comprehensive sales, leasing,
systems integration and support capabilities.
Paratech was developed in direct response to client's
increased demands for a broader solution to their system needs.
Since the Company was already a primary resource for its
customers' systems sales and financing requirements, the Company
believes that there are significant opportunities for it to also
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offer systems integration, support and value-added capabilities
to these same customers. In addition to the direct involvement
of Paramount's Co-Chief Executive Officers, Glenn Nortman and
Jeff Nortman, Paratech is staffed with experienced technology
solutions sales managers, systems consultants/integrators and
technicians.
Drawing on the Company's strong relationships with the
original equipment manufacturers, Paratech is applying brand name
hardware and software lines, including Compaq, Digital, Hewlett-
Packard, Hitachi Data Systems, IBM, Sun Microsystems, Amdahl,
CISCO, EMC and STK, as well as Alta Vista, Microsoft NT, Novell,
Oracle and other proprietary software. The Company can address a
wide range of system requirements, including multi-platform,
connectivity and migration issues; Intranet and Internet
implementation; and data warehouse extractions and enhancements.
Paratech's initial focus is on the New York-Metropolitan and
surrounding Tri-State area. The Company's long term goals for
Paratech's operations include the expansion of its business to
encompass computer maintenance services, PC rentals and other
related support services. The Company believes Paratech not only
gives the Company an expanded set of services that it can
leverage to its sales and leasing business, but also has
significant growth potential in its own right. According to the
International Data Corporation, the network services market will
grow 20 percent annually, to nearly $27 billion by the year 2000.
The addition of Paratech, the Company believes, will allow the
Company to become an active participant in that growth.
JOINT VENTURE
In an effort to expand its leasing activities to include
non-data processing high technology equipment, the Company has
created a joint venture to lease a state-of-the-art food vending
and cooking product.
In June 1995, the Company and KRh Thermal Systems ("KRh")
formed KRh Financial LLC ("KRhF") to lease to food service
operators the Hot Choice Vending Machine, a fully-integrated
freezer-to-oven vending machine designed to deliver fully-cooked,
high quality fast food in about a minute. KRh is a California
general partnership managed by Kaiser Thermal Systems, Inc., a
wholly-owned subsidiary of Kaiser Aerospace and Electronics, and
Thermaltech Development, LP. The Company owns 20% of KRhF. In
addition, under a related service agreement, the Company provides
leasing services to KRhF for which the Company is paid a
prescribed fee. During the year ended December 31, 1996, KRhF
successfully leased and financed vending machines for an
aggregate sale price in excess of $200,000. KRh is still is the
early stages of its business, and the results of KRhF are
immaterial to the overall financial position of Paramount.
LEASE FINANCING SOURCES
The Company maintains several informal relationships with
banks and other financial institutions for the purpose of
discounting lease transactions on a non-recourse basis. These
banks and financial institutions are in the business of
discounting lease transactions and actively look to acquire
transactions that meet their criteria of credit quality,
transaction size, term, documentation and rate. Prior to
committing to a lease transaction, the Company reviews the
creditworthiness and other key characteristics of the lease and
discusses the same with one or more of these banks or financial
institutions in an attempt to get prior approval for the
transaction. This avoids the possibility of the Company
committing to a transaction that it would be unable to finance.
To the extent that a time lag exists between the date that the
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Company must pay its vendors for the IT equipment to be leased
and the date that the non-recourse lease financing is funded, the
Company can and in limited circumstances has used its bridge
financing lines. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and
Capital Resources."
CERTAIN RISKS ASSOCIATED WITH EXPANSION OF LEASE PORTFOLIO
The Company plans to continue to greatly expand its computer
lease portfolio. In connection therewith the Company may have to
make significant residual value investments. There are certain
risks inherent in making residual value investments. Because
this involves making a current cash investment in leased IT
equipment based upon the Company's expectation of the value of
such equipment at a time in the future (typically upon lease
expiration), if the value of the equipment at such point proves
to be less than the Company's expectations, the Company would not
be able to recoup some or all of its residual value investment.
If the Company were to be unable to recoup its residual value
investment with respect to a significant portion of its lease
portfolio, the Company would experience significant and adverse
consequences, including the requirement to write-down a
substantial portion of its assets and a loss of liquidity.
The Company believes that it can mitigate the risks
associated with residual value investments considerably. The
Company intends to make these residual value investments on a
conservative and select basis. These investments will be made at
accounts where the Company has developed a strong working
relationship with the data processing and financial officers. The
residual value investment will be based heavily on this
relationship and the end-user's historical tendencies to either
upgrade equipment and extend leases prior to expiration, or to
return equipment at lease expiration. In addition, the Company
will utilize its experience in computer hardware in determining
the extent of its residual value investments. Each situation will
be analyzed separately regarding the possible upgrade paths of
the hardware, the potential for technological changes which may
reduce the comparative efficiency of the equipment, and lastly,
the Company's knowledge of the end-users and their likely growth
plans for the future. In addition, the Company will consult with
published reports by independent appraisal services to gauge its
investments. On an annual basis, the Company will compare its
residual investments to these published reports and make
write-downs if a reduction in value is deemed to be other than
temporary.
The Company's strategy is to create a diversified portfolio
of computer hardware at high quality end-user accounts in various
industries. By diversifying along product lines, expiration date
and end-user accounts, the Company believes that it protects
itself against any one product, customer or industry experiencing
a significant downturn. In addition, the Company intends to take
a proactive approach to managing its portfolio of IT equipment on
lease. This involves consistently meeting with users and
understanding their particular needs. A significant component to
this approach is the management of information regarding the
portfolio. By diligently monitoring its portfolio, keeping aware
of new product availability and trends, and by maintaining strong
working relationships with its end-user customers, the Company
believes that it can minimize the costs associated with making
residual value investments and maximize the profit of owning the
assets.
DISTRIBUTION AND MAINTENANCE
The Company has developed relationships with numerous
independent warehouse facilities throughout the United States
that specialize in IT equipment to handle distribution and
warehousing. By using these localized centers, the Company has
benefitted in minimizing costs of freight and distribution.
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The Company, like other competing computer sales and leasing
companies, does not grant any warranties on the products it sells
or leases. However, most of the new and used IBM and
IBM-compatible computer equipment which the Company sells and
leases is covered under either the manufacturer's warranty or the
manufacturer's maintenance program, or is acceptable to be
covered under the manufacturer's maintenance program, and the
Company represents this status to the buyer/lessee. Prior to
buying any used equipment, the Company obtains a guarantee from
the seller that the equipment is acceptable under the
manufacturer's maintenance program. Under each Master Lease, all
costs associated with product maintenance must be borne and
undertaken by the lessees.
CUSTOMER CONCENTRATION
The Company's typical customers are large, creditworthy
corporations that require several million dollars of equipment
per year and are repeat customers of the Company. Repeat
business generated through existing relationships is an important
source of revenue for the Company. While the Company believes
that its business is not dependent on any single customer, as of
December 31, 1996, the three largest lessees of the Company
accounted for 47% of the original acquisition cost of all
equipment leases owned and managed as of such date. The loss of
any of these major customers could have a material adverse effect
on the Company's business, financial condition and results of
operations.
COMPETITION
The Company competes directly with numerous other companies
which buy, sell or lease new and used computer and other high
technology equipment. Further, the major computer equipment
manufacturers themselves directly compete with the Company. Many
of the Company's competitors have substantially greater financial
resources and larger staffs than the Company. The Company's
principal competitors include manufacturers, such as IBM;
brokers, dealers and leasing companies, such as Comdisco, Inc.,
GE Capital Corporation, IBM Credit Corporation and El Camino
Resources; and commercial banks and other financial institutions.
Although the aforementioned companies are competitors of the
Company, in many instances they also are customers of and
suppliers to the Company.
The computer leasing and trading industry is characterized
by intense competition. Companies compete for accounts through a
variety of factors. The Company believes it competes on the basis
of price, responsiveness to customer needs, flexibility in
structuring lease transactions, relationships with customers and
vendors and knowledge of the equipment. Further, the Company has
a network of lenders to discount the rental streams at what the
Company believes are favorable competitive rates. Further the
Company believes that it has an efficient back office operation
which allows it to keep its overhead low, thus requiring a lower
sales threshold on each transaction. Another important
competitive factor is customer service. The Company has attempted
to take a "hands-on" approach with its customers in order to
build and maintain long-term, mutually beneficial relationships,
and the Company believes that this relationship-building approach
has distinguished Paramount from some of its competitors. In
addition, as an independent lessor and trader of equipment,
Paramount is able to deliver a wide variety of equipment to its
customers on a timely basis.
The Company's continued ability to compete effectively may
be affected by the policies of IBM, Hitachi and other computer
manufacturers. The Company attempts to provide customers with a
diverse selection of products, a high level of customer service,
the knowledge and competence of its employees and competitive
pricing. The Company believes that the knowledge and experience
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of its executive officers and the relationships that they have
fostered in the industry will continue to provide the Company
with competitive advantages in the marketplace.
Paratech competes against major hardware distributors and
national and regional consulting and service organizations. The
Company believes that it is able to compete in this market due to
the technical expertise of its employees, its focus on customer
service, and its relationship with equipment manufacturers and
vendors. In addition, the Company believes its ability to
structure a lease financing package for the equipment and
services provided by Paratech represent a significant competitive
advantage in the market place.
EMPLOYEES
As of December 31, 1996, the Company employed eleven persons
full-time, including four persons devoted exclusively to
Paratech. The Company has experienced no work stoppages and
considers its employee relations to be satisfactory. None of the
Company's employees are represented by a labor union.
GOVERNMENT REGULATION
The Company has not been materially affected by any
government regulations applicable to its sales, leasing, trading
or investment activities.
ITEM 2 - PROPERTIES
The Company leases approximately 2,734 square feet of office
space for its principal executive offices at One Jericho Plaza,
Jericho, New York 11753. Payment of rent for the Company's
offices is approximately $5,400 per month through August 1997;
thereafter, the rent increases pursuant to a schedule reaching
approximately $5,800 in the fourth year. This lease expires in
August 1999. The Company also maintains a sales office in Boston,
Massachusetts.
ITEM 3 - LEGAL PROCEEDINGS
There are no material legal proceedings pending against the
Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders
during the fourth quarter of the fiscal year ended December 31,
1996.
8
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Units, Common Stock and Class A Warrants began
trading separately on the Nasdaq SmallCap Market under the
symbols "PARAU," "PARA" and "PARAW," respectively, on January
22, 1996, the date of the Company's IPO. The following table
sets forth the high and low last sale prices for the Company's
securities for the periods commencing January 22, 1996 as
reported by the Nasdaq SmallCap Market. These prices do not
reflect retail mark-ups, mark-downs or commissions.
UNITS HIGH LOW
---- ---
January 22, 1996 through March 31, 1996 . . $15 3/4 $10
April 1, 1996 through April 15, 1996(1) . . 10 5/6 8 5/6
COMMON STOCK
January 22, 1996 through March 31, 1996 . . $ 6 $ 3 3/4
3/4
April 1, 1996 through June 30, 1996 . . . . 4 5/8 3
July 1, 1996 through September 30, 1996 . . 6 2 1/2
October 1, 1996 through
December 31, 1996 (2) . . . . . . . . . 1 1/2 3/16
January 1, 1997 through March 15, 1997 . . 1 15/32
CLASS A WARRANTS
January 22, 1996 through March 31, 1996 . . $ 2 1/4 7/8
April 1, 1996 through June 30, 1996 . . . . 1 1/2 19/32
July 1, 1996 through September 30, 1996 . . 1 5/16 3/8
October 1, 1996 through
December 31, 1996(2) . . . . . . . . . 3/4 1/16
January 1, 1997 through March 15, 1997 . . 13/16 3/97
The closing sales prices of these securities as of March 19,
1997, as reported by the Nasdaq SmallCap Market, were $0.594 per
share of Common Stock and $0.063 per Class A Warrant.
As of March 19, 1997, there were 23 record holders of the
Common Stock.
-------------------
(1) The Units were deleted from the Nasdaq SmallCap Market,
effective April 16, 1996, due to the fact that the Common
Stock and Class A Warrants predominately traded separately.
(2) On December 6, 1996, the underwriter of the Company's IPO
ceased operations.
9
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994
------------ ------------ ------------
REVENUE:
Sales . . . . . . . . $13,277,895 $21,418,872 $25,290,524
Lease revenue . . . . 697,241 1,647,923 2,592,531
Fee, interest and 14,446 180,265 109,247
other income . . . ----------- ----------- ----------
Total revenues . 13,989,582 23,247,060 27,992,302
----------- ----------- ----------
COSTS AND EXPENSES:
Cost of sales . . . . 12,618,090 19,566,840 23,540,952
Lease expense . . . . 375,049 1,317,497 2,091,361
Selling, general and
administrative
expenses . . . . . 911,694 1,641,602 1,680,601
Interest expense . . -- -- --
----------- ----------- ----------
Total costs and 13,904,833 22,525,939 27,312,914
expenses . . . ----------- ----------- ----------
Income (loss) before
provision for taxes 84,749 721,121 679,388
Provision for income -- 10,153 33,706
taxes . . . . . . . ----------- ----------- ----------
Net income (loss) . . $ 84,749 $ 710,968 $ 645,682
=========== =========== ==========
Loss per share . . .
Weighted average
common shares
outstanding . . . .
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996
-------------- ---------------
REVENUE:
Sales . . . . . . . $30,857,949 $27,159,894
Lease revenue . . . 2,147,358 3,680,924
Fee, interest and 162,873 511,698
other income . . ----------- -----------
Total revenues 33,168,180 31,352,516
----------- -----------
COSTS AND EXPENSES:
Cost of sales . . . 28,955,984 25,785,022
Lease expense . . . 1,828,412 3,419,600
Selling, general and
administrative
expenses . . . . 1,805,499 2,447,884
Interest expense . 5,284,756 6,209
----------- -----------
Total costs and 37,874,651 31,658,715
expenses . . ----------- -----------
Income (loss) before
provision for
taxes . . . . . . (4,706,471) (306,199)
Provision for income 21,850 498,212
taxes . . . . . . ----------- -----------
Net income (loss) . $(4,728,321) $(804,411)
=========== ==========
Loss per share . . ($0.10)
===========
Weighted average
common shares 7,817,973
outstanding . . . ===========
10
<PAGE>
AT DECEMBER 31,
-------------------------------------------
1992 1993 1994
---- ---- ----
BALANCE SHEET DATA:
Total assets . . . . . . $5,514,422 $9,798,454 $8,128,970
Obligations for financial
equipment --
non-recourse . . . . . 5,216,489 7,331,988 5,152,274
Shareholders' (deficit)
equity . . . . . . . . (56,816) 606,149 851,999
LEASE PORTFOLIO DATA:
Net investment in direct
finance and sales type
leases . . . . . . . . 5,170,104 6,795,493 5,411,219
Assets held for operating
leases, net of accumulated
depreciation . . . . . -- 1,048,370 864,126
AT DECEMBER 31,
--------------------------------
1995 1996
---- ----
BALANCE SHEET DATA:
Total assets . . . . . . $12,378,585 $51,561,520
Obligations for financial
equipment --
non-recourse . . . . . 9,337,883 23,461,175
Shareholders' (deficit)
equity . . . . . . . . 568,718 8,171,386
LEASE PORTFOLIO DATA:
Net investment in direct
finance and sales type
leases . . . . . . . . 6,446,063 20,942,542
Assets held for operating
leases, net of
accumulated
depreciation . . . . . 3,976,209 21,103,033
11
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The operating results of the Company are subject to
quarterly and annual fluctuations resulting from a variety of
factors, including product announcements by manufacturers;
economic conditions; interest rate fluctuations; and variations
in the mix of leases written by the Company. In addition, the
Company's sales volume can fluctuate significantly from quarter
to quarter based on the closing date and nature of each
particular sales transaction. The mix of leases written in a
year 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; 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 fluctuation, the
Company believes that comparisons of the results of its operations
for preceding quarters are not necessarily meaningful and that the
results for any one particular quarter should not be relied
upon as an indication of future performance.
The results of operations for the year ended December 31,
1996 represent a significant change in focus for Paramount as
compared to the prior year's activity. The Company has begun to
carry out its business plan to aggressively expand its end-user
lease origination business. Specifically, the Company has
increased its presence in end-user accounts, put greater emphasis
on new lease origination and established a greater marketing
presence in the high-technology community. In addition, the
proceeds of the Company's January 1996 IPO have increased the
Company's ability to make residual value investments in leased
equipment, thus creating new opportunities for lease origination.
See "Liquidity and Capital Resources." As a result of this
change in focus, the Company measures its progress not only in
terms of revenue and profit, but also on the growth of its lease
portfolio, which generates both lease revenue during the term of
the leases and sales or lease revenue at lease expiration through
subsequent sales or re-leases of the equipment.
Historically, the Company has generated the largest portions
of its revenue from the wholesale trading of used computer
equipment (i.e., broker-to-broker trading). Early during fiscal
----
1996 management determined that as a result of new product
announcements and increased competition among equipment
manufacturers, the market for this type of activity was
changing and offered limited opportunities for the current year.
As a result, the Company made the strategic decision to
significantly reduce its activity in this market, while continuing
with its plans to both aggressively expand its leasing operations
and develop the complementary systems integration business of
Paratech. The Company believes that this strategy will result
in substantial future benefits. By investing in a growing and
expanding base of high quality assets on lease to relationship-
based customers, the Company believes that it will be able to
generate significant revenue and earnings over a continuum of time,
and not just in a particular month or quarter. In addition, the
Company believes that the system integration business of Paratech
should allow the Company to offer additional services to its
leasing customers over this same period. In addition, the Company
believes that the equipment trading business will always be an
important part of its business mix, more so in the future as a
means of equipment re-marketing.
12
<PAGE>
As a key component of its growth strategy, during the third
quarter of 1996, the Company commenced operations at Paratech to
offer comprehensive information technology solutions, including
network design and integration, software applications, training
and value-added support services such as Help Desk. The Company
believes that the addition of Paratech is a major step towards
establishing Paramount as a total high technology solution
provider. The Company believes that it is now positioned to
offer its customers comprehensive asset management and technology
solutions, from the technology itself, through a plan for keeping
that technology current and to a financial package to effectively
acquire that technology. 1996 was a year of investment and
groundwork for Paratech, as the business was building its staff
and establishing its presence in the market. The results of
operations from Paratech are consolidated with those of
Paramount.
Paramount has always operated in a highly competitive and
rapidly changing marketplace. The Company believes that its
ability to adapt to changes, and to evolve as a business 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.
LEASE ACCOUNTING
In accordance with Statement of Financial Accounting Standard
No. 13, "Accounting for Leases," the Company classifies its
leases as either direct finance leases or operating 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 December 31, 1996, the portfolio of
equipment on lease owned by Paramount had a combined net book
value on the balance sheet of $42.0 million and had an original
13
<PAGE>
cost basis of $51.4 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. As of
December 31, 1996, the portfolio of equipment managed by
Paramount had an original cost of $24.1 million. Thus, as of
December 31, 1996, the portfolio of equipment on lease owned and
managed by Paramount had an original acquisition cost of $75.5
million.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995
The Company recorded a pre-tax loss of $306,200 for the year
ended December 31, 1996 as compared to a pre-tax loss of $4.7
million for the comparable period ended December 31, 1995.
During the year ended December 31, 1995, the Company expensed
$5.3 million of deferred financing costs related to the issuance
of 1.5 million shares of Common Stock as additional
consideration under certain Bridge Units which were originally
issued in connection with a Bridge Loan to the Company entered
into in July and August of 1995. This amount was based on the
estimated value of the Company's Common Stock at the consummation
of the IPO. The expense recorded did not affect the Company's
cash position or net equity as a result of the corresponding
credit made to additional paid-in capital. The pre-tax loss for
the year ended December 31, 1996 is largely attributable to the
increased emphasis on new lease origination, the timing of the
associated revenue recognition, and the creation and development
of Paratech. See "General."
In accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," the Company
recorded a one time, non-cash adjustment of $430,400 to its
Provision For Income Taxes during the year ended December 31,
1996. This adjustment was necessitated by the change of the
Company's tax status from an S-Corporation to a C-Corporation in
connection with the Company's January 1996 IPO. 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. This adjustment does not affect
the Company's current cash position, as a result of the
corresponding credit made to a deferred tax liability account,
but did cause the Company to report an after tax loss of $804,400
for the year ended December 31, 1996 as compared to an after tax
loss of $4.7 million for the comparable period ended December 31,
1995.
During the year ended December 31, 1996, the Company entered
into new lease transactions totaling $53.7 million of equipment
cost. This represents an increase of $46.0 million over the cost
of equipment leased during the year ended December 31, 1995. Of
the total cost of equipment leased during the year ended December
31, 1996, $12.4 million was subsequently sold to an equipment
investor. Of the balance of new lease origination for the year
ended December 31, 1996, $21.8 million was recorded as direct
finance leases or sales-type leases, and $19.5 million was
recorded as operating leases, compared to $3.7 million and $3.9
million, respectively, for the year ended December 31, 1995. The
increase in new lease origination is a direct result of the
Company's efforts to expand its end-user lease origination
business. See "General." During the year ended December 31,
1996, the Company entered into $21.6 million of non-recourse
lease financing arrangements, net of terminations resulting from
lease sales and lease extensions, as compared with $6.8 million
for the year ended December 31, 1995. See "Liquidity and Capital
Resources." Non-recourse debt entered during the year ended
December 31, 1996 increased at a slower rate than new lease
origination as a result of the timing of the closing of certain
large lease transactions. Of the total amount of new lease
business, $18.2 million was related to leases for which the
14
<PAGE>
Company was not required to pay for the equipment until January
1997. The Company had commitments from lenders for both non-
recourse lease financing, and in certain cases, residual value
financing, for these leases as of December 31, 1996. See
"Liquidity." This amount was recorded as accounts payable-leases
on the Company's December 31, 1996 balance sheet.
Consistent with the growth in new lease origination, lease
revenue, comprised of rental income from operating leases and
interest income from direct finance and sales type leases,
increased by 71.4% to $3.7 million for the year ended December
31, 1996 from $2.1 million for the comparable period ended
December 31, 1995. Lease expense, which includes depreciation
expense on operating leases, interest expense on lease financing
and sublease rent expense, increased by 87.0% to $3.4 million for
the year ended December 31, 1996 from $1.8 million for the year
ended December 31, 1995. See "General."
For the year ended December 31, 1996, the Company recorded
sales revenue of $27.2 million. Of this amount, $11.3 million
was from sales type leases, and $12.5 million was from the sale
of leased equipment to an equipment investor. Subsequent to a
sale of this variety, the Company generally is a party to a re-
marketing agreement under which it may earn additional income
from the asset's future re-lease or sale value. The Company
includes these leases within the aggregate value of its active
portfolio of owned and managed leases. See "General." For the
year ended December 31, 1995, the Company recorded sales revenue
of $30.9 million which included $16.4 million of sales of
equipment leases to equipment investors. The decrease in
equipment sales revenue is a result of the Company's expansion of
its leasing operations and the increased emphasis on lease
origination and portfolio development. Management believes that
as the Company's base of end-user lease and sale customers
continues to grow and expand, the Company should experience a
matching growth in sales revenue and profits. See "General."
During the year ended December 31, 1996, the Company
generated $186,300 in fee and other income, compared to $97,800
for the comparable period last year. This revenue is principally
derived from the Company's involvement in certain transactions in
which it acts as an arranger of financing for transactions
originated by third parties. The Company does not recognize as
revenue the gross amount of the lease financing arranged, but
rather records the net profit generated from the transaction.
Selling, general and administrative expenses ("SG&A") totaled
$2.4 million for the year ended December 31, 1996, representing
an increase of 35.6% over the $1.8 million recorded during the
year ended December 31, 1995. The increase in SG&A is a result
of the increased sales and support staff at the Company as well
as the increased compliance costs associated with being a public
company. In addition, SG&A expenses incurred at Paratech
significantly contributed to this increase.
During the year ended December 31, 1996, the Company recorded
$325,400 of interest income, an increase of $260,400 over the
year ended December 31, 1995. This increase is due to the
investment of the IPO proceeds in interest bearing cash accounts,
cash equivalents and marketable securities during the year ended
December 31, 1996.
The tax provision of $498,200 for the year ended December 31,
1996 represents the cumulative adjustment of $430,400 described
above, plus a provision for state, local and other taxes of
$67,800. Prior to 1996, the Company was an S-Corporation and not
subject to a corporate federal income tax.
15
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994
The Company recorded a pre-tax loss of $4.7 million for the
year ended December 31, 1995 as compared to pre-tax income of
$679,000 for the comparable period ended December 31, 1994.
During the year ended December 31, 1995, the Company expensed
$5.25 million of deferred financing costs related to the issuance
of 1.5 million shares of Common Stock issuable as additional
consideration under certain Bridge Units which were originally
issued in connection with a Bridge Loan to the Company entered
into in July and August of 1995. This amount was based on the
estimated value of the Company's Common Stock at the consummation
of the IPO. The expense recorded did not affect the Company's
cash position or net equity as a result of the corresponding
credit made to additional paid-in capital.
During the year ended December 31, 1995, the Company entered
into new lease transactions totaling $7.7 million of equipment
cost. Of this amount, $3.7 million was classified as direct
finance leases and $4.0 million was classified as operating
leases. For the year ended December 31, 1994, the Company entered
into $1.7 million of direct finance leases and $1.2 million of
operating leases. This growth reflects the Company's increased
marketing presence in end-user leasing accounts and expanded
banking relationships. During the year ended December 31, 1995,
the Company entered into $7.6 million of non-recourse lease
financing arrangements, net of terminations resulting from lease
sales and lease extensions, as compared with $2.1 million for the
year ended December 31, 1994. See "Liquidity and Capital
Resources."
Lease revenue for the year ended December 31, 1995 was $2.1
million, representing a decrease of 17.17% over the $2.6 million
recorded during the year ended December 31, 1994. Lease expense
decreased for the year ended December 31, 1995 by 14.9% to $1.8
million from $2.1 million for the year ended December 31, 1994.
The reduction in both lease revenue and expense is a result of
the maturation of the Company's lease portfolio and the Company's
success in re-marketing (through lease extensions and renewals)
equipment that came off lease to some of its end-user lease
customers. These extensions and renewals are typically at a
reduced rate from the original lease (resulting in the reduction
in lease revenue) but generate higher gross profit margins to the
Company, since in most cases the Company has depreciated the
equipment below its current fair market value.
For the year ended December 31, 1995, the Company recorded
sales revenue of $30.9 million. Of this amount, $16.4 million
was from the sale of leased equipment to an equipment investor.
Subsequent to a sale of this variety, the Company generally is a
party to a re-marketing agreement under which it may earn
additional income from the asset's future re-lease or sale value.
The Company includes these leases within the aggregate value of
its active portfolio of owned and managed leases. For the year
ended December 31, 1994, the Company recorded sales revenue of
$25.3 million. This increase reflects the continued growth in the
end-user sector of the Company's business, as the year ended 1995
saw the Company successfully close a number of transactions for
large computer systems to end-user customers.
During the year ended December 31, 1995, the Company
generated $97,800 in fee and other income, compared to $101,400
for the comparable period ended December 31, 1994. This revenue
is principally derived from the Company's involvement in certain
transactions in which it acts as an arranger of financing for
transactions originated by third parties. The Company does not
recognize as revenue the gross amount of the lease financing
arranged, but rather records the net profit generated from the
transaction.
16
<PAGE>
SG&A expenses totaled $1.8 million for the year ended
December 31, 1995, representing an increase of 7.4% over the $1.7
million recorded during the year ended December 31, 1995. The
increase in SG&A is a result of the increased sales and support
staff at the Company.
LIQUIDITY AND CAPITAL RESOURCES
On January 22, 1996, the Company consummated an initial
public offering of its securities. In connection with the IPO,
the Company issued a total of 1,495,000 units, inclusive of the
underwriter's over-allotment option which was exercised in full,
at a price of $7.00 per unit, generating net proceeds to the
Company of approximately $8.4 million. Concurrent with the IPO,
the Company repaid the $1.0 million owed to certain bridge
lenders plus the related interest accrued that was outstanding as
of December 31, 1995.
As of December 31, 1996, the Company had $6.8 million in
cash, cash equivalents and investments available for sale.
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. Since inception, the Company has been able to
cover its SG&A expenses from internally generated cash flow and
has never had to borrow funds to cover such expenses. Although
the Company's business is subject to monthly and quarterly
fluctuations that may require the Company to use its cash
balances to cover such expenses for short periods of time, the
Company does not anticipate having to use significant amounts of
its cash balances to cover such expenses.
During the year ended December 31, 1996, the Company had
three lines of credit available. These credit lines allow the
Company, subject to the satisfaction of certain financial
covenants with respect to one of such facilities, to borrow up to
$2,750,000 in the aggregate and are secured by equipment and
contracts to sell or lease that equipment. Borrowings under
these lines bear interest at 1% to 1 1/2% 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. As of December 31, 1995,
the Company had borrowed $495,000 from one of these bank lenders
in connection with the acquisition of equipment on lease. This
amount was paid in full in March 1996 and no additional amounts
were borrowed during the year. Two of these lines, totaling
$1.25 million, expire on June 30, 1997. The third line, in the
amount of $1.5 million, expired on June 30, 1996. The Company is
in the process of reinstating this line under similar terms and
conditions.
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. See "General." As a result of the
Company's IPO, management believes that it 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 year
ended December 31, 1996, the Company entered into several
residual value sharing arrangements, whereby an equipment
investor purchased a portion of the Company's residual value in
exchange for the right to share in remarketing proceeds generated
from the equipment upon lease expiration. The Company received
$500,000 from these transactions, and used this amount to reduce
17
<PAGE>
the cost basis and residual value of the leased asset. In
January 1997, the Company entered into an additional $2.3 million
of residual sharing arrangements regarding equipment on lease of
December 31, 1996. In addition, the Company has commitments from
this same finance company to finance Paramount's portion of the
residual value of certain leased assets. These commitments,
which total $1.2 million, were used by the Company in January of
1997. In June 1996, in connection with an extension and re-
financing of a lease transaction, the Company repaid $60,500 of a
residual value loan that was outstanding as of December 31,
1995. As of December 31, 1996, the Company had a total of
$18,400 of residual value loans outstanding.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISK
Statements contained in this Form 10-K which are not
historical facts are forward-looking statements. The forward-
looking statements in this Form 10-K 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; the success of
Paratech in establishing the Company as a comprehensive asset
management and information technology solution provider; and
general economic conditions.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This statement is effective for
transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. In management's
opinion, when adopted, the aforementioned pronouncement will not
have a material effect on the Company's financial position or
results of operation.
The FASB recently issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). This new standard encourages, but does not
require, companies to recognize compensation expense for grants
of stock, stock options and other equity instruments based on a
fair-value method of accounting.
Companies that do not choose to adopt the new expense
recognition rules of SFAS 123 will continue to apply the existing
accounting rules contained in Accounting Principles Board Opinion
(APBO) No. 25, but will be required to provide pro forma
disclosures of the compensation expense determined under the
fair-value provisions of SFAS 123, if material. APBO No. 25
requires no recognition of compensation expense for most of the
stock-based compensation arrangements provided by the Company,
namely, broad-based employee stock purchase plans and option
grants where the exercise price is equal to the market price at
the date of grant. The Company has adopted the disclosure
provisions of SFAS 123 which had no impact on the financial
statements or the notes thereto.
In 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
18
<PAGE>
("SFAS 121"). Long-lived assets to be held and used are recorded
at cost. SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The
effect of adopting SFAS 121 was not material to the Company's
financial statements since there were no events or changes in
circumstances for the year ended December 31, 1996 that indicated
that the carrying amount of long-lived assets had been impaired.
INFLATION
Inflation has not had a significant impact on the Company's
operations.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Company for the
fiscal year ended December 31, 1996 are located beginning at page
F-1 of this Annual Report on Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - ITEM 13 - DOCUMENTS INCORPORATED BY REFERENCE
Information with respect to Items 10, 11, 12 and 13 of Form 10-K is
hereby incorporated by reference into this Part III of Form 10-K from the
Registrant's Definitive Proxy Statement relating to the Registrant's 1997
Annual Meeting of Stockholders to be filed by the Registrant with the
Securities and Exchange Commission on or before April 30, 1997.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The exhibits listed in the Index to Exhibits below are filed as
part of this Annual Report on Form 10-K.
(A) EXHIBITS:
3.1* - Restated and Amended Certificate of Incorporation
of the Registrant
3.2* - Amended on Restated By-laws of the Registrant
4.1* - Specimen Common Stock Certificate
4.2* - Form of Underwriter's Unit Purchase Option, as
amended
4.3* - Form of Class A and Class B Warrant Agreement, as
amended
19
<PAGE>
4.4* - Specimen Class A Warrant Certificate
4.5* - Specimen Class B Warrant Certificate
10.1* - Employment Agreement between Registrant and
Jeffrey Nortman dated as of January 22, 1996
10.2* - Employment Agreement between Registrant and Glenn
Nortman dated as of January 22, 1996
10.3* - Employment Agreement between the Registrant and
Paul Vecker dated as of January 22, 1996
10.4* - Form of Master Lease Agreement relating to
Computer Equipment Leases
10.5* - 1995 Stock Option Plan
10.6* - Operating Agreement of KRh Financial, LLC, dated
June 1995, between the Company and KRh Thermal
Systems
10.7* - Lease Origination and Service Agreement, dated
June 1995, between the Company and KRh Financial,
LLC.
10.8* - Form of Indemnification Agreement
10.9* - Sublease Agreement, dated September 15, 1995,
between the Company and Lehman Brothers Inc.
10.10* - Consent to Sublease, dated September 15, 1995,
among Chasco Company, Lehman Brothers Inc. and the
Company
10.11* - 1995 Director Option Plan
-----------
* Incorporated by Reference from the Registrant's Registration
Statement on Form S-1, Registration No. 33-96382.
FINANCIAL STATEMENTS: See Index to Consolidated Financial
Statements on page F-1.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of the fiscal year ended December 31, 1996.
(C) EXHIBITS
The Exhibits set forth in (a) above are filed as part of this
Annual Report on Form 10-K.
(D) FINANCIAL STATEMENT SCHEDULES
Information required by schedules called for unde Regulation
S-X is either not applicable or is included in the financial
statements or notes thereto.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
PARAMOUNT FINANCIAL CORPORATION
Dated: March 21, 1997 By: /s/ JEFFREY NORTMAN
------------------------------
Jeffrey Nortman,
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/JEFFREY NORTMAN Co-Chief Executive Officer March 21, 1997
----------------------- and Director (Co-Principal
Jeffrey Nortman Executive Officer)
/s/ GLENN NORTMAN Co-Chief Executive Officer March 21, 1997
----------------------- and Director (Co-Principal
Glenn Nortman Executive Officer)
/s/PAUL VECKER Senior Vice President, Chief March 21, 1997
----------------------- Financial Officer, Treasurer
Paul Vecker and Director (Principal
Financial Officer and
Principal Accounting
Officer)
21
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1996
-----------------
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for each of the three
years ended December 31, 1996 F-4
Consolidated Statements of Shareholders' Equity for each of the
three years ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-20
Information required by schedules called for under Regulation S-X is
either not applicable or is included in the financial statements or
notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Paramount Financial Corporation:
We have audited the accompanying consolidated balance sheets of Paramount
Financial Corporation and subsidiary as of December 31, 1995 and 1996, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paramount Financial
Corporation and subsidiary as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Melville, New York
February 18, 1997
ARTHUR ANDERSEN LLP
F-2
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31,
------------------------
ASSETS 1995 1996
------ ---------- -----------
Cash and cash equivalents $ 1,153,476 $ 3,700,774
Investments available for sale -- 3,163,841
Accounts receivable 106,794 2,260,013
Net investment in direct finance and sales-
type leases 6,446,063 20,942,542
Assets held under operating leases, net of
accumulated depreciation 3,976,209 21,103,033
Other assets 696,043 391,317
----------- -----------
Total assets $12,378,585 $51,561,520
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Notes payable $ 1,611,697 $ 18,384
Accounts payable 419,624 1,062,226
Accounts payable - leases 126,990 18,234,518
Accrued expenses 313,673 188,169
Obligations for financed equipment-non
recourse 9,337,883 23,461,175
Deferred income taxes -- 425,662
----------- -----------
Total liabilities 11,809,867 43,390,134
----------- -----------
COMMITMENTS (Note 15)
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 and outstanding,
respectively 35,000 79,900
Additional paid-in capital 5,282,049 13,644,228
Accumulated deficit (4,748,331) (5,552,742)
----------- -----------
Total shareholders' equity 568,718 8,171,386
----------- -----------
Total liabilities and shareholders' $12,378,585 $51,561,520
equity =========== ===========
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Years Ended December 31,
------------------------------------
1994 1995 1996
----------- ----------- -----------
REVENUES:
Sales $25,290,524 $30,857,949 $27,159,894
Lease revenue 2,592,531 2,147,358 3,680,924
Fee and other income 101,358 97,802 186,264
Interest income 7,889 65,071 325,434
----------- ----------- -----------
Total revenues 27,992,302 33,168,180 31,352,516
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 23,540,952 28,955,984 25,785,022
Lease expense 2,091,361 1,828,412 3,419,600
Selling, general and
administrative expenses 1,680,601 1,805,499 2,447,884
Interest expense (Note 7) -- 5,284,756 6,209
----------- ----------- -----------
Total costs and expenses 27,312,914 37,874,651 31,658,715
----------- ----------- -----------
Income (loss) before
provision for income taxes 679,388 (4,706,471) (306,199)
PROVISION FOR INCOME TAXES (Note 9) 33,706 21,850 498,212
----------- ----------- ----------
Net income (loss) $ 645,682 $(4,728,321) $ (804,411)
=========== =========== ===========
Loss per share $(0.10)
==========
Weighted average common shares 7,817,973
outstanding ==========
The accompanying notes are an integral part of these consolidated
statements.
F-4
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
----------------------------------------------------
Common Stock Additional
----------------------- Paid-In
Shares Amount Capital
----------- ----------- ----------------
BALANCE, December 31,
1993 3,301,886 $33,018 $ 32,049
Current year
distributions - - -
Current year net - - -
income --------- ------- -----------
BALANCE, December 31,
1994 3,301,886 33,018 32,049
Issuances of common
stock 198,114 1,982 5,250,000
Current year
distributions - - -
Current year net - - -
loss --------- ------- -----------
BALANCE, December 31,
1995 3,500,000 35,000 5,282,049
Issuance of common
stock in the
initial public
offering, net of
offering costs of
$2,057,921 2,990,000 29,900 8,377,179
Issuance of common
stock to bridge
lenders 1,500,000 15,000 (15,000)
Current year net - - -
loss --------- ------- -----------
BALANCE, December 31, 7,990,000 $79,900 $13,644,228
1996 ========= ======= ===========
Retained
Earnings Total
----------- ----------
BALANCE,December 31,
1993 $ 541,082 $ 606,149
Current year
distributions (399,832) (399,832)
Current year net 645,682 645,682
income ----------- ----------
BALANCE, December 31,
1994 786,932 851,999
Issuances of common
stock - 5,251,982
Current year
distributions (806,942) (806,942)
Current year net (4,728,321) (4,728,321)
loss ---------- ----------
BALANCE, December 31,
1995 (4,748,331) 568,718
Issuance of common
stock in the
initial public
offering, net of
offering costs of
$2,057,921 - 8,407,079
Issuance of common
stock to bridge
lenders - -
Current year net (804,411) (804,411)
loss ----------- ---------
BALANCE, December 31, ($5,552,742) $8,171,386
1996 =========== ==========
F-5
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 645,682 $(4,728,321) $(804,411)
Adjustments to reconcile net income
(loss) to net cash provided
by (used in) operating
activities:
Amortization of deferred
financing costs - 5,250,000 -
Deferred income taxes - - 425,662
Depreciation 990,638 814,218 2,037,472
Amortization of discounts on
investments - - (162,296)
Amortization of unearned
operating lease revenue from
sublease transactions (114,405) (104,073) (19,928)
Amortization of prepaid operating
lease expense from sublease
transactions 97,899 92,376 25,067
Net proceeds from prepaid
sublease transaction 6,000 - -
Changes in operating assets and
liabilities:
Accounts receivable (130,811) 56,032 (2,153,219)
Inventory of equipment 1,563,966 65,725 -
Other assets (141,018) (453,749) 279,659
Unearned sales revenue 825,000 (825,000) -
Accounts payable (151,510) (323,933) 642,602
Accounts payable - leases - (126,990) 18,107,528
Accrued expenses 3,294 179,586 (105,576)
---------- ---------- ----------
Net cash provided by (used in) 3,594,735 (104,129) 18,272,560
operating activities ---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment for direct
finance leases and sales-type
leases (1,653,729) (3,707,954)(21,773,460)
Termination of direct finance
leases 429,226 729,330 1,591,822
Proceeds applied to direct
finance leases and sales-type
leases 2,608,777 1,943,781 5,685,159
Purchase of equipment for
operating leases (1,229,847) (3,950,717)(31,913,845)
Termination of operating leases 428,814 30,200 12,749,549
Purchase of investments - - (19,495,594)
Proceeds from sale/maturity of
investments - - 16,494,049
---------- ---------- ----------
Net cash provided by (used in) 583,241 (4,955,360)(36,662,320)
investing activities ---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from sale of common
stock in an initial public
offering - - 8,407,079
Distributions to shareholders in
cash (332,940) (806,942) -
Proceeds from notes payable 64,000 1,611,697 -
Repayment of notes payable (460,000) (64,000) (1,593,313)
Increase in non-recourse lease
financing 2,100,085 7,562,494 31,559,769
Termination of non-recourse lease
financing (615,801) (782,362) (9,978,194)
Repayments and interest
amortization applied to (3,663,998) (2,594,523) (7,458,283)
non-recourse lease financing ---------- ---------- ----------
Net cash (used in) provided by (2,908,654) 4,926,364 20,937,058
financing activities ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 1,269,322 (133,125) 2,547,298
CASH AND CASH EQUIVALENTS, beginning
of period 17,279 1,286,601 1,153,476
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of $1,286,601 $1,153,476 $3,700,774
period ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 33,706 $ 21,850 $ 24,437
========== ========== ==========
Cash paid for interest $ 440,500 $ 521,483 $1,358,538
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. COMPANY BACKGROUND:
-------------------
Paramount Financial Corporation ("Paramount" or the "Company") was
incorporated in the state of Delaware in July 1991. The Company's former
legal name, Paramount Computer Leasing Corporation, was changed to
Paramount Financial Corporation subsequent to the year ended December 31,
1994. Paramount is a comprehensive asset management and information
technology solution provider offering customers a wide range of integrated
services including lease finance, network design and implementation. The
Company is not tied to any one manufacturer and thus can provide customers
with available technical and financial alternatives regardless of the
specific hardware platform. Paramount's customer base is mostly comprised
of large, domestic, creditworthy customers in a variety of industries.
Prior to 1996, the Company generated most of its revenue from wholesale
trading of new and used equipment. However, in 1996, the Company
aggressively expanded its leasing operations which now accounts for most of
its revenue. In July 1996, Paramount formed a new wholly owned subsidiary,
Paratech Resources Inc., which offers comprehensive information technology
solutions including network design and integration, software applications,
training and value added support services.
On January 22, 1996 ("Effective Date"), the Company consummated an initial
public offering of its securities. In connection with the offering, the
Company issued a total of 1,495,000 units inclusive of the underwriter's
over-allotment option which was exercised in full, at a price of $7.00 per
unit. Each unit sold in the offering consists of two shares of common
stock and two redeemable class A warrants. The common stock and class A
warrants are detachable and can trade separately. The class A warrants are
exercisable commencing one year from the Effective Date. Each class A
warrant entitles the holder to purchase one share of common stock at $4.00
per share (subject to adjustment for anti-dilution) during the four year
period commencing one year from the Effective Date. The class A warrants
are redeemable by the Company for $0.05 per warrant, in the event that the
closing bid price of the Company's common stock exceeds $9.00 per share for
twenty consecutive trading days ending within ten days of the notice of
redemption. With the prior written consent of the underwriter, upon thirty
days written notice to all holders of the class A warrants, the Company
shall have the right to reduce the exercise price and/or extend the term of
the class A warrants. None of the class A warrants issued in connection
with the initial public offering have been exercised to date.
In connection with the offering, 300,000 shares of common stock owned by
the Company's two original shareholders (the "Selling Securityholders")
were also offered and sold to the public. Additionally, there was a
secondary offering of securities by certain non-affiliated lenders of the
Company (the "Selling Lenders"). The Selling Lenders registered 750,000
units, identical to the initial public offering units described above, as
well as an additional 1,500,000 shares of common stock issuable upon the
exercise of class B warrants (Note 7). The class B warrants are identical
to class A warrants, except that their exercise price is $4.20 per share,
they are not included for listing on any public trading market and there is
no solicitation fee payable in connection with their exercise. None of the
aforementioned class A or class B warrants have been exercised to date.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements as of and for the year ended December
31, 1996 include the accounts of the Company and its wholly owned
subsidiary, Paratech Resources Inc., after elimination of intercompany
balances and transactions.
Cash Equivalents
----------------
The Company considers all highly liquid debt and equity instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. Cash equivalents include investments in money market funds
and are stated at cost, which approximates market value.
Investments Available for Sale
------------------------------
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities"
addresses the accounting and reporting for investments in debt and equity
securities. Securities classified as available for sale are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of stockholders' equity (on an after tax
basis). Gains and losses on the disposition of securities are recognized
on the specific identification method in the period in which they occur.
At December 31, 1996, investments available for sale consist of United
States government and agency bonds with original maturities of one year or
less. The cost of debt securities is adjusted for accretion of discount to
maturity which is recorded as interest income. At December 31, 1996, the
cost basis of these securities approximates market value.
Net Investment in Direct Finance and Sales-Type Leases
------------------------------------------------------
The net investment in direct finance and sales-type leased assets consists
of the present value of the future minimum lease payments plus the present
value of the residual value, if any (collectively referred to as the "net
investment"). The residual value is the estimated fair market value of the
leased assets at lease expiration.
Completed lease contracts which qualify as direct finance and sales-type
leases, as defined by Statement of Financial Accounting Standards No. 13,
"Accounting for Leases" ("SFAS 13"), are accounted for on the balance sheet
by recording the total minimum lease payments receivable, the estimated
residual value of the leased equipment and the unearned income. The
unearned lease income represents the excess of the total minimum lease
payments and the estimated residual value expected to be realized, over the
cost of the related equipment. The unearned income is recognized as
revenue over the term of each lease by applying a constant periodic rate of
return to the declining net investment in each lease.
Lease revenue includes that portion of unearned income amortized into
income during the current period. Revenue recognized at the inception of a
sales-type lease is recorded in sales.
Assets Held Under Operating Leases
----------------------------------
F-8
<PAGE>
Assets held under operating leases consist of the equipment at cost, net of
accumulated depreciation. Depreciation is recognized on a straight-line
basis over the lease term up to the Company's estimate of the equipment's
residual value at lease expiration. Accumulated depreciation was
approximately $770,000 and $2,315,000 at December 31, 1995 and 1996,
respectively.
Lease revenue includes the contractual lease payments and is recognized on
a straight-line basis over the lease term.
Residual Values
---------------
The Company's residual value estimates are based on current market
conditions and published residual value projections, as determined at lease
inception. On an ongoing basis, the Company compares its residual value
estimates against currently published independent forecasts of equipment
values at lease expiration as well as other known market conditions. If
the residual value is determined to be excessive and the decline in
residual value is judged to be other than temporary, the Company revises
its residual values accordingly with corresponding adjustments to income
and unearned income. During the year ended December 31, 1996, the Company
entered into residual value sharing agreements whereby an equipment
investor or a financial institution purchased a portion of the residual
value of the equipment on lease in exchange for the right to share in
remarketing proceeds received upon lease expiration. The proceeds received
were used to reduce the cost basis and the residual value in the leased
assets.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
-------------------
The Company records revenues from equipment sales upon the shipment of the
equipment and transfer of title to the customer. When equipment is sold to
another computer leasing and trading company (a "broker"), the transfer of
title and recognition of revenue generally occur upon the receipt of
payment from the broker.
From time to time, the Company will receive payment prior to the transfer
of title or purchase of the related inventory. The Company records such
amounts as unearned sales revenue on the balance sheet. Upon shipment and
transfer of title, unearned sales revenue is reversed and recorded as
equipment sales.
The Company records revenue from the sale of leased equipment to an
equipment investor upon transfer of title to the equipment. Subsequent to
a sale of this variety, the Company generally is a party to a re-marketing
agreement under which it may earn additional income from the asset's future
re-lease or sale value upon lease termination or expiration.
F-9
<PAGE>
See Net Investment in Direct Finance and Sales-Type Leases and Assets Held
Under Operating Leases for a discussion of revenues earned under leasing
transactions.
Lease Expense
-------------
Lease expense includes depreciation on assets held under operating leases,
interest expense on obligations for financed equipment and sublease rental
expense. The cost of equipment recognized at the inception of a sales-type
lease is reflected in cost of sales.
Income Taxes
------------
At its inception, the Company elected status as an S corporation and,
therefore, through December 31, 1995 was not subject to federal income tax
as a separate entity. Instead, the shareholders were taxed on the
Company's income, whether or not distributed, and they were entitled to
deduct Company losses, if any, to the extent of the tax basis each
shareholder had in the Company's common stock. The Company had been
subject to certain corporate taxes on the state level. In connection with
its initial public offering described above, the Company terminated its S
election and is currently taxable as a C corporation. The adjustment to
record deferred income taxes upon termination of the Company's S election
was to record a net deferred income tax liability of approximately
$430,000.
Deferred income taxes are provided for temporary differences between the
carrying values of assets and liabilities for financial reporting and tax
purposes at the enacted rate for the year in which these differences are
expected to reverse in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".
Loss Per Share Information
--------------------------
Net loss per share is based upon the weighted average number of common
shares outstanding during the year. Common stock equivalents are excluded
from the computation as they would have an anti-dilutive effect. Any
shares issued, or deemed to have been issued in the case of the Bridge Loan
shares, within a one year period prior to the initial filing of the
registration statement, have been considered outstanding for all periods
presented.
New Accounting Pronouncements
-----------------------------
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." This statement is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December
31, 1996. In management's opinion, when adopted, the aforementioned
pronouncement will not have a material effect on the Company's financial
position or results of operation.
The FASB recently issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This new
standard encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments based on a fair-value method of accounting.
F-10
<PAGE>
Companies that do not choose to adopt the new expense recognition rules of
SFAS 123 will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion (APBO) No. 25, but will be required to
provide pro forma disclosures of the compensation expense determined under
the fair-value provisions of SFAS 123, if material. APBO No. 25 requires
no recognition of compensation expense for most of the stock-based
compensation arrangements provided by the Company, namely, broad-based
employee stock purchase plans and option grants where the exercise price is
equal to the market price at the date of grant. The Company has adopted
the disclosure provisions of SFAS 123 which had no impact on the financial
statements or the notes thereto.
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" ("SFAS 121"). Long-lived assets to be held
and used are recorded at cost. SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The effect of adopting
SFAS 121 was not material to the Company's financial statements since there
were no events or changes in circumstances for the year ended December 31,
1996 that indicated that the carrying amount of long-lived assets had been
impaired.
Reclassification
----------------
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
3. DIRECT FINANCE AND SALES-TYPE LEASES:
-------------------------------------
The net investment in direct finance and sales-type leases at December 31,
1995 and 1996, respectively, is comprised of the following:
1995 1996
---------------- ----------------
Total minimum lease payments $7,269,564 $22,668,923
receivable
Estimated residual value of 252,475 541,947
equipment ---------- -----------
7,522,039 23,210,870
Less: Unearned income 1,075,976 2,268,328
---------- -----------
Net investment in direct finance and $6,446,063 $20,942,542
sales-type leases ========== ===========
4. FUTURE MINIMUM LEASE PAYMENTS:
------------------------------
Future minimum lease rentals to be received by the Company under non-
cancelable direct finance, sales-type and operating leases expiring through
the year 2002 are as follows:
Year Ending Direct Finance and Operating
----------- ------------------ ---------
December 31, Sales-Type Leases Leases
------------ ----------------- ------
1997 $9,013,117 $8,433,412
1998 8,505,942 7,820,517
1999 3,634,276 1,526,448
2000 1,225,104 149,860
F-11
<PAGE>
2001 212,857 13,710
2002 77,627 --
5. SUBLEASE TRANSACTIONS:
----------------------
The Company enters into certain transactions in which it acts as both
lessee and sublessor of equipment. Since both the lease and sublease are
operating leases, no related assets or liabilities are recorded on the
Company's balance sheet, other than transactions that are prepaid. The
Company recognized approximately $693,800, $523,000 and $38,700 in rental
income and approximately $665,500, $533,200 and $40,300 in rent expense
from sublease transactions during the years ended December 31, 1994, 1995
and 1996, respectively.
In certain cases both the Company and the sublessee have made discounted
payments at the lease inception in full satisfaction of the lease
obligations. Payments received by the Company are recorded as unearned
operating lease revenue, and amortized into lease revenue on a straight-
line basis over the life of the sublease. Payments made by the Company are
recorded as prepaid lease expense, included within other assets on the
accompanying balance sheets, and amortized into lease expense on a
straight-line basis over the life of the lease.
6. OBLIGATIONS FOR FINANCED EQUIPMENT - NON-RECOURSE:
--------------------------------------------------
Under various arrangements with banks and financial institutions, the
Company finances substantially all of its equipment leases with non-
recourse notes. These notes provide for an assignment of future lease
rentals to these institutions at fixed interest rates (which range between
6.2% and 10.8%). In exchange for these future rentals, the Company
receives a discounted cash payment. In the event of a default by a lessee,
the financial institution has a first lien on the underlying equipment,
with no further recourse against the Company. The underlying equipment
securing these non-recourse notes represents the Company's assets under
direct finance, sales-type and operating leases, which total approximately
$10.4 million in book value at December 31, 1995 and $24.9 million at
December 31, 1996.
Future maturities through the year 2002 on the non-recourse notes described
above are as follows:
Year Ending December 31, Lease Payments
------------------------ --------------
1997 $17,085,847
1998 16,162,727
1999 5,101,581
2000 1,369,772
2001 257,415
2002 and thereafter 77,677
40,055,019
-----------
Less: Interest 16,593,844
$23,461,175
-----------
===========
F-12
<PAGE>
Through February 18, 1997, the Company entered into additional non-recourse
loan transactions providing for additional obligations for financed
equipment of approximately $13,172,000 for leases entered into prior to
December 31, 1996.
7. NOTES PAYABLE:
--------------
Notes payable were comprised of the following at December 31, 1995 and
1996:
1995 1996
-------------------- --------------------
Bridge loans (a) $1,034,756 $ -
Note payable under
secured line of
credit (b) 495,000 -
Note payable to bank 81,941 18,384
---------- -------
$1,611,697 $18,384
========== =======
(a) In July 1995, the Company completed agreements with a group of lenders
for an aggregate of $1,000,000 in bridge loans, with interest at 8%
per annum. In accordance with the terms of the loans, upon
consummation of the Company's initial public offering these loans,
plus accrued interest to date, were paid in full.
As additional compensation for making the bridge loans, the bridge
lenders received the right to acquire 750,000 units of the Company's
securities (the "Bridge Units") and an aggregate of 1,500,000 class B
warrants to purchase 1,500,000 shares of common stock commencing on
the Effective Date. Each unit consists of two shares of the Company's
common stock and two redeemable class A warrants. The terms and
conditions of the shares of common stock and the class A warrants
included in the Bridge Units are identical to the terms and conditions
of the common stock and class A warrants sold to the public in the
Company's initial public offering. The terms and conditions of the
class B warrants are identical to the class A warrants, except that
each class B warrant will be exercisable at a price of $4.20 per
share. The Company has recorded an expense of $5,250,000 during 1995
in connection with the issuance of these units based on the value of
the Company's common stock at the time of the initial public offering.
(b) In October 1995, the Company borrowed $495,000 under a secured line of
credit (Note 8) to finance the purchase of a lease. The note was paid
in full in March 1996.
Subsequent Financing
--------------------
On January 17, 1997, the Company entered into a note payable in the amount
of $1,007,000 with a financial institution to finance the residual value of
certain equipment on lease, at an interest rate of prime plus 0.25%.
Interest is payable quarterly commencing April 1, 1997. The entire
principal amount is due 60 days after lease expiration (March 1, 1999).
The equipment on lease and the related lease serve as collateral for this
note payable.
The Company also entered into a similar arrangement on January 17, 1997
with the same institution for $238,000 of residual value financing bearing
interest at prime plus 0.50% payable semi-annually commencing July 1, 1997.
The entire principal amount is due 60 days after lease expiration (November
F-13
<PAGE>
30, 1999). The equipment on lease and the related lease serve as
collateral for this note payable.
Also on January 17, 1997, the Company entered into two residual value
sharing agreements whereby the above mentioned financial institution agreed
to purchase a portion of the residual values of the equipment on lease for
$2,296,000 in exchange for the right to share in remarketing proceeds
received upon lease expiration. The proceeds received were used to reduce
the Company's cost basis and residual value in the leased assets.
8. LINES OF CREDIT:
----------------
These facilities have been arranged with three banks in the total amount of
$1,250,000, for the purpose of financing the cost of equipment purchased
for sale or lease, on a short-term basis, generally payable in 30 to 90
days. The lending banks are given a first security interest in both the
equipment and the contract for sale or lease. The above secured lines also
include a $100,000 unsecured working capital line. The interest rate
charged for these borrowings is a floating 1% 1.5% over the banks' prime
lending rate, 8.25% at December 31, 1995 and 1996, respectively. Two of
the lines, totaling $1,250,000, expire on June 30, 1997. The third line of
credit in the amount of $1,500,000 expired as of June 30, 1996. As of
December 31, 1995, $495,000 was outstanding under a facility. As of
December 31, 1996, no amounts were outstanding under these facilities. The
Company's principal shareholders have personally guaranteed the entire
amount of the lines with all banks.
9. INCOME TAXES:
-------------
The provision for income taxes is comprised of the following:
Year Ended December 31,
-------------------------------
1994 1995 1996
---- ---- ----
Current:
Federal $ - $ - $ -
State 33,706 21,850 72,550
------- ------- --------
33,706 21,850 72,550
------- ------- --------
Deferred:
Federal - - (82,583)
State - - (12,145)
------- ------- --------
- - (94,728)
------- ------- --------
Valuation allowance - - 90,000
------- ------- --------
Termination of Subchapter "S"
election - - 430,390
------- ------- --------
Total $33,706 $21,850 $498,212
======= ======= ========
F-14
<PAGE>
Significant components of deferred income tax assets and liabilities are as
follows:
December 31, 1996
-------------------------------
Deferred tax liabilities:
Depreciation $(984,844)
Deferred tax assets:
Lease transactions treated
differently for tax and
financial reporting
purposes 447,006
Net operating loss
carryforward 190,844
Valuation allowance (90,000)
Other 11,332
--------
559,182
--------
Net deferred income tax $425,662
liability ========
The following reconciliation presents the principal reasons for the
difference between income taxes calculated at the federal statutory income
tax rate (34%) and the provision for income taxes:
Year Ended
December 31, 1996
-----------------
Federal income tax benefit at U.S.
statutory rate $(104,108)
Subchapter "C" impact of SFAS 109 430,390
Valuation allowance 90,000
Franchise taxes 36,583
All other, net 45,347
---------
Provision for income taxes $ 498,212
=========
For the years ended December 31, 1994 and 1995, income was taxable at the
shareholder level since the Company had made a Subchapter "S" election.
The Company has net operating loss carryforwards for income tax reporting
purposes of approximately $490,000 expiring in 2011. The valuation
allowance represents that portion of the deferred income tax benefit that
the Company may not be able to realize.
10. SHAREHOLDERS' EQUITY:
---------------------
In connection with the recapitalization of the Company in contemplation of
its initial public offering, in August 1995, the Company's Board of
Directors approved a stock split of approximately 33,018.86792-to-one, in
the form of a stock dividend to the Company's common shareholders. Par
value changed to .01 per share from $1.00 per share. The stock dividend
resulted in the issuance of 3,499,894 additional shares of Common Stock,
for a total of 3,500,000 shares outstanding subsequent to the split. This
action required an amendment to the Company's articles of incorporation,
F-14
<PAGE>
which increased the number of authorized shares of Common Stock from 1,000
to 35,000,000 and authorized 5,000,000 shares of preferred stock. All
shareholders' equity accounts and per share data have been retroactively
adjusted to reflect such recapitalization.
Pursuant to a 1993 agreement, in April 1995, the Company issued common
shares representing 6% of the previous total outstanding shares to an
officer.
See Note 1 for a description of the Company's initial public offering of
its securities.
11. STOCK OPTION PLANS:
-------------------
Employee Stock Option Plan
--------------------------
On August 28, 1995, the Board of Directors adopted and the Company's
shareholders approved the Stock Option Plan for all senior executive
officers, key employees and consultants of the Company pursuant to which
750,000 shares of common stock were reserved for issuance. No options have
been granted to date. Options granted under the Stock Option Plan may be
either incentive stock options ("ISO's"), which are intended to meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as
amended, or non-qualified stock options ("NSO's"). Under the Stock Option
Plan, the Board of Directors may grant (i) ISO's at an exercise price per
share which is not less than the fair market value of a share of Common
Stock on the date on which such ISO's are granted (and not less than 110%
of the fair market value in the case of any optionee who beneficially owns
more than 10% of the total combined voting power of the Company), and (ii)
NSO's at an exercise price per share which is determined by the Board of
Directors (and which may be less than the fair market value of a share of
Common Stock on the date on which such NSO's are granted). The Stock
Option Plan further provides that the maximum period in which options may
be exercised will be determined by the Board of Directors, except that
ISO's may not be exercised after the expiration of ten years from the date
the ISO was initially granted (and five years in the case of any optionee
who beneficially owns more than 10% of the total combined voting power of
the Company). Any option granted under the Stock Option Plan will be
nontransferable and may be exercised upon payment of the option price in
cash, a cash equivalent, Common Stock or any other form of consideration
which is acceptable to the Board of Directors.
Director Option Plan
--------------------
On October 1, 1995, the Board of Directors of the Company adopted, and the
Company's shareholders approved, the Director Option Plan (the "Director
Plan") pursuant to which 50,000 shares of Common Stock of the Company were
reserved for issuance upon the exercise of options granted to non-employee
directors of the Company. Under the Director Plan, an eligible director of
the Company will, after having served as a director for one year,
automatically receive non-qualified stock options to purchase 2,000 shares
of Common Stock per annum at an exercise price equal to the fair market
value of such shares at the time of grant of such options. Each option is
immediately exercisable for a period of ten years from the date of grant
but generally may not be exercised more than 90 days after the date an
optionee ceases to serve as a director of the Company. As of December 31,
1996, there were no options granted to directors.
12. EMPLOYEE SAVINGS PLAN
---------------------
F-16
<PAGE>
During 1996, the Company adopted an employee savings plan which covers all
employees who have completed at least one year of service with the Company
and permits participants to make contributions by salary reduction pursuant
to section 401(k) of the Internal Revenue Code. Company contributions are
discretionary. As of December 31, 1996, the Company did not make any
contributions to the plan.
13. JOINT VENTURES:
---------------
In June 1995, the Company and KRh Thermal Systems ("KRh") formed KRh
Financial LLC ("KRhF") to lease to food service operators the Hot Choice
Vending Machine, a fully-integrated freezer-to-oven vending machine
designed to deliver fully-cooked, high quality fast food in about a minute.
KRh is a California general partnership managed by Kaiser Thermal Systems,
Inc., a wholly-owned subsidiary of Kaiser Aerospace and Electronics, and
Thermaltech Development, LP. The Company owns 20% of KRhF. In addition,
under a related service agreement, the Company provides leasing services to
KRhF for which the Company is paid a prescribed fee. Under the terms of the
joint venture, the Company made no initial capital investment, nor does it
have any obligation to make future capital investments. KRhf is still in
the early stages of its business and the results of KRhF are immaterial to
the overall financial position of Paramount.
14. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT:
--------------------------------------------------
For the years ended December 31, 1994, 1995 and 1996, the following
customers represented in excess of 10% of total revenues for the respective
years:
Customer 1994 1995 1996
-------- ---- ---- ----
A 27% 10% -
B - 58% -
C - 13% -
D - - 40%
E - - 25%
The Company's net investment in direct finance and sales-type leases is
concentrated primarily with end users of the computer equipment. The
Company has various arrangements with banks and financial institutions in
which lease receivables are assigned to the institutions in exchange for a
discounted cash payment. This financing is in the form of non-recourse
notes, in which the financial institution has a first lien on the
underlying equipment with no further recourse against the Company.
Therefore, the Company has no credit exposure from these assigned leases.
15. COMMITMENTS:
------------
Operating Leases
----------------
The Company leases office facilities and office equipment under operating
leases expiring through August 1999. Total rent expense amounted to
F-17
<PAGE>
approximately $90,000, $45,000 and $45,000 in 1996, 1995 and 1994,
respectively. Total minimum lease payments due under non-cancelable
operating leases as of December 31, 1996, are as follows:
Year Ending
December 31, Office Facilities
------------ -----------------
1997 $67,326
1998 68,694
1999 46,480
Employment Agreements
---------------------
The Company has entered into employment agreements with 3 executives
expiring through the end of 1998 with aggregate minimum payments required
as follows:
1997 $863,500
1998 $863,500
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,700
<SECURITIES> 3,163
<RECEIVABLES> 2,260
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,561
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 8,486
<TOTAL-LIABILITY-AND-EQUITY> 51,561
<SALES> 27,159
<TOTAL-REVENUES> 31,352
<CGS> 29,204
<TOTAL-COSTS> 29,204
<OTHER-EXPENSES> 2,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (306)
<INCOME-TAX> (498)
<INCOME-CONTINUING> (804)
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<EXTRAORDINARY> 0
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<NET-INCOME> (804)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
