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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-27190
PARAMOUNT FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3072768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE JERICHO PLAZA, JERICHO, NEW YORK 11753
(Address of principal executive offices) (zip code)
(516) 938-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
NUMBER OF SHARES OUTSTANDING AT AUGUST 11, 1998:
1,997,500 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE.
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<PAGE>
PARAMOUNT FINANCIAL CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1998
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 . . 1
Consolidated Statements of Operations
Three Months Ended and Six Months Ended
June 30, 1998 and 1997 . . . . . . . . . 2
Consolidated Statement of Changes in
Stockholders' Equity Six Months Ended
June 30, 1998 . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 4
Notes to Unaudited Consolidated
Financial Statements . . . . . . . . . . 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 6-9
PART II - Other Information . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, JUNE 30,
ASSETS 1997 1998
------ ------------ --------
(UNAUDITED)
Cash and cash equivalents . . $ 2,209,649 $ 4,356,884
Investments available for
sale . . . . . . . . . . . 3,524,456 --
Accounts receivable . . . . . 1,138,479 1,424,288
Net investment in direct
finance and sales-type
leases . . . . . . . . . . 39,941,764 34,045,111
Assets held under operating
leases, net of accumulated
depreciation . . . . . . . 5,459,895 8,294,465
Other assets . . . . . . . . 788,218 1,506,641
----------- -----------
Total assets . . . . . . . . $53,062,461 $49,627,389
=========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
-----------------------------
Notes payable . . . . . . . . $ 2,656,365 $ 3,409,731
Accounts payable . . . . . . 1,307,496 878,176
Accounts payable --
leases . . . . . . . . . . 708,568 382,753
Accrued expenses . . . . . . 383,097 250,609
Obligations for financed
equipment -- non-recourse 40,287,404 37,338,900
Deferred income taxes . . . . 73,848 --
----------- -----------
Total liabilities . . . . . . 45,416,778 42,260,169
----------- -----------
Shareholders' equity:
Preferred stock, $.01 par
value; 5,000,000 shares
authorized, none
outstanding . . . . . . . -- --
Common stock, $.04 par value;
4,375,000 shares
authorized, and 1,997,500
shares issued and
outstanding . . . . . . . 79,900 79,900
Additional paid-in
capital . . . . . . . . . 13,644,228 13,664,228
Accumulated deficit . . . . . (6,049,080) (6,311,957)
Treasury stock, 12,500 and
19,000 shares at cost, (29,365) (44,951)
respectively . . . . . . . ----------- -----------
Total shareholders' equity . 7,645,683 7,367,220
----------- -----------
Total liabilities and $53,062,461 $49,627,389
shareholders' equity . . . =========== ===========
See accompanying notes to financial statements.
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PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
UNAUDITED
---------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1998 1997 1998
---- ---- ---- ----
REVENUES:
Sales . . . . . . $ 5,814,632 $2,012,115 $ 6,750,871 $16,493,577
Lease revenue . . 2,814,018 2,140,011 5,423,365 3,646,339
Fee, interest and
other income . . 280,089 239,698 780,964 459,625
---------- --------- ---------- ---------
Total
revenues . 8,908,739 4,391,824 12,955,200 20,599,541
---------- --------- ---------- ---------
COSTS AND EXPENSES:
Cost of sales . . 5,258,167 1,609,139 6,033,311 15,397,330
Lease expense . . 2,741,598 2,022,490 5,190,680 3,465,665
Selling, general
and
administrative
expenses . . . . 784,906 1,142,767 1,487,542 2,174,674
---------- --------- ---------- ---------
Total costs
and expenses 8,784,671 4,774,396 12,711,533 21,037,669
---------- --------- ----------- ----------
Income (loss)
before provision
(benefit) for
income taxes . . 124,068 (382,572) 243,667 (438,128)
PROVISION
(BENEFIT) FOR
INCOME TAXES . . 49,870 (153,029) 97,709 (175,251)
---------- --------- -------- ---------
Net income
(loss) . . $74,198 $(229,543) $145,958 $(262,877)
========== ========= ========= =========
Basic income
(loss) per
common
share . . $0.04 $(0.12) $0.07 $(0.13)
========== ========= ======== ========
Diluted
income
(loss) per
common $0.04 $(0.12) $0.07 $(0.13)
share ========== ========= ======== ========
Shares used in
computing net
income (loss) per
share:
Basic . . . 1,995,577 1,978,500 1,996,533 1,979,213
========== ========= ========= =========
Diluted . . 1,995,577 1,978,500 1,996,533 1,979,213
========== ========== ========= =========
See accompanying notes to financial statements.
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PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------
UNAUDITED
---------
COMMON STOCK
------------
ADDITIONAL
PAID-IN- ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) STOCK TOTAL
------ ------ -------- --------- ----- -----
BALANCE,
DECEMBER
31,
1997 . 1,997,500 $79,900 $13,644,228 ($6,049,080) $(29,365)$7,645,683
Net loss -- -- -- (262,877) -- (262,877)
Purchase
of
treasury
stock -- -- -- -- (15,586) (15,586)
--------- --------- ---------- ---------- --------- ----------
BALANCE,
JUNE 30,
1998 . 1,997,500 $79,900 $13,664,228 ($6,311,957) ($44,951)$7,367,220
========= ========= =========== =========== ========= ==========
See accompanying notes to financial statements.
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PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
UNAUDITED
---------
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 145,958 $ (262,877)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Deferred income taxes -- (73,848)
Depreciation 3,790,698 2,177,287
Amortization of discounts on
investments (97,183) (26,953)
Amortization of goodwill -- 20,865
Changes in operating assets and
liabilities:
Accounts receivable (2,068,633) 4,707
Other assets (72,092) (50,073)
Accounts payable (592,571) (429,320)
Accrued expenses 42,846 (204,555)
--------- ---------
Net cash provided by operating
activities 1,149,023 1,155,233
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment for direct
finance leases and sales-type
leases (25,381,098) (5,928,241)
Termination of direct finance leases 4,236,465 3,159,587
Proceeds applied to direct finance
leases and sales-type leases 5,012,761 8,602,308
Purchase of equipment for operating
leases (41,333) (5,719,445)
Termination of operating leases -- 57,000
Residual value sharing arrangements 4,628,698 713,587
Payment for acquisition of
Deltaforce, net of cash acquired -- (231,774)
Purchases of investments (10,156,296) (3,084,593)
Proceeds from sale/maturity of 8,940,000 6,636,003
investments ---------- ----------
Net cash (used in) provided by
investing activities (12,760,803) 4,204,432
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (18,574) (15,586)
Proceeds from notes payable 3,578,697 1,413,587
Repayment of notes payable (1,110) (1,336,112)
Decrease in amounts due on purchases
of equipment for leases (17,448,765) (325,815)
Increase in non-recourse lease
financing 32,192,094 10,492,359
Termination of non-recourse lease
financing (885,700) (2,864,076)
Repayments and interest amortization
applied to non-recourse lease (8,616,519) (10,576,788)
financing --------- ----------
Net cash provided by (used in) financing
activities 8,800,123 (3,212,431)
--------- ----------
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1997 1998
-------- --------
Net increase (decrease) in cash and cash
equivalents (2,811,657) 2,147,234
CASH AND CASH EQUIVALENTS, beginning of
period 3,700,774 2,209,649
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 889,117 $4,356,883
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 28,210 $ 45,428
========= =========
Cash paid for interest $1,328,337 $1,334,385
========= =========
See accompanying notes to financial statements.
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PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions for
Form 10-Q and Regulation S-X related to interim period
financial statements and, therefore, do not include all
information and footnotes required by generally accepted
accounting principles. However, in the opinion of
management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair
presentation of the financial position of Paramount
Financial Corporation and subsidiaries (the "Company") at
June 30, 1998 and its results of operations and cash flows
for the three and six months ended June 30, 1997 and 1998,
respectively, have been included. The results of operations
for the interim periods are not necessarily indicative of
the results that may be expected for the entire year.
Reference should be made to the annual financial statements,
including footnotes thereto, included in the Company's Form
10-K for the fiscal year ended December 31, 1997.
2. The financial statements for the three and six months ended
June 30, 1998 are consolidated to include the results of the
Company's two wholly owned subsidiaries, Paratech Resources,
Inc. and Deltaforce Personnel Services, Inc ("Deltaforce").
All material intercompany balances and transactions have
been eliminated.
3. On January 9, 1998, the Company acquired 100% of the
outstanding shares of Deltaforce, a privately held New York
City-based staffing company, for approximately $723,000,
which included $325,000 of notes payable. The acquisition
was accounted for as a purchase and accordingly the
operating results of Deltaforce have been included in the
Company's consolidated statements since the date of the
acquisition. The excess of the aggregate purchase price
over the fair market value of the net assets acquired of
approximately $626,000 has been recorded as goodwill and is
being amortized over 15 years.
4. In April 1998, the Company entered into a term loan with a
bank collateralized by $600,000 in cash maintained in an
investment account. Principal payments of approximately
$41,600 and interest are due on a quarterly basis through
April 20, 2001.
5. Effective May 19, 1998, the Board of Directors authorized a
one-for-four reverse stock split of the Company's common
stock. The par value of the common stock was increased from
$.01 to $.04 per share. In connection with the reverse
stock split, the Board of Directors approved the reduction
of authorized number of shares of common stock from
8,750,000 shares to 4,375,000 (such numbers give effect to
the reverse stock split). Accordingly, all references in
the financial statements and notes to common share data have
been adjusted to reflect the reverse stock split. Preferred
stock remained unchanged.
6. On August 3, 1998, the Company acquired the business of RBW
Staffing Services, Inc. (d/b/a "WordSmiths Staffing
Services"), a privately held, New York City-based staffing
company. The acquisition will be accounted for as a
purchase; accordingly, the purchase price will be allocated
to the underlying assets purchased based on their respective
estimated fair market values at the date of acquisition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with, and is qualified in its entirety by, the
unaudited financial statements, including the notes thereto,
appearing elsewhere in this 10-Q.
GENERAL
Paramount Financial Corporation and subsidiaries ("Paramount"
or the "Company") is a comprehensive asset management and
business solution provider, offering customers a wide range of
integrated services, including lease finance, information
technology ("IT") consulting, network design and implementation
and staffing services. The Company includes two wholly owned
subsidiaries, Paratech Resources, Inc. ("Paratech") and, as of
January 1998, Deltaforce Personnel Services, Inc. ("Deltaforce").
The first six months of 1998 were significant for several
reasons. In January, the Company completed the acquisition of
Deltaforce, a privately held New York City based staffing
company. This acquisition further enhances the Company's product
offerings by including staffing services to its expanding list of
integrated services, and is a continuation of the Company's
strategic diversification plans. In addition to the Deltaforce
acquisition, the Company continued to invest in the expansion of
its systems integration subsidiary, Paratech, which is moving
ahead with its growth plans in both personnel and product
offerings. Both of these companies are an important part of the
evolution of Paramount from a lease finance company to a
diversified business solution provider. When comparing the first
six months of 1998 with the first six months of 1997, it is
important to note that Deltaforce was not part of the Company
until January 1998 and Paratech was a relatively insignificant
part of the Company for the first quarter of 1997.
The Company remains committed to the growth of its lease
portfolio and continued to expand this activity during the six
months ended June 30, 1998. The Company believes that continued
expansion of the portfolio of IT equipment on lease will create
financial benefits over a continuum of time, since, unlike other
equipment, IT equipment is frequently upgraded and/or enhanced
during the term of its lease, resulting in opportunities to lease
new equipment and re-market displaced equipment. Further, as an
integrated lessor and business solution provider, the Company
believes that it is well positioned to meet the ever-changing
needs of its customers.
FLUCTUATIONS IN QUARTERLY RESULTS
The operating results of Paramount are subject to quarterly
fluctuations resulting from a variety of factors, including the
volume of new leases written, product announcements by
manufacturers, economic conditions, interest rate fluctuations
and variations in the mix of leases written. In addition, the
Company's revenue can fluctuate significantly from quarter to
quarter based on the closing date and nature of each particular
lease and/or sales transaction. The mix of leases written in a
quarter is a result of a combination of factors, including
changes in customer demands and/or requirements, new product
announcements, price changes, changes in delivery dates, changes
in maintenance policies and pricing policies of equipment
manufacturers and price competition from other lessors.
Leasing transactions (other than sales type leases), in
general, do not provide for significant earnings in the month of
lease origination. Instead, revenue, expense and profit from
lease transactions are recorded over the life of the asset and
the lease. Lease revenue and lease expense recognition is
dependent upon a number of factors, including the term of the
lease, the accounting classification of the lease (i.e.,
----
operating, direct finance or sales type) and the commencement
date of the lease and the lease financing within a particular
period. See "Lease Accounting."
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The Company is aggressively working to maximize the returns on
the residual value investments made on its lease portfolio. Such
efforts, which are an ordinary but not a predictable part of the
Company's business, often result in equipment originally leased
under an operating lease, and accounted for as described below,
being upgraded or otherwise enhanced and extended at the original
account or leased to a different end-user. The resulting lease
may qualify under FAS 13 (as defined below) as a sales type
lease, in which the Company can record as sales revenue the fair
market value of the equipment and recognize as income the
difference between this amount and the equipment's cost or net
book value. Since a sales type lease is a form of direct finance
lease, the new lease is recorded over its remaining term as a
direct finance lease resulting in a reduction of lease rental
income and lease expense compared to the original operating lease
accounting.
Marketing efforts may also result in the sale of the leased
asset to the customer which will result in an increase in
revenue, and to the extent the sales proceeds exceed the net book
value, net income, in the quarter in which the sale occurs. Any
such sale will also result in a reduction of revenue, expense and
profit expected in subsequent quarters since the equipment was
sold.
Given the possibility of such fluctuations as described above,
the Company believes that comparisons of the results of its
operations for preceding quarters are not necessarily meaningful
and that such results for one quarter should not be relied upon
as an indication of future performance.
LEASE ACCOUNTING
In accordance with Statement of Financial Accounting Standard
No. 13, "Accounting for Leases" ("FAS 13"), the Company
classifies its leases as either operating leases or direct
finance leases. The allocation of income among accounting
periods within a lease term will vary depending upon the lease
classification, as described below.
Direct Finance Leases: Direct finance leases transfer
substantially all benefits and risks of equipment ownership to
the lessee. A lease is a direct finance lease if it meets one of
the following criteria: (1) the lease transfers ownership of the
equipment to the lessee by the end of the lease term; (2) the
lease contains a bargain purchase option; (3) the lease term at
inception is at least 75% of the estimated economic life of the
leased equipment; or (4) the present value of the minimum lease
payments is at least 90% of the fair value of the leased
equipment at lease inception.
At lease inception, the cost of equipment under a direct
finance lease is recorded as "Net investment in direct finance
leases". The difference between the gross lease payments
receivable, plus the estimated residual value of the equipment,
and the equipment cost is recognized as income over the life of
the lease using the effective 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 June 30, 1998, the portfolio of equipment on
lease owned by Paramount had a combined net book value on the
balance sheet of $42.3 million and had an original cost basis of
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<PAGE>
$70.8 million. Equipment managed by Paramount is equipment on
lease to customers of Paramount which was subsequently sold to
investors, but with respect to which Paramount remains the lessor
and remarketing agent. The portfolio of equipment managed by
Paramount had an original cost of $23.2 million. Thus, as of
June 30, 1998, the portfolio of equipment on lease owned and
managed by Paramount had an original acquisition cost of $94.0
million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
Net loss for the three months ended June 30, 1998 was
$230,000, after a benefit from incomes taxes of $153,000, as
compared with net income of $74,000 after a provision for income
taxes $50,000.
For the three months ended June 30, 1998, the Company recorded
sales revenue of $2.0 million, a $3.8 million decrease over the
$5.8 million recorded during the three months ended June 30,
1997. The decrease is a result of the transactional nature of
the Company's leasing business and the resulting quarterly
fluctuations. See "General" and "Fluctuations in Quarterly
Results." The decrease in sales was partially offset by the
revenue generated from the newly acquired Deltaforce as well as a
21% increase in Paratech's revenue.
As a result of the Company's ongoing marketing efforts with
respect to its lease portfolio, certain assets which were
recorded as operating leases during the first and second quarters
of 1997 have been upgraded and re-leased, providing the Company
with a return on its residual value investment. The resulting
lease has been accounted for as a sales type lease. As a result
of this activity, the effect of accounting for a lease as a
direct finance lease versus an operating lease, lease revenue and
lease expense decreased for the three months ended June 30, 1998
when compared to the three months ended June 30, 1997 by 24.0%
and 26.2%, respectively. See "Fluctuations in Quarterly Results"
and "Lease Accounting."
During the three months ended June 30, 1998, the Company
entered into new lease transactions totaling $1.3 million of
equipment cost as compared with $15.3 million for the three
months ended June 30, 1997. Of the total cost of equipment
leased during the quarter ended June 30, 1998, $704,000 was
recorded as direct finance leases, and $609,000 was recorded as
operating leases, compared to $15.3 million in direct finance
leases only, for the quarter ended June 30, 1997. During the
quarter ended June 30, 1998, the Company entered into $696,000 of
non-recourse lease financing arrangements, as compared with $11.1
million for the three months ended June 30, 1997. See "Liquidity
and Capital Resources."
During the three months ended June 30, 1998, the Company
generated $240,000 in fee, interest and other income, compared to
$281,000 for the comparable period last year. Generally, fee
income is generated as a result of the Company's involvement in
certain transactions in which it acted as an arranger of
financing for leases originated by third parties, or otherwise
assisted these companies in their lease related transactions.
These transactions come about as a result of the Company's
relationship with other lessors and financial institutions. The
Company cannot predict with any certainty the timing and nature
of any future such transactions. See "General."
Selling, general and administrative expenses ("SG&A") totaled
$1.1 million for the three months ended June 30, 1998,
representing an increase of 45.6% over the $785,000 recorded
during the three months ended June 30, 1997. The increase in
SG&A is a result of the acquisition of Deltaforce as well as the
continued growth in technical, sales and support staff at the
Company.
The tax benefit of $153,000 for the three months ended June
30, 1998 reflects an effective rate of 40% for federal and state
taxes. During the three months ended June 30, 1997, the Company
recorded a tax provision of $50,000, reflecting the same 40%
effective tax rate.
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<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE
30, 1997
Net loss for the first six months of 1998 was $263,000, after
a benefit from income taxes of $175,000, as compared with net
income of $146,000, after a provision for income taxes of
$98,000.
For the six months ended June 30, 1998, the Company recorded
sales revenue of $16.5 million, a $9.7 million increase over the
$6.8 million recorded during the six months ended June 30, 1997.
The majority of the sales volume in 1998 was a result of
remarketing activities within the Company's existing lease
portfolio. In addition, the 70.4% increase in Paratech's sales
and the revenue generated by Deltaforce, which was acquired in
January 1998, also contributed to the increase in revenue as
compared with the six month period in 1997. See "Fluctuations in
Quarterly Results."
As a result of the Company's ongoing marketing efforts with
respect to its lease portfolio, certain assets which were
recorded as operating leases during the first quarter of 1997,
have been upgraded and re-leased, providing the Company with a
return on its residual value investment. The resulting lease has
been accounted for as a sales type lease. As a result of this
activity, and the effect of accounting for a lease as a direct
finance lease versus an operating lease, lease revenue and lease
expense decreased for the six months ended June 30, 1998 when
compared to the six months ended June 30, 1997 by 32.8% and 33.2%
respectively. See "Lease Accounting."
During the six months ended June 30, 1998, the Company entered
into new lease transactions totaling $11.6 million of equipment
cost as compared with $25.3 million for the six months ended June
30, 1997. Of the total cost of equipment leased during the
quarter ended June 30, 1998, $5.9 million was recorded as direct
finance leases, and $5.7 million was recorded as operating
leases, compared to $25.4 million and $41,000 respectively, for
the quarter ended June 30, 1997. During the six months ended
June 30, 1998, the Company entered into $10.5 million of non-
recourse lease financing arrangements, as compared with $32.2
million for the six months ended June 30, 1997. See "Liquidity
and Capital Resources." Non-recourse debt entered into during
the six months ended June 30, 1997 increased at a faster rate
than new lease origination as a result of the timing of the
closing of certain large lease transactions. Of the total amount
of non-recourse debt, $13.3 million related to leases that
commenced in December 1996, but for which the Company was not
required to pay for the equipment until January 1997.
During the six months ended June 30, 1998, the Company
generated $460,000 in fee, interest and other income, compared to
$781,000 for the comparable period last year. Generally, fee
income is generated as a result of the Company's involvement in
certain transactions in which it acted as an arranger of
financing for leases originated by third parties, or otherwise
assisted these companies in their lease related transactions.
These transactions come about as a result of the Company's
relationship with other lessors and financial institutions. The
Company cannot predict with any certainty the timing and nature
of any future such transactions.
SG&A expenses totaled $2.2 million for the six months ended
June 30, 1998, representing an increase of 46.1% over the $1.5
million recorded during the six months ended June 30, 1997. The
increase in SG&A is a result of the acquisition of Deltaforce as
well as the continued growth in technical, sales and support
staff at the Company.
The tax benefit of $175,000 for the six months ended June 30,
1998 reflects an effective rate of 40% for federal and state
taxes. During the six months ended June 30, 1997, the Company
recorded a tax provision of $98,000, reflecting the same 40%
effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had $4.4 million in cash and
cash equivalents. 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. Primarily as a result
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<PAGE>
of the acquisition of Deltaforce, the continued investment in
Paratech and the Company's continuing investment in its portfolio
of IT equipment on lease, the Company experienced a net cash
reduction during the first two quarters of 1998.
The Company's leasing business generates cash primarily from
the marketing of equipment within its portfolio, and uses cash to
acquire computer equipment to put on lease. In addition, the
Company's leasing business generates cash from fee related
transactions. The Company finances substantially all of its
leases by discounting the payment stream on a non-recourse basis
through various banks and financial institutions. Thus, the only
cash required in these lease transactions is the residual value
investment by the Company. The Company believes that it
currently has sufficient resources to make the residual value
investments required to grow its lease portfolio. In addition,
the Company has numerous options available to finance 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.
The Company continues to fund the growth of Paratech. In
addition, the Company is seeking to expand Paratech's operations
through both acquisitions and internal growth. Since Deltaforce
is an established operation, the Company does not anticipate
investing significant cash in this business. However, in order
to expand Deltaforce's operations, which the Company is
aggressively seeking to accomplish, the Company will need to
utilize its cash balances to fund potential future acquisitions.
The Company is limited to its current cash balances for funding
such add-on acquisitions and internal growth, unless the Company
is able in the future to raise significant additional financing.
There can be no assurance that the Company will be able to raise
any such financing. Further, the Company's cash funds for
acquisitions might be limited to the extent that the Company's
current operations or the operations of any future acquisitions
require the funding of losses or the incurrence of capital
outlay.
During the six months ended June 30, 1998, the Company entered
into several residual value sharing and financing arrangements
with an equipment investor totaling $1.4 million. This investor
(i) purchased a portion of the Company's residual value of
equipment on lease in exchange for the right to share in
remarketing proceeds generated from the equipment on lease, and
(ii) provided recourse financing for the remaining portion of the
Company's residual value investment. The equipment on lease and
the related leases serve as collateral for these financings.
During the six months ended June 30, 1998, in connection with the
early extension of leases, the Company repaid $847,500 of such
loans using the proceeds of these extensions. The Company
expects to repay the balance of these loans through the proceeds
generated from remarketing the subject equipment in the future.
These transactions allow the Company to continue to grow and
expand its lease portfolio without significantly affecting its
current cash balances.
At June 30, 1998, the Company had three types of credit lines
available.
Equipment Bridge Financing Lines: These lines allow the
Company to borrow up to $1.25 million in the aggregate and are
secured by equipment and contracts to sell or lease that
equipment. Borrowings under these lines bear interest at 1%
above the prime rate. In addition, one of these lines offers the
Company the ability to borrow up to $100,000 on an unsecured
basis. The purpose of these credit lines is to allow the Company
to pay its suppliers on a timely basis while waiting for the
customer to pay or for the non-recourse financing to occur.
During the quarter ended June 30, 1998, the Company did not
borrow any amounts from these lines, and accordingly had nothing
outstanding as of June 30, 1998. As a result of its cash
balances, the Company has been able to internally finance its
equipment purchases.
Lease Finance Line: This line allows the Company to borrow up
to $1 million (which amount had been $2 million but was reduced
to $1 million in connection with the loan amendment described
below) to permanently finance, on a recourse basis, the rental
streams under certain lease transactions pledged as collateral.
The facility is secured by the individual leases pledged and the
associated equipment. The Company is required to maintain
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<PAGE>
certain financial ratios. As of June 30, 1998, the Company was
not in compliance with the debt covenant requiring tangible net
worth of at least $8 million. The Company has amended this
facility and, as of August 12, 1998, is in compliance with the
terms of the facility. Borrowings are financed at a fixed rate
spread over the US Treasury bill at the time of funding. As of
June 30, 1998, the Company had $179,000 outstanding under this
line.
Term Loan: In April 1998, Paramount entered into a $500,000
term loan with a bank collateralized by $600,000 in cash
maintained in an investment account. Principal payments of
approximately $41,600 and interest are due on a quarterly basis
through April 20, 2001.
Deltaforce Revolving Credit Facility: Deltaforce has a
$250,000 revolving line of credit agreement with a bank secured
by accounts receivable which expires on January 11, 1999.
Interest on outstanding borrowings accrues at the bank's prime
rate plus 1%. Borrowings are limited to 80% of eligible accounts
receivable. As of June 30, 1998, Deltaforce had $200,000
outstanding under this line.
During the year ended December 31, 1997, the Board of
Directors of the Company approved a plan that would allow for the
repurchase of up to $500,000 worth of Common Stock of the
Company. The repurchase program took effect immediately and is
authorized to continue for a period of two years. Subject to
applicable rules, the plan allows the Company to repurchase
shares at any time during the authorized period in any increments
it deems appropriate. During the first two quarters of 1998, the
Company repurchased 26,000 shares for a purchase price of
$15,600.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISK
Statements contained in this Form 10-Q which are not
historical facts are forward-looking statements. The Forward-
looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements made herein
contain a number of risks and uncertainties that could cause
actual results to differ materially. These risks and
uncertainties include, but are not limited to, the specific
factors impacting the Company's business discussed under the
caption "General", as well as increased competition; the
availability of computer equipment; the ability of the Company to
expand its operations and attract and retain qualified sales
representatives experienced in the purchase, sale and lease of
new and used computer equipment; technological obsolescence of
the Company's portfolio of computer equipment; and general
economic conditions.
-12-
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PARAMOUNT FINANCIAL CORPORATION
Date: August 13, 1998 By: /s/ Paul Vecker
-------------------------------------
Paul Vecker, Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,356
<SECURITIES> 0
<RECEIVABLES> 1,424
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,627
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 80
<OTHER-SE> 7,367
<TOTAL-LIABILITY-AND-EQUITY> 54,974
<SALES> 2,012
<TOTAL-REVENUES> 4,391
<CGS> 1,609
<TOTAL-COSTS> 4,774
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (383)
<INCOME-TAX> (153)
<INCOME-CONTINUING> (230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (230)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.13)
</TABLE>
