UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(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, 1997
[ ] 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 Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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
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(Title of class)
Class A Warrants, each to purchase one share of Common Stock
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(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
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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 18, 1998 was
approximately $2,064,732, 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 18, 1998 was: 7,914,000 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 1998 Annual Meeting of Stockholders, to be filed by the
Registrant with the Securities and Exchange Commission on or before
April 30, 1998, is hereby incorporated by reference into Part III of
this Annual Report on Form 10-K.
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PARAMOUNT FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1 - BUSINESS......................................................... 1
General ....................................................... 1
Deltaforce Acquisition................................................ 2
Industry Background................................................... 2
System Integration and Consulting Business............................ 4
Lease Finance Business................................................ 5
Temporary Staffing Business........................................... 8
Competition ....................................................... 9
Employees .......................................................10
Government Regulation.................................................10
ITEM 2 - PROPERTIES.......................................................10
ITEM 3 - LEGAL PROCEEDINGS................................................10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS................................................10
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................11
ITEM 6 - SELECTED FINANCIAL DATA..........................................13
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...........................................15
General .......................................................15
Lease Accounting......................................................16
Results of Operations.................................................17
Liquidity and Capital Resources.......................................20
Forward Looking Statements and Associated Risk........................22
Inflation .......................................................22
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA............................................................22
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE......................................................23
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PART III
ITEM 10 - ITEM 13 - DOCUMENTS INCORPORATED BY
REFERENCE..........................................23
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K........................................23
SIGNATURES .............................................................25
FINANCIAL STATEMENTS.......................................................F-1
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PART I
ITEM 1 - BUSINESS
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 was formed in 1991 and includes two wholly owned
subsidiaries, Paratech Resources, Inc. ("Paratech") and, as of January
1998, Deltaforce Personnel Services, Inc. ("Deltaforce").
Paramount continued its aggressive expansion and diversification
in 1997. During the year the Company took major steps to broaden its
product and services offerings to further enhance its position as a
total solution provider to its clients. The Company continued its
strategic expansion into the system integration and consulting
business, through Paratech, while at the same time, sustaining the
growth of its lease finance activities. In addition, with the
acquisition of Deltaforce in January 1998, the Company is now
positioned as a three-tiered solution provider offering a total
package of integrated services, from hardware acquisition and
financing to consulting and integration services and staffing
solutions.
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
computers to corporate end-user customers. The Company has always
believed that the development of a portfolio of high quality,
essential data processing equipment on lease to relationship-based end
user customers is a key element to its long-term business success.
Unlike other assets, computer equipment is frequently upgraded and/or
enhanced during the term of its lease. An owner of a portfolio of this
type of equipment, such as Paramount, can generate significant
financial benefits over a continuum of time as it works closely with
its end-user customers to meet their ever changing computing needs.
Beginning in 1993, the Company began to aggressively expand its
leasing operations. This expansion was restricted by the Company's
cash position, limiting its ability to invest in the equipment's
residual value, a key element in developing a portfolio of this type.
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. During the two years since the IPO, the Company has
generated $92.2 million of new lease business. The majority of the
Company's revenues for fiscal 1997 and 1996 are from leasing and lease
related transactions.
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There have been many changes in the computer industry during the
past several years. One of the most significant of these changes has
been the emergence of high-powered alternatives to the traditional
mainframe computer and its associated applications. However, the
Company believes that the traditional mainframe will continue to be
the primary platform for organizations with large data warehousing and
high transactions rate applications for many years to come. Although
mainframe computer leasing and related services remain a significant
focus of the Company, it is a reality of the industry that for small
to mid-size businesses, the power of computing is moving away from the
mainframe and onto the distributed desktop. In response to this trend,
and in recognition of the Company's need to provide its customers with
more value added services, the Company in 1996 created Paratech
Resources Inc. Paratech offers customers a full service solution,
including hardware, software, system design, integration and other
value-added support services for the local area and wide area network
(LAN and WAN) environment. The Company believes that the creation of
Paratech has helped establish Paramount as a total solution provider
in the IT market. The Company is now positioned to offer its customers
technology, a plan for keeping that technology current and a financial
package to effectively acquire, maintain and upgrade that technology.
The addition of Paratech both enhanced the services that Paramount
offers to its existing customers and generated new customers who need
the types of products and service that the combined Company can offer.
With the constant change prevalent in the IT industry, Paramount is
dedicated to offering a total package of integrated products and
services to its customers by being a single-source solutions provider.
DELTAFORCE ACQUISITION
In January 1998, the Company completed the acquisition of
Deltaforce Personnel Services, Inc., a privately held, New York
City-based staffing company which has provided legal support and
personnel services to the New York metropolitan area legal community
for more than ten years. The addition of Deltaforce further enhances
the Company's product offerings by including staffing solutions to its
expanding list of integrated solution services. The Company plans to
expand its staffing services to include IT professionals. The Company
believes that the acquisition provides Paramount with a foundation in
the staffing services industry that will add to the total Paramount
product mix and be a source of growth and expansion for the Company.
In addition, with the rise in customer demand for trained IT staff,
the Company can now extend its solutions offers to its client base
through Deltaforce.
INDUSTRY BACKGROUND
Technology is more important in business than ever before. In
fact, almost every aspect of an organization is dependent on computer
and information technology. However, in today's competitive business
environment, most organizations are focused on their core competencies
and not on managing and maximizing the return on their investment in
IT. Thus, the need is increasing for the expertise of companies, such
as Paramount, to help businesses through this process.
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System Integration and Consulting
The Gartner Group, a leading computer industry analyst, estimates
that the average cost of a corporate customer acquiring, maintaining,
supporting and disposing of a networked PC is approximately $41,000
over a five year period. Thus, more than ever, companies are
struggling for cost-effective solutions that bring order to this
ever-changing situation, and most recognize that they cannot achieve
this on their own. Businesses are looking for solution providers that
can offer them a full spectrum of services that will ultimately lead
to a lower cost of ownership of their IT assets.
According to the International Data Corporation, a computer
industry research firm, the network services market will grow 20%
annually, to nearly $27 billion by the year 2000. This growth is being
driven by several factors, including the proliferation of distributed
computing applications, the increased reliance on network computing,
and the trend for companies to outsource network management
responsibilities to companies such as Paramount.
Lease Finance
The large system 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 currently in service becoming technologically obsolete,
but usually causes the price of existing equipment to decrease,
reflecting the increased performance and cost-effectiveness of 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. 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
residual 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 unaffected.
As more end-users become aware of the economic benefits of
leasing, they often turn to independent leasing companies. Independent
lessors, such as the Company, offer tailored financing and flexible
delivery, and can deliver financing for mixed systems from different
vendors. Responding to customers' demands, leasing companies are
becoming increasingly 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.
According to a 1997 Survey of Industry Activity and Business
Operations by the Equipment Leasing Association, technology equipment
leasing and financing is a $160 billion industry in the United States.
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Staffing Services
The temporary staffing industry, once used predominately as a
short-term solution for peak production periods and to temporarily
replace absent workers, has evolved into a permanent and significant
component of the staffing plans of many companies. Corporate
restructuring and downsizing, increased government regulations
governing employee relations, advances in technology, and the desire
by many companies to shift employee cost from a fixed to a variable
expense have contributed to the strong growth of the temporary
staffing industry. According to the Employment Research Corporation,
an economic research and consulting firm, the temporary staffing
industry sustained double-digit growth in 1997. The Omnicomp Group,
another economic research firm focusing on the staffing industry,
predicts that the staffing industry will continue to outperform the
economy as a whole in 1998 with growth rates in the range of 10-11%
expected.
SYSTEM INTEGRATION AND CONSULTING BUSINESS
The Company's system integration and consulting business is
conducted through Paratech Resources Inc. Paratech's mission is to
assist and support companies in designing computer networks that cater
to their individual needs and to implement these systems in a
cost-effective manner. Paratech offers a full range of comprehensive
technology solutions, including network design and integration,
software applications, system training and value added support.
Nineteen ninety-seven was a year of great expansion for Paratech.
Paratech significantly added to its sales and technical staff,
broadened its product offering and increased revenue by over 544% as
compared to 1996. The Company's significant investment in Paratech
personnel and infrastructure in 1997 was a major contributor to
Paramount's consolidated loss from operations. The Company views this
loss as an investment in building a business that has the tools and
organizational structure to sustain profitable growth into the future.
During 1997, Paratech became authorized by Microsoft, Inc. as a
Microsoft Solution Provider Partner. As a result of this affiliation,
Paratech jointly sponsored several technical and corporate solution
seminars with Microsoft during 1997. Paratech continues to invest in
the expansion of its sales and consulting manpower in order to meet
the technical and engineering needs of its rapidly expanding client
base. In addition to establishing its Microsoft affiliation, Paratech
expanded its application expertise in workgroup IT consulting.
Paratech added a group of technical and sales specialists with
extensive experience in designing and implementing Lotus Notes
applications, and became a Qualified Lotus Notes Reseller. Paratech
also extended its reseller relationships by receiving authorizations
from IBM for Workstations & Servers, 3Com, DEC, Compaq, Dell and
Gateway.
Paratech is platform independent and thus can provide customers
with the latest technology and flexible financial alternatives.
Because companies want both value and fast delivery of their products,
Paratech sifts through the barrage of products and equipment to offer
the most extensive and complete solutions to its customers. Paratech
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works with its customers to develop strategies governing when to
acquire equipment, when to upgrade existing equipment and when to
order new equipment to take advantage of current technology. In
addition, Paratech consults and implements BackOffice, GroupWare,
Intranet and Internet solutions while advising clients of the latest
releases.
As a result of Paratech's affiliation with Paramount, the Company
can offer its customers lease financing for all of the products and
services that it sells. The Company believes that this provides
Paratech with a significant competitive advantage in the system
integration market. Customers of Paratech are provided with a total
technology and financial solution which will allow them to assess
their IT costs in terms of a fixed monthly rate, rather than a large
one-time cash outlay.
LEASE FINANCE BUSINESS
Operations
The Company's leasing operations involve the 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 equipment manufactured by 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 equipment;
telecommunications equipment; and personal computers.
As a result of the Company's involvement in the system
integration business, Paramount is positioned to offer lease finance
arrangements to customers of Paratech. This is not only a strategic
advantage for Paratech, but is also an additional source of quality
assets and customers for the Paramount lease portfolio. As the
business of Paratech continues to expand, the Company anticipates that
a significant portion of its new lease business will come from
transactions originated by Paratech.
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.
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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 computer products to its
end-user customers and depending on the type of computer 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 IT needs. To this end, the
Company consistently works with its customers to develop strategies
governing when to acquire 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 equipment in
place at the end of the initial lease term. Prior to the expiration of
the original lease term, the Company initiates the remarketing process
for the related equipment. Typically, remarketing equipment in place
produces better residual returns than selling or leasing the equipment
to a third party. The Company is able to maximize its revenues and
residual return by focusing its efforts on keeping the equipment in
place at the end of the initial lease term. In addition, leased
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 computer 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.
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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.
Thereby avoiding 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 Company must pay its vendors
for the 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. In addition, the
Company has entered into recourse financing arrangements whereby
certain financial institutions finance the residual value investment
of certain equipment on lease. 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 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.
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. Residual value investments 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 with particular focus on the possible upgrade paths of the
hardware, the potential for technological changes which may reduce the
comparative efficiency of the equipment, and 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 permanent.
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
pro-active approach to managing its portfolio of computer equipment on
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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 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, 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 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. 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 leasing 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, 1997, the
three largest lessees of the Company accounted for 63.5% 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.
TEMPORARY STAFFING BUSINESS
The Company entered the temporary staffing business in 1998 with
the acquisition of Deltaforce Personnel Services Inc.
Deltaforce, which commenced operations in 1988, is a provider of
temporary legal-support staff to the legal community in the New York
metropolitan area. The company's typical clients are large New York
City based law firms with on-going needs for temporary personnel
services. In order to diversify Deltaforce's services, Paramount plans
to rapidly add an IT staffing services division to Deltaforce's cadre
of services. The Company believes that the acquisition of Deltaforce
is significant since it enhances the business solution services that
Paramount can offer to its customers. Deltaforce also provides
Paramount with a seasoned management team with over twenty years of
proven experience in the industry.
The Company believes that the demand for qualified personnel is
increasing significantly in IT related disciplines, making this one of
the fastest growing sectors of the temporary staffing services
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industry. Several factors will contribute to the growing demand for IT
services over the next several years, including the need by many
companies to correct the Year 2000 problem and the rapidly growing IT
aspects of most successful business. Many companies and organizations
requiring Year 2000 conversions do not have the internal personnel,
resources or expertise required to address the problem, and instead
will rely on the staffing industry to supply personnel. With the
addition of Deltaforce, Paramount is now positioned to address all of
their clients IT needs, including temporary personnel.
COMPETITION
The Company competes directly with numerous other companies which
buy, sell or lease new and used computer and other IT 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 certain 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 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
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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.
Deltaforce competes against local and national temporary
personnel firms. Many of these firms have greater financial resources
available for marketing and advertising as well as a larger pool of
potential candidates to fill positions. The Company believes that it
can compete against these firms due to the experience of existing
management, the relationships that it has maintained over the years,
and the reputation that it holds in the market for providing high
quality service. In addition, Deltaforce will be installing a new
state-of-the-art computer system specifically designed for the
temporary personnel industry, which it believes will allow it to
better manage its pool of candidates and compete against these larger
companies. Further, as a result of its affiliation with Paratech,
Deltaforce expects to have additional opportunities to place
candidates in IT related disciplines.
EMPLOYEES
As of December 31, 1997, the Company employed twenty-two persons
full-time. 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 business 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 an office in New York City that it shares with Deltaforce.
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, 1997.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and Class A Warrants began trading
separately on the NASDAQ SmallCap Market under the symbols "PARA" and
"PARAW," respectively, on January 22, 1996, the date of the Company's
IPO. The following table sets forth the high and low sale prices for
the Company's securities for the periods shown below:
UNIT HIGH LOW
---- ---
January 22, 1996 through March 31, 1996 ..... $15 3/4 $10
April 1, 1996 through April 15, 19961 ....... 10 5/6 8 5/6
COMMON STOCK
1996
----
First quarter ............................... $ 6 $3 3/4
Second quarter .............................. 4 5/8 3
Third Quarter2 .............................. 6 2 1/2
Fourth Quarter .............................. 1 1/2 3/16
1997
----
First quarter ............................... 25/32 3/8
Second quarter .............................. 3/4 5/16
Third quarter ............................... 1 3/32 3/8
Fourth quarter .............................. 1 3/97 17/32
1998
----
January 1, 1998 through March 18, 1998 ...... 11/16 3/8
CLASS A WARRANTS
1996
----
First quarter ............................... $ 2 1/4 7/8
Second quarter .............................. 1 1/2 19/32
Third quarter ............................... 1 5/16 3/8
Fourth quarter .............................. 3/4 1/16
1997
----
First quarter ............................... 5/32 3/97
Second quarter .............................. 3/32 3/97
Third quarter ............................... 3/16 3/97
Fourth quarter .............................. 3/16 1/16
1998
----
January 1, 1998 through March 18, 1998 ...... 1/8 3/32
- --------
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.
11
<PAGE>
The closing sales prices of these securities as of March 18,
1998, as reported by the Nasdaq SmallCap Market, were $0.438 per share
of Common Stock and $0.094 per Class A Warrant.
As of March 18, 1998, there were 38 record holders of the Common
Stock.
12
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
REVENUES:
<S> <C> <C> <C> <C> <C>
Sales ................... $21,418,872 $25,290,524 $30,857,949 $27,159,894 $21,405,788
Lease revenue ........... 1,647,923 2,592,531 2,147,358 3,680,924 9,829,991
Fee, interest and
other income ........ 180,265 109,247 162,873 511,698 1,159,062
----------- ----------- ----------- ----------- -----------
Total revenues 23,247,060 27,992,302 33,168,180 31,352,516 32,394,841
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales ........... 19,566,840 23,540,952 28,955,984 25,785,022 19,933,213
Lease expense ........... 1,317,497 2,091,361 1,828,412 3,419,600 9,499,365
Selling, general and
administrative
expenses ............ 1,641,602 1,680,601 1,805,499 2,447,884 3,746,712
Interest expense ........ -- -- 5,284,756 6,209 --
----------- ----------- ----------- ----------- -----------
Total costs and
expenses ......... 22,525,939 27,312,914 37,874,651 31,658,715 33,179,290
----------- ----------- ----------- ----------- -----------
Income (loss) before
provision for (benefit
from) taxes ............ 721,121 679,388 (4,706,471) (306,199) (784,449)
Provision for (benefit
from) income taxes ..... 10,153 33,706 21,850 498,212 (288,111)
----------- ----------- ----------- ----------- -----------
Net income (loss) ....... $ 710,968 $ 645,682 $(4,728,321) $ (804,411) $ (496,338)
=========== =========== =========== =========== ===========
Basic loss per
common share ............ ($0.10) ($0.06)
=========== ===========
Diluted loss per
common share ............ ($0.10) ($0.06)
=========== ===========
Shares used in
computing net loss
per share:
Basic ............... 7,817,973 7,964,466
=========== ===========
Diluted ............. 7,817,973 7,964,466
=========== ===========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total assets .................... $9,798,454 $8,128,970 $12,378,585 $51,561,520 $53,062,461
Obligations for financial
equipment-- non-recourse ...... 7,331,988 5,152,274 9,337,883 23,461,175 40,287,404
Shareholders' equity ............ 606,149 851,999 568,718 8,171,386 7,645,683
LEASE PORTFOLIO DATA:
Net investment in direct finance
and sales type leases ......... 6,795,493 5,411,219 6,446,063 20,942,542 39,941,764
Assets held for operating leases,
net of accumulated depreciation 1,048,370 864,126 3,976,209 21,103,033 5,459,895
</TABLE>
14
<PAGE>
ITEM 7 - 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 audited
financial statements, including the notes thereto, appearing elsewhere
in this Form 10-K.
GENERAL
Paramount Financial Corporation and subsidiaries is a
comprehensive asset management and business solution provider,
offering customers a wide range of integrated services, including
lease finance, IT consulting, network design and implementation and
staffing services.
The operating results of Paramount are subject to quarterly
fluctuations resulting from a variety of factors, including new
product announcements by manufacturers, economic conditions, interest
rate fluctuations and variations in the mix of leases written. In
addition, the Company's sales volume fluctuates significantly from
quarter to quarter as a result of the closing date and nature of each
particular sales transaction. The mix of leases written in a quarter
is a result of a combination of factors, including changes in customer
demands and/or requirements, new product announcements, price changes,
changes in delivery dates, changes in maintenance policies and pricing
policies of equipment manufacturers, and price competition from other
lessors. Leasing transactions (other than sales type leases), in
general, do not provide for significant earnings in the month of lease
origination. Instead, revenue, expense and profit from lease
transactions are recorded over the life of the asset and the lease.
Lease revenue and lease expense recognition is dependent upon a number
of factors, including the term of the lease, the accounting
classification of the lease (i.e., operating, direct finance, or sales
type) and the commencement date of the lease and the lease financing
within a particular period. See "Lease Accounting." Given the
possibility of such fluctuations, the Company believes that
comparisons of the results of its operations for preceding quarters
are not necessarily meaningful and that the results for one quarter
should not be relied upon as an indication of future performance.
Nineteen ninety-seven was a year of expansion for Paramount. The
Company continued its evolution from a predominantly lease finance
company into a total technology solution provider. The key elements of
this strategy have been the development and maturity of the Company's
systems integration and network design capabilities, and the continued
expansion of the Company's portfolio of essential IT equipment on
lease to relationship based end-user customers. The Company believes
that continuing to expand the portfolio of IT equipment 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 IT solution provider, the Company believes that it is well
positioned to meet the ever-changing needs of its customers.
15
<PAGE>
The results of operations for the year ended December 31, 1997
are presented on a consolidated basis including the results of
Paratech, the Company's system integration subsidiary, which commenced
operations during the third quarter of 1996. The Company believes that
the addition of Paratech has been a major step towards establishing
Paramount as a total high technology solution provider. Paratech
generates revenue from sales of desktop computer and related systems
and through sales of technical support services. During 1997, the
Company significantly added to Paratech's sales and technical staff
and broadened its product offerings. As a result of this expansion,
Paratech's revenues increased by 544% over 1996. The Company invested
heavily in Paratech's personnel and infrastructure in 1997. This
investment was a major contributor to Paramount's loss from operations
in 1997. The Company views this loss as an investment in building a
business that has the tools and organizational structure to sustain
profitable growth.
Paramount operates in a highly competitive and rapidly changing
marketplace. The Company believes that its ability to adapt to changes
and to evolve into a valued single-source IT solutions provider for
its customers, offering a complete package of products and services 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 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, in
connection with 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
16
<PAGE>
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, 1997, the portfolio of equipment on lease owned by
Paramount had a combined net book value on the balance sheet of $45.4
million and had an original cost basis of $71.4 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. The portfolio of
equipment managed by Paramount had an original cost of $26.2 million.
Thus, as of December 31, 1997, the portfolio of equipment on lease
owned and managed by Paramount had an original acquisition cost of
$97.6 million compared to $75.5 million at December 31, 1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company recorded a net loss of $496,300 for the year ended
December 31, 1997, as compared to a net loss of $804,400 for the year
ended December 31, 1996. The net loss for the year ended December 31,
1997 is primarily a result of the Company's continued investment in
the growth and expansion of Paratech, as well as the nature and timing
of certain lease transactions. The results for the year ended December
31, 1996 include a one time, non-cash adjustment of $430,400 to
Provision for Income Taxes. This adjustment was necessitated by the
change of the Company's tax status from a Sub-Chapter S Corporation to
a C-Corporation in connection with the Company's January 1996 IPO, and
was made in accordance with Statement of Financial Accounting
Standards No.109. The amount of the adjustment represents the
cumulative deferred tax liability, which arose primarily from
temporary tax differences with respect to depreciation, generated by
the S-Corporation and payable in the future by the C-Corporation. See
"General" and "Lease Accounting."
Lease revenue, comprised of rental income from operating leases
and interest income from direct finance and sales type leases,
increased by 167% to $9.8 million for the year ended December 31, 1997
from $3.7 million for the year ended December 31, 1996. Lease expense,
which includes depreciation expense on operating leases, interest
expense on lease financing and sublease rent expense, increased by
177% to $9.5 million for the year ended December 31, 1997 from $3.4
million for the year ended December 31, 1996. These increases are a
direct result of the Company's continuing efforts to expand its
leasing portfolio. See "General" and "Lease Accounting."
During the year ended December 31, 1997, the Company recorded
$21.4 million of sales revenue. This represents a decrease of $5.8
million over the $27.2 million recorded during 1996. The reduction in
sales revenue is a result of a decrease in the dollar amount of sales
type leases entered into during 1997, and the continued shift in focus
of the Company towards system integration sales. See "General" and
"Lease Accounting."
17
<PAGE>
During the year ended December 31, 1997, the Company generated
$1.2 million in fee, interest and other income, compared to $511,700
for the comparable period last year. The Company generates fee income
from commissions earned on third party lease financing transactions.
These transactions generally come about as a result of the Company's
relationship with other lessors and financial institutions. The
Company cannot predict with any certainty the timing and nature of any
future such transactions. See "General." Interest income is derived
from the investment of the Company's cash balances in interest bearing
cash accounts, cash equivalents and marketable securities during the
periods ended December 31, 1997 and 1996.
Selling, general and administrative expenses ("SG&A") totaled
$3.7 million for the year ended December 31, 1997, representing an
increase of 53.1% over the $2.4 million recorded during 1996. The
increase in SG&A is a result of the expansion of the operations of
Paratech and the increased sales and support staff at the Company. See
"General."
The benefit from income taxes of $288,100 for the year ended
December 31, 1997 reflects an effective tax rate of 37% for federal
and state taxes. 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 of $67,800. Prior to 1996, the
Company was an S-Corporation and not subject to a corporate federal
income tax.
During the year ended December 31, 1997, the Company entered into
new lease transactions totaling $38.5 million of equipment cost. Of
this amount, $11.9 million were for sales type leases for which the
sales price and cost of equipment were recorded as sales revenue and
cost of sales, respectively. This compares with $53.7 million for the
year ended December 31, 1996, of which $12.4 million was subsequently
sold to an equipment investor, $21.8 million was recorded as direct
finance or sales-type leases and $19.5 million was recorded as
operating leases. See "General" and "Lease Accounting." During the
year ended December 31, 1997, the Company entered into $35.4 million
of non-recourse lease financing arrangements, net of terminations
resulting from lease extensions, as compared with $21.6 million for
the year ended December 31, 1996. See "Liquidity and Capital
Resources."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company recorded a net loss of $804,400 for the year ended
December 31, 1996 as compared to a net 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 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 net 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
18
<PAGE>
development of Paratech. See "General" and "Lease Accounting." In
addition, 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 a
Sub-Chapter S Corporation to a C-Corporation in connection with the
Company's 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 did not affect the Company's current cash position, as a
result of the corresponding credit made to a deferred tax liability
account.
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 operation and
the increased emphasis on lease origination and portfolio development.
See "General."
During the year ended December 31, 1996, the Company recorded
$511,700 of fee, interest and other income, an increase of $348,900
over the year ended December 31, 1995. The Company generates fee
income from commissions earned on third party lease financing
transactions. These transactions generally come about as a result of
the Company's relationship with other lessors and financial
institutions. The Company cannot predict with any certainty the timing
and nature of any future such transactions. See "General." Interest
income is derived from the investment of the Company's cash balances
in interest bearing cash accounts, cash equivalents and marketable
securities during the period ended December 31, 1996.
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
19
<PAGE>
as the increased compliance costs associated with being a public
company. In addition, expenses incurred at Paratech were a significant
contributor to this increase.
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.
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 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 related to leases for which the
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had $5.7 million in cash,
cash equivalents and marketable securities, including $600,000 which
was pledged as additional collateral under a Letter of Credit
arrangement. Substantially all of this amount was invested in
interest-bearing savings accounts, money market accounts established
by major commercial banks or in United States Government or other AA
rated obligations. Primarily as a result of the start-up of Paratech
and the Company's continuing investment in its portfolio of IT
equipment on lease the Company experienced a net cash loss from
operations in 1997.
The Company's leasing business generates cash primarily from the
remarketing of equipment coming off leases, 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 lease
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 it for the
20
<PAGE>
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.
The Company believes that it has completed its start-up cash
investment in Paratech. Since Deltaforce is an established operation,
the Company does not anticipate investing significant cash in this
business. However, in order to expand Paratech's and Deltaforce's
operations, which the Company is aggressively seeking to accomplish,
the Company will need to utilize its cash balances to fund follow-on
acquisitions. The Company is limited to its current cash balances for
funding such acquisitions, 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 or any future
acquisitions require the funding the of losses or the incurrence of
capital outlay.
During the year ended December 31, 1997, the Company entered into
several residual value sharing and financing arrangements with an
equipment investor totaling $8.2 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 upon 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 year ended December 31, 1997, in
connection with the early extension of leases, the Company repaid $1.3
million 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 December 31, 1997, the Company had two 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 year ended December 31, 1997, the
Company did not borrow any amounts from these lines, and accordingly
had nothing outstanding as of December 31, 1997. 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 $2
million 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
21
<PAGE>
associated equipment. The Company is required to maintain certain
financial ratios. As of December 31, 1997, the Company was not in
compliance with the debt covenant requiring tangible net worth of at
least $8 million. Borrowings are financed at a fixed rate spread over
the US Treasury bill at the time of funding. As of December 31, 1997,
the Company had $315,600 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. As of December 31, 1997, the
Company had repurchased 50,000 shares for a cash purchase price of
$29,000.
Based on a recent assessment, the Company has determined that its
computer software and operating systems are in compliance with the
Year 2000 issue. The Company believes that future modifications, if
any are required, will not have a material effect on the Company's
results of operations or financial position.
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; and general economic conditions.
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, 1997 are located beginning at page F-1 of this
Annual Report on Form 10-K.
22
<PAGE>
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 1998 Annual Meeting of Stockholders to be filed by the
Registrant with the Securities and Exchange Commission on or before
April 30, 1998.
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
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+ - Stock Purchase Agreement dated January 6, 1998 by
and among Paramount Financial Corporation and Lawrence
P. Kagan and Steven Lippel
10.7* - Form of Indemnification Agreement
23
<PAGE>
10.8* - Sublease Agreement, dated September 15, 1995,
between the Company and Lehman Brothers Inc.
10.9* - Consent to Sublease, dated September 15, 1995, among
Chasco Company, Lehman Brothers Inc. and the Company
10.10* - 1995 Director Option Plan
27+ - Financial Data Schedule
- -----------
+ Filed herewith.
* 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, 1997.
(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 under Regulation S-X
is either not applicable or is included in the financial
statements or notes thereto.
24
<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 27, 1998 By: /s/ GLENN NORTMAN
----------------------------
Glenn Nortman,
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/ GLENN NORTMAN Chief Executive Officer March 27, 1998
- --------------------------- and Director
Glenn Nortman (Principal Executive Officer)
/s/JEFFREY NORTMAN Chief Operating Officer March 27, 1998
- --------------------------- and Director
Jeffrey Nortman
/s/PAUL VECKER Senior Vice President, Chief March 27, 1998
- --------------------------- Financial Officer, Treasurer
Paul Vecker and Director
(Principal Financial Officer and
Principal Accounting Officer)
25
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1997
-----------------
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for each of the three years ended F-4
December 31, 1997
Consolidated Statements of Shareholders' Equity for each of the three F-5
years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three years F-6
in the period ended December 31, 1997
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, 1996
and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1996 and 1997,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Melville, New York
March 6, 1998
ARTHUR ANDERSEN LLP
F-2
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------
ASSETS 1996 1997
------ ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 3,700,774 $ 2,209,649
Investments available for sale 3,163,841 3,524,456
Accounts receivable 2,260,013 1,138,479
Net investment in direct finance and sales-type leases 20,942,542 39,941,764
Assets held under operating leases, net of
accumulated depreciation 21,103,033 5,459,895
Other assets 391,317 788,218
------------ ------------
Total assets $ 51,561,520 $ 53,062,461
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Notes payable $ 18,384 $ 2,656,365
Accounts payable 1,062,226 1,307,496
Accounts payable - leases 18,234,518 708,568
Accrued expenses 188,169 383,097
Obligations for financed equipment -
non-recourse 23,461,175 40,287,404
Deferred income taxes 425,662 73,848
------------ ------------
Total liabilities 43,390,134 45,416,778
------------ ------------
COMMITMENTS (Note 14)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none outstanding -- --
Common stock, $.01 par value; 35,000,000 shares
authorized, 7,990,000 shares issued and
outstanding, respectively 79,900 79,900
Additional paid-in capital 13,644,228 13,644,228
Accumulated deficit (5,552,742) (6,049,080)
Treasury stock, 50,000 shares at cost -- (29,365)
------------ ------------
Total shareholders' equity 8,171,386 7,645,683
------------ ------------
Total liabilities and shareholders' equity $ 51,561,520 $ 53,062,461
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1996 1997
---------- ---------- ----------
REVENUES:
<S> <C> <C> <C>
Sales $30,857,949 $27,159,894 $21,405,788
Lease revenue 2,147,358 3,680,924 9,829,991
Fee, interest and other income 162,873 511,698 1,159,062
----------- ----------- -----------
Total revenues 33,168,180 31,352,516 32,394,841
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 28,955,984 25,785,022 19,933,213
Lease expense 1,828,412 3,419,600 9,499,365
Selling, general and
administrative expenses 1,805,499 2,447,884 3,746,712
Interest expense (Note 7) 5,284,756 6,209 --
----------- ----------- -----------
Total costs and expenses 37,874,651 31,658,715 33,179,290
----------- ----------- -----------
Loss before provision for
(benefit from) income taxes (4,706,471) (306,199) (784,449)
PROVISION FOR (BENEFIT FROM) INCOME
TAXES (Note 9) 21,850 498,212 (288,111)
----------- ----------- -----------
Net loss $(4,728,321) $ (804,411) $ (496,338)
=========== =========== ===========
Basic loss per common share $(0.10) $(0.06)
=========== ==========
Diluted loss per common share $(0.10) $(0.06)
=========== ==========
Shares used in computing net loss
per share:
Basic 7,817,973 7,964,466
=========== ===========
Diluted 7,817,973 7,964,466
=========== ===========
</TABLE>
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, 1995, 1996 AND 1997
----------------------------------------------------
Common Stock
--------------------- Additional
Paid-In
Shares Amount Capital
--------- ------- -----------
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
approximately $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, 1996 7,990,000 79,900 13,644,228
Purchase of treasury stock -- -- --
Current year net loss -- -- --
------------ ------------ ------------
BALANCE, December 31, 1997 7,990,000 $ 79,900 $ 13,644,228
============ ============ ============
Retained
Earnings
(Accumulated Treasury
Deficit) Stock Total
------------ -------- -----------
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 loss (4,728,321) -- (4,728,321)
------------ ------------ ------------
BALANCE, December 31, 1995 (4,748,331) -- 568,718
Issuance of common stock in
the initial public offering,
net of offering costs of
approximately $2,057,921 -- -- 8,407,079
Issuance of common stock to
bridge lenders -- -- --
Current year net loss (804,411) -- (804,411)
------------ ------------ ------------
BALANCE, December 31, 1996 (5,552,742) -- 8,171,386
Purchase of treasury stock -- (29,365) (29,365)
Current year net loss (496,338) -- (496,338)
------------ ------------ ------------
BALANCE, December 31, 1997 $ (6,049,080) $ (29,365) $ 7,645,683
============ ============ ============
F-5
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1995 1996 1997
------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (4,728,321) $ (804,411) $ (496,338)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Amortization of deferred financing costs 5,250,000 -- --
Deferred income taxes -- 425,662 (351,814)
Depreciation 814,218 2,037,472 6,721,854
Amortization of discounts on investments -- (162,296) (205,082)
Amortization of unearned operating lease revenue from
sublease transactions (104,073) (19,928) --
Amortization of prepaid operating lease expense from
sublease transactions 92,376 25,067 --
Changes in operating assets and liabilities:
Accounts receivable 56,032 (2,153,219) 1,121,534
Inventory of equipment 65,725 -- --
Other assets (453,749) 279,659 (396,901)
Unearned sales revenue (825,000) -- --
Accounts payable (323,933) 642,602 245,270
Accounts payable - leases (126,990) 18,107,528 (17,525,950)
Accrued expenses 179,586 (105,576) 194,928
------------ ------------ ------------
Net cash (used in) provided by operating activities (104,129) 18,272,560 (10,692,499)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment for direct finance leases and
sales-type leases (3,707,954) (21,773,460) (38,158,975)
Termination of direct finance leases 729,330 1,591,822 4,499,046
Proceeds applied to direct finance leases and
sales-type leases 1,943,781 5,685,159 12,327,521
Purchase of equipment for operating leases (3,950,717) (31,913,845) (346,733)
Termination of operating leases 30,200 12,749,549 6,972,505
Residual value sharing arrangements -- -- 4,628,698
Purchases of investments -- (19,495,594) (14,187,250)
Proceeds from sale/maturity of investments -- 16,494,049 14,031,717
------------ ------------ ------------
Net cash used in investing activities (4,955,360) (36,662,320) (10,233,471)
------------ ------------ ------------
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 (806,942) -- --
Repurchase of common stock -- -- (29,365)
Proceeds from notes payable 1,611,697 -- 3,894,286
Repayment of notes payable (64,000) (1,593,313) (1,256,305)
Increase in non-recourse lease financing 7,562,494 31,559,769 38,818,439
Termination of non-recourse lease financing (782,362) (9,978,194) (3,463,973)
Repayments and interest amortization applied to
non-recourse lease financing (2,594,523) (7,458,283) (18,528,237)
------------ ------------ ------------
Net cash provided by financing activities 4,926,364 20,937,058 19,434,845
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (133,125) 2,547,298 (1,491,125)
CASH AND CASH EQUIVALENTS, beginning of period 1,286,601 1,153,476 3,700,774
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,153,476 $ 3,700,774 $ 2,209,649
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 21,850 $ 24,437 $ 48,574
============ ============ ============
Cash paid for interest $ 521,483 $ 1,358,538 $ 2,936,823
============ ============ ============
</TABLE>
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. Net proceeds of the offering totaled approximately
$8,400,000, after deducting underwriting discount and commissions,
underwriter's non-accountable expense allowance and other offering
expenses.
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.
F-7
<PAGE>
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements as of and for the years ended
December 31, 1996 and 1997 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 as 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 and 1997, 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 and recorded as interest income. At
December 31, 1996 and 1997, 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.
F-8
<PAGE>
Completed lease contracts which qualify as direct finance and
sales-type leases, as defined by Statement of Financial Accounting
Standards No. 13, ("SFAS 13") "Accounting for Leases", 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
- ----------------------------------
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 $2,315,000 and $5,148,000 at December
31, 1996 and 1997, 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
years ended December 31, 1996 and 1997, 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 re-marketing
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
F-9
<PAGE>
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.
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 in 1996.
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 at which these differences are
F-10
<PAGE>
expected to reverse in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
Net Loss Per Common Share
- -------------------------
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per
Share". In accordance with SFAS 128, basic loss per common share
amounts for the years ended December 1996 and 1997 have been computed
by dividing net loss by the weighted average number of common shares
outstanding for the period. Common stock equivalents are excluded from
the computation as they would have an anti-dilutive effect.
Stock-Based Compensation
- ------------------------
In 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", by continuing to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," while providing the required pro forma disclosures as
if the fair value method had been applied (see Note 11).
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with the
1997 presentation.
F-11
<PAGE>
3. DIRECT FINANCE AND SALES-TYPE LEASES:
-------------------------------------
The net investment in direct finance and sales-type leases at December
31, 1996 and 1997 was comprised of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Total minimum lease payments receivable $22,668,923 $39,434,601
Estimated residual value of equipment 541,947 3,777,595
----------- -----------
23,210,870 43,212,196
Less: unearned income 2,268,328 3,270,432
----------- -----------
Net investment in direct finance and sales-type leases $20,942,542 $39,941,764
=========== ===========
</TABLE>
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 2002 are as follows:
Years Ending Direct Finance and Operating
December 31, Sales-Type Leases Leases
------------ ----------------- ------
1998 21,842,685 2,977,191
1999 14,495,741 1,611,942
2000 2,134,938 232,960
2001 691,961 82,960
2002 269,276 -
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 $523,000 and $38,700 in rental
income and approximately $533,200 and $40,300 in rent expense from
sublease transactions during the years ended December 31, 1995 and
1996, respectively. For the year ended December 31, 1997, the Company
did not have sublease rental income or expense.
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 consolidated balance sheets, and
amortized into lease expense on a straight-line basis over the life of
the lease.
F-12
<PAGE>
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 $24.9 million in book value at
December 31, 1996 and $45.3 million at December 31, 1997.
Future maturities through 2002 on the non-recourse notes described
above are as follows:
Years Ending December 31, Lease Payments
------------------------- --------------
1998 $24,283,204
1999 15,746,400
2000 2,398,764
2001 695,842
2002 225,994
-----------
43,350,204
Less: Interest 3,062,800
-----------
$40,287,404
===========
7. NOTES PAYABLE AND OTHER FINANCING:
----------------------------------
Notes payable were comprised of the following at December 31, 1996 and
1997:
1996 1997
---- ----
Notes payable to a financial
institution (a) $ - $ 2,324,611
Note payable to bank (b) 18,384 331,754
---------------- ------------
$ 18,384 $ 2,656,365
================ ============
(a) During 1997, the Company entered into three notes payable
agreements totalling $2,086,555 with a financial institution to
finance the residual value of certain equipment on lease, at an
interest rate of prime (8.50% at December 31, 1997) plus 0.25%.
Interest is payable quarterly and the principal amount is due 60
days after lease expiration. All three notes mature in the year
2000. The equipment on lease and the related lease serve as
collateral for the notes payable.
F-13
<PAGE>
Also in 1997, the Company entered into a similar arrangement with
the same institution for $238,056 of residual value financing
bearing interest at prime (8.50% at December 31, 1997) plus 0.50%
payable semi-annually. The entire principal amount is due 60 days
after lease expiration (November 30, 1999). The equipment on
lease and the related lease serve as collateral for this note
payable.
The Company expects to repay the loans referred to above using
the proceeds generated from re-marketing the subject equipment in
the future.
The Company entered into a similar note payable in the amount of
$1,254,000 with the same institution in early 1997 and repaid the
loan in the same year.
(b) In December 1997, the Company entered into a loan agreement with
a bank for a $2,000,000 credit facility, which expires on
December 30, 1998, to finance the purchase of equipment on leases
that are approved by the bank. The bank will issue notes equal to
the discounted rental payments under the leases being financed
using the bank's current interest rate. The notes are payable
monthly as the lease payments become due. As collateral for the
notes, the bank has a first priority security interest in the
equipment and the underlying lease. Under the agreement the
Company is required to maintain certain financial ratios. As of
December 31, 1997, the Company was not in compliance with the
debt covenant requiring tangible net worth of at least $8
million. As of December 31, 1997, the Company had borrowed
approximately $316,000 at 7.90%. Annual maturities are $229,000,
$87,000 and $19,000 in 1998, 1999 and 2000, respectively.
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 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.
F-14
<PAGE>
Additional Financing
- --------------------
During 1997, the Company entered into several residual value sharing
agreements whereby a financial institution agreed to purchase a
portion of the residual values of the equipment on lease for
approximately $4,629,000 in exchange for the right to share in
re-marketing 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:
----------------
Secured Bridge Line
- -------------------
This facility has been arranged with two 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 line also includes a $100,000 unsecured working capital
line. The interest rate charged for these borrowings is a floating 1%
over the banks' prime lending rate, 8.25% and 8.5% at December 31,
1996 and 1997, respectively. Both lines expire on June 30, 1998. As of
December 31, 1996 and 1997, no amounts were outstanding under these
facilities.
9. INCOME TAXES:
-------------
The provision for (benefit from) income taxes is comprised of the
following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1995 1996 1997
---- ---- ----
Current:
<S> <C> <C> <C>
Federal $ -- $ -- $ --
State 21,850 72,550 63,703
--------- --------- ---------
21,850 72,550 63,703
--------- --------- ---------
Deferred:
Federal -- (82,583) (251,928)
State -- (12,145) (99,886)
--------- --------- ---------
-- (94,728) (351,814)
--------- --------- ---------
Valuation allowance 90,000 --
--------- ---------
Termination of Subchapter "S" election -- 430,390 --
--------- --------- ---------
Total $ 21,850 $ 498,212 $(288,111)
========= ========= =========
</TABLE>
F-15
<PAGE>
Significant components of deferred income tax assets and (liabilities)
are as follows:
1996 1997
---- ----
Depreciation $(984,844) $ 263,757
Lease transactions treated differently for
tax and financial reporting purposes 447,006 (803,095)
Net operating loss carryforward 190,844 471,698
Valuation allowance (90,000) (90,000)
Other 11,332 83,792
--------- ---------
Net deferred income tax liability $(425,662) $ (73,848)
========= =========
The following reconciliation presents the principal reasons for the
difference between income taxes calculated at the United States
federal statutory income tax rate (34%) and the provision for (benefit
from) income taxes:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1997
---- ----
<S> <C> <C>
Federal income tax benefit at U.S. statutory rate $(104,108) $(266,713)
Subchapter "C" impact of SFAS 109 430,390 --
Valuation allowance 90,000 --
Franchise taxes, net of federal benefit 36,583 39,547
All other, net 45,347 (60,945)
--------- ---------
Provision for (benefit from) income taxes $ 498,212 $(288,111)
========= =========
</TABLE>
For the year ended December 31, 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 $1,210,000 expiring through 2012.
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 $0.01 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, 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.
F-16
<PAGE>
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.
All of the Company's shareholders prior to the initial public offering
were also executive officers and directors of the Company.
See Note 1 for a description of the Company's initial public offering
of its securities.
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. As of December 31, 1997, the Company
had repurchased 50,000 shares for a cash purchase price of $29,000.
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. In
June 1997, the Board of Directors approved an amendment to increase
the aggregate number of shares of common stock reserved for issuance
by 750,000 shares, for a total of 1,500,000. 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
F-17
<PAGE>
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.
In 1997, the Company granted a total of 165,000 options, net of
cancellations, pursuant to the Stock Option Plan. Of the total options
granted, 85,000 options are exercisable after one year and the
remaining 80,000 options are exercisable in whole or in part 20% per
year from the date of grant. As of December 31, 1997, none of the
options were exercisable. The Company accounts for these plans under
APB Opinion No. 25, under which no compensation has been recorded. Had
compensation cost for the plan been determined in accordance with SFAS
123, the Company's net loss and basic loss per common share would have
been decreased to the following proforma amounts:
1997
----
Net Loss As Reported $496,338
Pro Forma 518,148
Basic loss per common share As Reported $ .06
Pro Forma $ .07
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. There were no stock options granted in
1996.
The following table reflects activity under the Stock Option Plan for
the year ended December 31, 1997:
Weighted
Average
Shares Exercise
------ --------
Price
-----
Outstanding, beginning of the year - $ -
Granted 210,000 .50
Canceled (45,000) .53
-------
Outstanding, end of year 165,000 .50
=======
Weighted average fair value of options granted $.25
Of the 165,000 options outstanding as of December 31, 1997, 80,000
options have exercise prices between $.38 and $.41 with a weighted
average exercise price of $.40 and a weighted average remaining
contractual life of 9.25 years. The remaining 85,000 options have an
exercise price of $.59 and a weighted average remaining contractual
life of 9.25 years.
F-18
<PAGE>
The fair value of each stock option grant is estimated as of the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997:
risk-free interest rate of 6.5%, expected lives of 3.45 years,
expected dividend yields of 0% and expected stock price volatility of
71%.
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. The Company has adopted SFAS 123
to account for stock-based compensation awards granted to non-employee
directors, under which a compensation cost is recognized for the fair
value of the options granted as of the date of grant. As of December
31, 1997, there were no options granted to directors under the
Director Plan.
12. EMPLOYEE SAVINGS PLAN
---------------------
The Company has 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 and 1997, the
Company did not make any contributions to the plan.
13. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT:
-------------------------------------------------
For the years ended December 31, 1995, 1996 and 1997, the following
customers represented in excess of 10% of total revenues for the
respective years:
Customer 1995 1996 1997
-------- ---- ---- ----
A 10% - -
B 58% - -
C 13% - -
D - 40% -
E - 25% -
F - - 47%
G - - 14%
F-19
<PAGE>
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.
14. COMMITMENTS:
------------
Letter of Credit
- ----------------
In 1997, the Company utilized a standby letter of credit in the amount
of $500,000 to guarantee payment under a financing arrangement for
trade purchases made by the Company's wholly owned subsidiary,
Paratech Resources, Inc. The letter of credit is backed by $600,000 of
cash kept in a safekeeping cash account with the bank that issued the
letter of credit.
Operating Leases
- ----------------
The Company leases office facilities and office equipment under
operating leases expiring through August 1999. Total rent expense
amounted to approximately $45,000, $90,000 and $130,000 in 1995, 1996
and 1997, respectively. Total minimum lease payments due under
non-cancelable operating leases as of December 31, 1997, are as
follows:
Years Ending
December 31, Office Facilities
------------ -----------------
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
totalling $940,000.
15. SUBSEQUENT EVENT
----------------
On January 9, 1998, the Company acquired 100% of the outstanding
shares of Deltaforce Personnel Services, Inc., 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 and liabilities based on their respective
estimated fair values at the date of acquisition.
F-20
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.6 Stock Purchase Agreement dated January 6, 1998 by
and among Paramount Financial Corporation and Lawrence
P. Kagan and Steven Lippel
27 Financial Data Schedule
Exhibit 10.6
STOCK PURCHASE AGREEMENT
BY AND AMONG
PARAMOUNT FINANCIAL CORPORATION
AND
LAWRENCE P. KAGAN AND STEVEN LIPPEL
-------------------------------------
DATED AS OF JANUARY 6, 1998
-------------------------------------
<PAGE>
EXHIBITS
Exhibit A - Form of Employment Agreements
Exhibit B - Form of Legal Opinion of Counsel to Delta
SCHEDULES
Schedule 2.1 - Jurisdictions Qualified to do Business
Schedule 2.3 - Company Required Consents
Schedule 2.6 - Certain Liabilities; List and Description of
Company Debt
Schedule 2.7 - Receivables
Schedule 2.8 - [Intentionally Omitted]
Schedule 2.9 - Absence of Certain Changes
Schedule 2.10A - General Descriptions of Real Property
Schedule 2.10B - Real Property Leases
Schedule 2.10D - Personal Property
Schedule 2.11 - Contracts; Modifications to Contracts
Schedule 2.12 - Intellectual Property Rights
Schedule 2.13 - Claims and Proceedings
Schedule 2.14 - Taxes
Schedule 5.2(e) - Promissory Notes
<PAGE>
SCHEDULES
Schedule 2.15 - Employee Benefit Plans; ERISA Matters
Schedule 2.16 - Employee-Related Matters
Schedule 2.17 - Insurance
Schedule 2.19 - Permits; Environmental Permits
Schedule 2.20 - Environmental Matters
Schedule 2.21 - Major Customers; Major Suppliers
Schedule 2.22 - Potential Conflicts of Interest
Schedule 2.24 - Depositories; Powers of Attorney
<PAGE>
STOCK PURCHASE AGREEMENT dated as of January 6, 1998 by and among
PARAMOUNT FINANCIAL CORPORATION, a Delaware corporation ("Purchaser"),
---------
and LAWRENCE P. KAGAN AND STEVEN LIPPEL (each a "Stockholder" and
-----------
collectively, the "Stockholders").
------------
R E C I T A L S
- - - - - - - -
1. The Stockholders own 100% of the outstanding capital stock of
Deltaforce Personnel Services, Inc., a New York corporation ("Delta").
-----
2. Delta is in the business of providing temporary staffing and
personnel services to law firms (the "Business").
--------
3. The Stockholders desire to sell and transfer to Purchaser, and
Purchaser desires to purchase and acquire from the Stockholders, all
of the Stockholders' right, title and interest in and to 100% of their
shares of capital stock of Delta, subject to the terms and conditions
contained herein (the "Acquisition").
-----------
4. Concurrently with the Closing (as defined herein) of the
Acquisition, the Stockholders will each enter into an employment
agreement with Delta, the form of which is annexed hereto as Exhibit A
---------
(the "Employment Agreement").
--------------------
5. In furtherance of the consummation of the Acquisition and the
other transactions contemplated hereby (the "Contemplated
------------
Transactions"), the parties hereto desire to enter into this Agreement
- ------------
(certain terms used herein have the respective meanings set forth in
Article IX).
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which
are hereby expressly acknowledged, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF CAPITAL STOCK OF DELTA
SECTION 1.1 AGREEMENT TO SELL AND PURCHASE CAPITAL STOCK;
--------------------------------------------
CONSIDERATION. Subject to the terms and conditions of this Agreement
- -------------
and in reliance upon the representations, warranties, covenants and
agreements contained herein, at the Closing, the Stockholders shall
sell, transfer and deliver to Purchaser, and Purchaser shall purchase
and accept from the Stockholders, free and clear of all Liens, the
Stockholders' right, title and interest in and to all of the
outstanding capital stock of Delta (collectively, the Purchased
---------
Shares"), for an aggregate purchase price (the "Purchase Price") equal
- ------ --------------
to $650,000, subject, however, to clauses (B) and (C) and the proviso
below. The Purchased Shares constitute 100% of the capital stock of
Delta. Payment of the Purchase Price for the Purchased Shares will be
payable as follows: (A) an aggregate of $325,000 shall be paid to the
Stockholders on the Closing Date by certified or bank cashier's check,
or by wire transfer of immediately available federal funds to accounts
designated by the Stockholders for that purposes, (B) an aggregate of
$162,500 shall be paid to the Stockholders no later than by March 31,
1999 if and only if the "Gross Profit" of the Business for the fiscal
year ended December 31, 1998 is at least $600,000 or greater, and (C)
an aggregate of $162,500 shall be paid to the Stockholders no later
than by March 31, 2000 if and only if the Gross Profit of the Business
for the fiscal year ended December 31, 1999 is at least $600,000 or
greater; provided, that with respect to the payments provided for in
--------
clauses (B) and (C), if (i) a Stockholder shall have voluntarily
terminated his employment with Delta prior to December 31, 1998, or
(ii) a Stockholder shall be terminated by the Company as a result of a
Forfeiture Event, then notwithstanding anything to the contrary set
forth herein, Purchaser shall not be required to make any of such
payments, except for payments theretofore paid or payments due but
unpaid. For purposes hereof, "Gross Profit" means total income from
temporary services minus total costs of temporary services plus total
-----
fees from permanent placements minus total commissions paid in respect
-----
of permanent placements, all as reflected on the audited financial
statements of the Business. All payments of the Purchase Price shall
be made pro rata to the Stockholders based upon their ownership of the
capital stock of Delta, and if any payment of the Purchase Price is to
be precluded based upon the proviso above to one of the Stockholders,
the other Stockholder shall continue to be entitled to receive his pro
rata portion of such payment.
SECTION 1.2 ADJUSTMENTS. (a) The Purchase Price shall be (A)
-----------
increased dollar for dollar by the amount, if any, by which Delta's
net worth (the "Closing Net Worth") as reflected on the Closing Date
-----------------
Balance Sheet (as defined below) exceeds $78,000, or (B) decreased
dollar for dollar by the amount by which the Closing Net Worth is less
than $78,000.
(b) Purchaser will prepare a balance sheet of Delta as of
the close of business on the day immediately preceding the Closing
Date (the "Closing Date Balance Sheet"). The Closing Date Balance
--------------------------
Sheet will be prepared in accordance with GAAP and, among other
things, shall set forth Delta's Closing Net Worth and the adjusted
Purchase Price, if any, together with a calculation of any amounts due
to Purchaser or the Stockholders, as the case may be. The costs and
expenses incurred in connection with preparation of the Closing Date
Balance Sheet shall be borne by Purchaser. Purchaser shall use its
reasonable efforts to complete the Closing Date Balance Sheet and to
deliver the Closing Date Balance Sheet to the Stockholders within
ninety (90) days after the Closing Date.
(c) Within thirty (30) days after receipt of the proposed
Closing Date Balance Sheet, the Stockholders shall deliver a written
notice to Purchaser stating whether they have any objections to the
proposed Closing Date Balance Sheet, describing in detail any
objections thereto. The Stockholders hereby agree to work diligently
with Purchaser to resolve any such objections. Failure to give such
timely objection notice (or written notification from the Stockholders
that they have no such objection to the proposed Closing Date Balance
Sheet) shall constitute acceptance and approval of such proposed
Closing Date Balance Sheet and the proposed adjustments to the
Purchase Price set forth therein, if any, and shall be final and
binding upon the parties hereto.
(d) The parties hereto shall promptly consult with each
other and their respective Representatives with respect to any
objections by the Stockholders pursuant to their objection notice and
shall use reasonable efforts to resolve all such objections within
thirty (30) days after delivery by the Stockholders of such objection
notice. If any objections remain unresolved after the end of such
30-day period, the parties hereto shall promptly retain (or one of
them if the other fails to jointly retain after a written notice)
Ernst & Young (or another unrelated "Big Six" accounting firm if Ernst
& Young is then providing accounting or consulting services to
Purchaser or its affiliates) (the "Resolving Accounting Firm") to
-------------------------
resolve any remaining disputes concerning the proposed Closing Date
Balance Sheet. The parties hereto, and their respective
Representatives, shall cooperate fully with the Resolving Accounting
Firm. The parties hereto shall give, and shall cause their respective
Representatives to give, the Resolving Accounting Firm and its
Representatives such reasonable assistance and access to the Assets
and books and records of Delta, and any applicable work papers,
schedules and other documents as the Resolving Accounting Firm shall
reasonably request. The Resolving Accounting Firm shall be directed to
resolve all disputes within thirty (30) days after being retained by
the parties hereto, and a resolution of the Resolving Accounting Firm
shall be final and binding on the parties hereto. Fees and expenses of
the Resolving Accounting Firm shall be borne equally by Purchaser and
the Stockholders, and shall be payable upon completion of the
Resolving Accounting Firm's work. For purposes of this Section 1.2,
the Closing Date Balance Sheet shall be deemed to be the statement
finally determined after all disputes have been resolved as provided
herein.
(e) To the extent that the final Closing Date Balance Sheet
requires an increase in the Purchase Price in accordance with the
provisions of Section 1.2(a), then, within three (3) days after
resolution of all disputes relating to the Closing Date Balance Sheet,
Purchaser shall pay an amount equal to the upward adjustment to the
Purchase Price by certified or bank cashier's check or wire transfer
of immediately available federal funds to such account as the
Stockholders may designate. To the extent that the final Closing Date
Balance Sheet requires a decrease in the Purchase Price in accordance
with the provisions of Section 1.2(a), then, within three (3) days
after resolution of all disputes relating to the Closing Date Balance
Sheet, the Stockholders shall pay an amount equal to the downward
adjustment to the Purchase Price by certified or bank cashier's check
or wire transfer of immediately available federal funds to such
account as Purchaser may designate.
(f) Any amounts which shall be paid either to the
Stockholders or to Purchaser pursuant to Section 1.2(e) shall be paid
together with interest thereon, calculated from the Closing Date
through the date of payment, at the Prime Rate.
SECTION 1.3 CLOSING. The closing (the "Closing") of the
------- -------
Contemplated Transactions shall take place at the offices of Reid &
Priest LLP, New York, New York, 40 West 57th Street, New York, New
York 10019, within three (3) days after all conditions precedent to
Closing hereunder provided for shall have been satisfied or waived, or
at such other date, time or place as the parties hereto shall mutually
agree. The date of the Closing is hereinafter called the "Closing
-------
Date." The parties hereto hereby agree to deliver at the Closing such
- ----
documents, certificates of officers and such other instruments as are
specified in Article V hereof and as reasonably may be required to effect
the transfer by the Stockholders of the Purchased Shares pursuant to
and as contemplated by this Agreement and to consummate the
Contemplated Transactions. All events which shall occur at the Closing
shall be deemed to occur simultaneously.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
The Stockholders, jointly and severally, represent and warrant to
Purchaser, as of the date of this Agreement and as of the Closing Date
(as if each such representation and warranty was remade on the Closing
Date), as follows:
SECTION 2.1 CORPORATE EXISTENCE AND POWER; STATUS OF THE
--------------------------------------------
PURCHASED SHARES. (a) Delta is a corporation duly organized and
- ----------------
validly existing under the laws of the State of New York, has all
requisite corporate authority and power to own, lease and operate its
properties and to conduct the Business as currently conducted, and is
qualified to do business in every jurisdiction in which its ownership
of property or conduct of the Business requires it to qualify, all of
which jurisdictions are listed on Schedule 2.1. The Stockholders,
------------
collectively, own and hold good and marketable title to the Purchased
Shares, free and clear of any Lien of any kind, which Purchased Shares
represent 100% of the outstanding capital stock of Delta, and there
are no outstanding options, warrants, commitments, agreements or any
other rights of any character entitling any person other than
Purchaser to acquire any of the capital stock or other interest of
Delta.
(b) Delta does not directly or indirectly own any interest
or investment in any person.
SECTION 2.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Each
------------------------------------
Stockholder has full power and authority to execute and deliver this
Agreement and each other Transaction Document to which he is a party
and to consummate the Contemplated Transactions. Except as set forth
on Schedule 2.3, no other proceedings on the part of the Stockholders
------------
(or any other person) are necessary to authorize the execution and
delivery by the Stockholders of this Agreement or the other
Transaction Documents to which he is a party or the consummation of
the Contemplated Transactions. This Agreement has been duly and
validly executed and delivered by each of the Stockholders and
constitutes, and the other Transaction Documents to which each
Stockholder is a party when executed and delivered by the Stockholders
will constitute (in each case, assuming the valid execution and
delivery thereof by the other parties thereto), the legal, valid and
binding agreements of the Stockholders, enforceable against each of
the Stockholders in accordance with their respective terms, except as
such obligations and their enforceability may be limited by applicable
bankruptcy and other similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of
equitable remedies is subject to the discretion of the court before
which any proceeding therefor may be brought (whether at law or in
equity).
SECTION 2.3 NO CONFLICTS; CONSENTS. Except as set forth on
----------------------
Schedule 2.3 (the "Company Required Consents"), neither the execution,
- ------------ -------------------------
delivery and performance by either of the Stockholders of this
Agreement and each other Transaction Document to which he is a party,
nor the consummation of the Contemplated Transactions (i) violates any
provision of the Certificate of Incorporation or By-laws (or
comparable instruments) of Delta; (ii) requires the Stockholders or
Delta to obtain any consent, approval, Permit or action of or waiver
from, or make any filing with, or give any notice to, any Governmental
Body or any other person; (iii) violates, conflicts with or results in
a breach or default under (after the giving of notice or the passage
of time or both), or permits the termination of, any Contract, right,
other obligation or restriction relating to or which affects the
Purchased Shares, the Stockholders or Delta to which the Stockholders
or Delta is a party or by which any of them or their Assets may be
bound or subject, or results in the creation of any Lien upon the
Purchased Shares or upon any of the Assets of Delta pursuant to the
terms of any such Contract; (iv) violates any Law or Order of any
Governmental Body against, or binding upon, the Stockholders, Delta or
the Purchased Shares or upon their respective Assets or the Business;
or (v) violates or results in the revocation or suspension of any
Permit.
SECTION 2.4 CHARTER DOCUMENTS AND CORPORATE RECORDS. (a) The
---------------------------------------
Stockholders have heretofore delivered to Purchaser true and complete
copies of the Certificate of Incorporation and By-laws of Delta, as in
effect on the date hereof. The stock and transfer books (or comparable
documents) of Delta have been made available to Purchaser for its
inspection and are true and correct. The Stockholders have heretofore
delivered to Purchaser true and correct copies of the minutes of
meetings (or written consents in lieu of meetings) of the Board of
Directors (and all committees thereof) and shareholder(s) of Delta.
(b) All financial, business and accounting books, ledgers,
accounts and official and other records relating to Delta and the
Business have been properly and accurately kept and completed in all
material respects, and there are no material inaccuracies or
discrepancies contained or reflected therein.
SECTION 2.5 FINANCIAL INFORMATION. The Stockholders have
---------------------
previously furnished to Purchaser true and complete copies of (i)
Delta's unaudited consolidated financial statements at and for the
years ended December 31, 1996, 1995 and 1994 (the "Annual
------
Statements"), (ii) Delta's unaudited consolidated financial statements
- ----------
at and for the nine months ended September 30, 1997 and September 30,
1996 (collectively, the "Interim Statements") (the balance sheet at
------------------
September 30, 1997 (the "Latest Balance Sheet Date") included in the
-------------------------
Interim Statements is referred to as the "Latest Balance Sheet"), and
--------------------
(iii) all management letters and attorney response letters issued in
connection with Delta's financial statements for each of the three
years ended December 31, 1996. The Annual Statements have been
prepared in accordance with GAAP consistently applied as set forth in
the notes thereto and present fairly the financial position of Delta
as of their date, and its earnings and changes in cash flow for the
periods then ended. Each balance sheet contained in the Annual
Statements fully sets forth all consolidated Assets and Liabilities of
Delta existing as of its date which, under GAAP, should be set forth
therein, and each statement of earnings contained therein sets forth
the items of income and expense of Delta which should appear therein
under GAAP. The Interim Statements have been prepared in a manner
consistent with Delta's past practices and present fairly the
financial position of Delta as of its dates and results of operations
for the respective periods then ended, subject to normal recurring
year-end adjustments and accruals.
SECTION 2.6 LIABILITIES. Except as and to the extent reflected in
-----------
the Latest Balance Sheet, Delta did not have, as of the Latest Balance
Sheet Date, any Liabilities or obligations (other than obligations of
continued performance under Contracts and other commitments and
arrangements entered into in the ordinary course of business); and
except as described on Schedule 2.6 hereto, Delta has not incurred any
------------
Liabilities since the Latest Balance Sheet Date, except (i) current
Liabilities for trade or business obligations incurred in connection
with the purchase of goods or services in the ordinary course of the
Business and consistent with past practice, and (ii) Liabilities in
respect of borrowings under the Company Debt. Schedule 2.6 contains a
------------
true and correct list of all Company Debt.
SECTION 2.7 COMPANY RECEIVABLES. Except to the extent of the
-------------------
amount of the reserve for doubtful accounts reflected in the Latest
Balance Sheet or as set forth on Schedule 2.7, all the Receivables of
------------
Delta reflected therein and all Receivables that have arisen since the
Latest Balance Sheet Date (except Receivables as have been collected
since such date) are valid and enforceable claims and constitute bona
fide Receivables resulting from the sale of goods and services in the
ordinary course of the Business. To the Stockholders' knowledge, the
Receivables are subject to no valid defense, offsets, returns,
allowances or credits of any kind, and are fully collectible within 90
days from the date they are invoiced, except to the extent of the
amount of the reserve for doubtful accounts reflected in the Latest
Balance Sheet. Except for Receivables, Delta has not made any loan or
advance to any person.
SECTION 2.8 [INTENTIONALLY OMITTED]
SECTION 2.9 ABSENCE OF CERTAIN CHANGES. Since the Latest Balance
--------------------------
Sheet Date, except as set forth in this Agreement or disclosed on
Schedule 2.9, Delta has conducted the Business in the ordinary course
- ------------
consistent with past practices and there has not been:
(a) Any material adverse change in the Business, or the
Assets, financial condition, prospects or the results of operations of
Delta (collectively, the "Condition of the Business") or any event,
-------------------------
occurrence or circumstance that could reasonably be expected to cause
such a material adverse change;
(b) Any transaction or Contract with respect to the
purchase, acquisition, lease, disposition or transfer of any Assets or
to any capital expenditure (in each case, other than in the ordinary
course of the Business in accordance with past practice) or creation
of any Lien on any Asset;
(c) Any declaration, setting aside or payment of any
dividend or other distribution with respect to any interest in Delta;
(d) Any damage, destruction or other casualty loss (whether
or not covered by insurance), condemnation or other taking affecting
the Assets of Delta;
(e) Any change in any method of accounting or accounting
practice by Delta;
(f) Any increase in the compensation payable or to become
payable to any officer, stockholder or director of Delta, or any
alteration in the benefits payable to any thereof;
(g) Any material adverse change in the relationships of
Delta with its customers, suppliers or vendors;
(h) Except for any changes made in the ordinary course of
Business, any change in any of Delta's business policies, including
advertising, marketing, pricing, purchasing, personnel, returns or
budget policies;
(i) Except in the ordinary course of the Business,
consistent with past practice, any payment, directly or indirectly, of
any Liability of $10,000 or more before it became due in accordance
with its terms; or
(j) Any material modification, termination, amendment or
other alteration or change in the terms or provisions of any Contract.
SECTION 2.10 PROPERTIES; TITLE. (a) Delta does not own, directly
-----------------
or indirectly, any real property.
(b) The only real property leased by Delta is set forth on
Schedule 2.10B. The office lease contained on Schedule 2.10B is a true
- -------------- --------------
and correct copy thereof. Delta is not in default (or alleged default)
under any such office lease, nor, to the knowledge of the
Stockholders, is the landlord in default thereunder, nor does any
condition exist that with notice or the lapse of time or both would
constitute a default (or give rise to a termination right) thereunder.
To the Stockholders' knowledge, such landlord does not intend to
terminate or alter the provisions thereof by reason of the
Contemplated Transactions or otherwise.
(c) Delta has good, valid, marketable, legal and beneficial
title to (or valid leasehold interest in) all of its Assets and is the
lawful owner of its Assets, free and clear of all Liens. The
furniture, equipment and other tangible personal property constituting
part of Delta's Assets (whether owned or leased) are in workable
condition and repair (subject to normal wear and tear). There are no
outstanding options, warrants, commitments, agreements or any other
rights of any character entitling any person other than Purchaser to
acquire any interest in all, or any part of, the Assets. Schedule
--------
2.10D contains a list and description of all (i) equipment, and (ii)
- -----
other tangible personal property of Delta with a book value (before
depreciation) of $2,500 or more.
SECTION 2.11 CONTRACTS. Schedule 2.11 sets forth an accurate and
--------- -------------
complete list of all material written Contracts and an accurate and
complete description of all material oral Contracts relating to the
Purchased Shares, the Business and/or Delta. The Stockholders have
heretofore delivered to Purchaser true, correct and complete copies of
all such written Contracts and summaries of the material provisions of
all such oral Contracts. All such Contracts are valid, in full force
and effect and binding upon Delta and, to the knowledge of the
Stockholders, the other parties thereto in accordance with their
terms. Delta is not in default (or alleged default) under any such
Contract, nor, to the knowledge of the Stockholders, is any other
party thereto in default thereunder, nor does any condition exist that
with notice or the lapse of time or both would constitute a default
(or give rise to a termination right) thereunder. To the Stockholders'
knowledge, none of the other parties to any such Contract intends to
terminate or alter the provisions thereof by reason of the
Contemplated Transactions or otherwise. Since the Latest Balance Sheet
Date, except as set forth on Schedule 2.11, neither the Stockholders
-------------
nor Delta has waived any material right under any such Contract,
materially amended or extended any such Contract or failed to renew
(or received notice of termination or failure to renew with respect
to) any such Contract. Except as set forth on Schedule 2.3, no consent
------------
of any party to the Contracts is required for the execution, delivery
or performance of this Agreement or the consummation of the
Contemplated Transactions. Neither the Stockholders nor Delta has
received written or oral notice of cancellation or termination of any
oral Contract.
SECTION 2.12 INTANGIBLE PROPERTY. Schedule 2.12 sets forth a
------------------- -------------
true, correct and complete list of all trademarks, registered
copyrights, service marks or trade names (and all applications for any
of the foregoing), permits, grants and licenses and all other
intangible assets, properties and rights running to or from, or used
by, Delta in the conduct of the Business, and there are no other
trademarks, copyrights, service marks, trade names or other intangible
assets, properties or rights that are material to the Business (the
"Intellectual Property Rights"). Except as disclosed on Schedule 2.12:
---------------------------- -------------
(a) [intentionally omitted];
(b) the Intellectual Property Rights do not infringe on or
conflict with the rights or intellectual property of third parties,
and neither the Stockholders nor Delta has received any notice
contesting its right to use any such Intellectual Property Rights;
(c) the Intellectual Property Rights have not been and are
not the subject of any pending or threatened litigation or Claim of
infringement;
(d) no license or royalty agreement to which Delta is a
party is in breach or default by any party thereto or the subject of
any notice of termination given or threatened;
(e) Delta has not granted any license or agreed to pay or
receive any royalty in respect of any Intellectual Property Rights;
and
(f) the Contemplated Transactions will not adversely affect
the right, title and interest of Delta in and to the Intellectual
Property Rights.
SECTION 2.13 CLAIMS AND PROCEEDINGS. Except as set forth on
----------------------
Schedule 2.13, there are no outstanding Orders of any Governmental
- -------------
Body against or involving Delta, the Business or the Purchased Shares.
Except as set forth on Schedule 2.13, there are no actions, suits,
-------------
claims or counterclaims or legal, administrative or arbitral
proceedings or investigations (collectively, "Claims") (whether or not
------
the defense thereof or Liabilities in respect thereof are covered by
insurance), pending or, to the Stockholders' knowledge, threatened on
the date hereof, against or involving Delta, the Purchased Shares, the
Assets or the Business. Schedule 2.13 also indicates those Claims the
-------------
defense thereof or Liabilities in respect thereof are covered by
insurance. Except as set forth on Schedule 2.13, on the date hereof
-------------
there are no Claims pending or, to the Stockholders' knowledge,
threatened, other than Claims that, individually or in the aggregate,
could not reasonably be expected to have an adverse effect on the
Condition of the Business. Except as set forth on Schedule 2.13, on
-------------
the date hereof, there is no fact, event or circumstances that would
give rise to any Claim. There exists on the date hereof, and there
will exist as of the Closing, no such fact, event or circumstance
known to the Stockholders that would give rise to any Claim that, if
pending or threatened on the date hereof or on the Closing Date, could
reasonably be expected to have an adverse effect on the Condition of
the Business. All notices required to have been given to any insurance
company listed as insuring against any Claim set forth on Schedule
--------
2.13 have been timely and duly given and, except as set forth on
- ----
Schedule 2.13, no insurance company has asserted that such Claim is
- -------------
not covered by the applicable policy relating to such Claim. There are
no Claims pending or, to the knowledge of the Stockholders, threatened
that would give rise to any right of indemnification on the part of
any director or officer of Delta or the heirs, executors or
administrators of such director or officer.
SECTION 2.14 TAXES. (a) Except as set forth in Schedule 2.14:
----- -------------
(i) Delta has timely filed or, if not yet due will
timely file, all Tax Returns required to be filed by it for all
taxable periods ending on or before the Closing Date and all such Tax
Returns are, or will be when filed, true, correct and complete;
(ii) Delta has paid or, if payment is not yet due, will
pay, to the appropriate Tax Authority or has established, in
accordance with GAAP and consistent with past practice, accruals that
are reflected on the Latest Balance Sheet for the payment of, all
Taxes of Delta for all taxable periods ending on or before the Closing
Date;
(iii) no extension of time has been requested or
granted for Delta to file any Tax Return that has not yet been filed
or to pay any Tax that has not yet been paid;
(iv) Delta has not received notice of a determination
by a Tax Authority that Taxes are owed by Delta (such determination to
be referred to as a "Tax Deficiency") and, to the knowledge of the
--------------
Stockholders, no Tax Deficiency is proposed or threatened;
(v) all Tax Deficiencies have been paid or finally
settled and all amounts determined by settlement to be owed have been
paid;
(vi) there are no Tax Liens on or pending against Delta
or any of its properties;
(vii) there are no presently outstanding waivers or
extensions or requests for waiver or extension of the time within
which a Tax Deficiency may be asserted or assessed;
(viii) no issue has been raised in any examination,
investigation, audit, suit, action, claim or proceeding relating to
Taxes (a "Tax Audit") which, by application of similar principles to
---------
any past, present or future period, would result in a Tax Deficiency
for such period;
(ix) there are no pending or, to the knowledge of the
Stockholders, threatened Tax Audits of Delta;
(x) [intentionally omitted];
(xi) there are no requests for rulings in respect of
any Tax pending between Delta and any Tax Authority; and
(xii) Delta has complied with all applicable laws,
rules and regulations relating to the withholding and payment of Taxes
and has timely withheld and paid to the proper governmental
authorities all amounts required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent
contractor, creditor or stockholder.
(b) Purchaser, at its expense, shall prepare or cause to be
prepared and file or cause to be filed all Tax Returns for Delta for
all periods ending on or prior to the Closing Date which are filed
after the Closing Date.
(c) Schedule 2.14 contains (i) a schedule of the filing
-------------
dates of all Tax Returns required to be filed by Delta, (ii) a
description of all past Tax Audits involving Delta, (iii) a list of
all elections made by Delta relating to Taxes, and (iv) a list of the
states, territories and jurisdictions (whether foreign or domestic) to
which any Tax is properly payable by Delta. Except as set forth in
Schedule 2.14, Delta has retained all supporting and backup papers,
- -------------
receipts, spreadsheets and other information necessary for (i) the
preparation of all Tax Returns that have not yet been filed, and (ii)
the defense of all Tax Audits involving taxable periods either ending
on or during the six (6) years prior to the Closing Date or from which
there are unutilized net operating loss, capital loss or investment
tax credit carryovers.
(d) Delta has collected and remitted to the appropriate Tax
Authority all sales and use or similar Taxes required to have been
collected on or prior to the Closing Date, including any interest and
any penalty, addition to tax or additional amount unpaid, and have
been furnished properly completed exemption certificates for all
exempt transactions. Delta has collected and/or remitted to the
appropriate Tax Authority all withholding, payroll, employment,
property, customs duty, fee, assessment or charge of any kind
whatsoever (including but not limited to Taxes assessed to real
property and water and sewer rents relating thereto), including any
interest and any penalty, addition to tax or additional amount unpaid.
SECTION 2.15 EMPLOYEE BENEFIT PLANS. (a) Set forth on Schedule
---------------------- --------
2.15 is a list of each employee benefit plan (within the meaning of
- ----
Section 3(3) of ERISA), written or oral employment or consulting
agreement, severance pay plan or agreement, employee relations policy
(or practice, agreement or arrangement), agreements with respect to
leased or temporary employees, vacation plan or arrangement, sick pay
plan, stock purchase plan, stock option plan, fringe benefit plan,
incentive plan, bonus plan, cafeteria or flexible spending account
plan and any deferred compensation agreement (or plan, program, or
arrangement) covering any present or former employee of Delta and
which is, or at any time was, sponsored or maintained by (or to which
contributions are, were, or at any time were required to have been,
made by) either (i) Delta, or (ii) any other organization which is a
member of a controlled group of organizations (within the meaning of
Code Sections 414(b), (c), (m) or (o) of which Delta is a member.
(b) (i) Delta is not subject to any legal, contractual,
equitable or other obligation to (1) establish as of any date any
employee benefit plan of any nature, including, without limitation,
any pension, profit sharing, welfare, post-retirement welfare, stock
option, stock or cash award, non-qualified deferred compensation or
executive compensation plan, policy or practice, or (2) continue any
employee benefit plan of any nature, including, without limitation,
any pension, profit sharing, welfare or post-retirement welfare plan,
or any stock option, stock or cash award, non-qualified deferred
compensation or executive compensation plan, policy or practice (or to
continue their participation in any such benefit plan, policy or
practice) on or after the date hereof;
(ii) Delta may, in any manner, and without the consent
of any employee, beneficiary or other person, terminate, modify or
amend any employee benefit plan or any other plan, program or practice
(or its participation in such employee benefit plan or any other plan,
program or practice) effective as of any date on or after the date
hereof; and
(iii) no representations or communications (directly or
indirectly, orally, in writing or otherwise) with respect to
participation, eligibility for benefits, vesting, benefit accrual
coverage or other material terms of any employee benefit plan have
been made prior to the Closing Date to any employee, beneficiary or
other person other than those which are in accordance with the terms
and provisions of each such plan as in effect immediately prior to the
Closing Date.
SECTION 2.16 EMPLOYEE-RELATED MATTERS. (a) Schedule 2.16 contains
------------------------ -------------
a true and correct list of all directors, officers, full-time
employees, consultants and independent sales representatives of Delta,
including any agreement relating thereto, and a description of the
rate and nature of all compensation payable by Delta to each such
person. Schedule 2.16 also contains a description of all existing
-------------
severance, accrued vacation obligations or retiree benefits of any
current or former director, officer, employee or consultant (to the
extent not included on Schedule 2.15). Except as set forth on such
-------------
Schedule 2.16, the employment or consulting arrangement of all such
- -------------
persons is terminable at will.
(b) Except as set forth on Schedule 2.16, (i) Delta is not a
-------------
party to any Contract with any labor organization or other
representative of its employees; (ii) there is no unfair labor
practice charge or complaint pending or, to the knowledge of
Stockholders, threatened against Delta; (iii) Delta has not
experienced any labor strike, slowdown, work stoppage or similar labor
controversy within the past three years; (iv) no representation
question has been raised respecting any of Delta's employees working
within the past three years, nor, to the knowledge of Stockholders,
are there any campaigns being conducted to solicit authorization from
Delta's employees to be represented by any labor organization; (v) no
Claim before any Governmental Body brought by or on behalf of any
employee, prospective employee, former employee, retiree, labor
organization or other representative of Delta's employees, is pending
or, to the knowledge of Stockholders, threatened against Delta; (vi)
Delta is not a party to, or otherwise bound by, any Order relating to
its employees or employment practices; and (vii) except with respect
to ongoing disputes of a routine nature involving immaterial amounts,
Delta has paid in full to all of their employees all wages, salaries,
commissions, bonuses, benefits and other compensation due and payable
to such employees.
SECTION 2.17 INSURANCE. Schedule 2.17 sets forth a list of all
--------- -------------
insurance policies, fidelity and surety bonds and fiduciary liability
policies (the "Insurance Policies") covering Delta's Assets, the
------------------
Business, operations, employees, officers and directors of Delta
(including Insurance Policies in effect since Delta's inception) and
true and complete copies of all such Insurance Policies have been
delivered to Purchaser. Schedule 2.17 also sets forth (a) with respect
-------------
to each Insurance Policy, the applicable deductible amounts and any
limitations to coverage, (b) any letter of credit relating to any such
Insurance Policy and all inspections and reports delivered to Delta by
any insurer with respect to such Insurance Policies, copies of which
have been delivered to Purchaser, and (c) a true and complete list of
Claims made in respect of Insurance Policies. There is no Claim by
Delta pending under any of such Insurance Policies as to which
coverage has been questioned, denied or disputed by the underwriters
of such Insurance Policies or requirement by any insurer to perform
work which has not been satisfied. All premiums due under all
Insurance Policies have been paid and Delta is otherwise in compliance
with the terms and conditions of all such Insurance Policies. All
Insurance Policies are in full force and effect. The Stockholders do
not know of any threatened termination of, premium increase with
respect to, or uncompleted requirements under, any Insurance Policy.
No premiums are or will be payable by Purchaser under Insurance
Policies after the Closing in respect of insurance provided for
periods prior to the Closing Date.
SECTION 2.18 COMPLIANCE WITH LAWS. Delta is not in violation in
--------------------
any material respect of any order, judgment, injunction, award,
citation, decree, consent decree or writ (collectively, "Orders"), or
------
any law, statute, code, ordinance, rule, regulation or other
requirement (collectively, "Laws"), of any government or political
----
subdivision thereof, whether federal, state, local or foreign, or any
agency or instrumentality of any such government or political
subdivision, or any court or arbitrator (collectively, "Governmental
------------
Bodies") affecting its Assets or the Business.
- ------
SECTION 2.19 PERMITS. Delta has obtained all licenses, permits,
-------
certificates, certificates of occupancy, orders, authorizations and
approvals of (collectively, "Permits") and all Environmental Permits,
-------
and have made all required registrations and filings with, any
Governmental Body that are required for the conduct of the Business.
All Permits and Environmental Permits that are required for the
conduct of the Business are listed on Schedule 2.19 and are in full
-------------
force and effect; no violations are or have been recorded in respect
of any Permit; and no proceeding is pending or, to the Stockholders'
knowledge, threatened to revoke or limit any Permit. No Permit will
terminate by reason of the Contemplated Transactions.
SECTION 2.20 ENVIRONMENTAL MATTERS. (a) Except as set forth in
---------------------
Schedule 2.20, there has been no manufacture, refining, storage,
- -------------
transport, disposal or treatment of Hazardous Substances by Delta (or
any predecessor in interest), or any Release at, on or under any Real
Property by Delta, or by any other person, in violation of any
Environmental Law or which would require remedial action under any
Environmental Law; none of the soil, ground water or surface water of
such Real Property is or has been contaminated by any Release. Except
as set forth on Schedule 2.20, Delta's operations have been and are in
-------------
compliance with all applicable Environmental Laws and Environmental
Permits.
(b) Neither the Stockholders nor Delta has received any
written, or any other type of (i) notice of any violation or liability
with respect to any Environmental Law, or (ii) notice of any actual,
pending or threatened Claim or Regulatory Action involving such party
or any present or former owner, lessee or operator of the Real
Property.
(c) Except as set forth in Schedule 2.20 (i) there are no
-------------
incinerators, septic tanks, underground tanks or cesspools located or
which have been located, on, at or under the Real Property, (ii) all
sewage from the Real Property is discharged into a public sanitary
sewer system, and (iii) there has been no Release by Delta or by any
other person into the atmosphere, any adjoining or adjacent body of
water or adjoining or adjacent property.
(d) The Stockholders have provided Purchaser with true and
complete copies of all documents, records and information in the
Stockholders' or Delta's possession or control or available to them
concerning environmental matters relevant to the Business and the Real
Property or any facilities or operations thereon, whether generated by
the Stockholders, Delta or others, including, without limitation,
environmental audits, environmental risk assessments or site
assessments of the Real Property and/or any adjacent property or other
property in the vicinity of each site owned or operated by Delta or
others, documentation regarding off-site disposal of Hazardous
Substances, spill control plans and environmental agency reports and
correspondence.
SECTION 2.21 CUSTOMERS AND SUPPLIERS. Schedule 2.21 lists, by
----------------------- -------------
dollar volume paid for the eleven months ended November 30, 1997 and
the six months ended June 30, 1997, the fifteen largest customers of
Delta (collectively, the "Major Customers"). Except as set forth in
---------------
Schedule 2.21, the relationships of Delta with such customers are
- -------------
reasonable commercial working relationships and (i) all amounts owing
from such customers, if not in dispute, have been paid in accordance
with their respective terms, (ii) none of such customers within the
last twelve months has threatened in writing to cancel, or otherwise
terminate, the relationship of such person with Delta, and (iii) none
of such customers during the last twelve months has decreased
materially, or threatened to decrease or limit materially, its
relationship with Delta or, to the Stockholders' knowledge, intends to
decrease or limit materially its purchases from Delta.
SECTION 2.22 POTENTIAL CONFLICTS OF INTEREST. Except as set forth
------------------------------
in Schedule 2.22, no officer, director or Affiliate of Delta, no
-------------
spouse of any such officer, director or Affiliate, nor, to the
knowledge of the Stockholders, no entity controlled by one or more of
the foregoing:
(a) owns, directly or indirectly, any interest in (excepting
less than 1% stock holdings for investment purposes in securities of
publicly held and traded companies), or is an officer, director,
employee or consultant of, any person that carries on business in
competition with Delta;
(b) owns, directly or indirectly, in whole or in part, any
material Asset that Delta uses in the conduct of its business; or
(c) has any material Claim whatsoever against, or owes any
amount to, Delta, except for claims in the ordinary course of business
such as for accrued vacation pay and accrued benefits under employee
benefit plans.
SECTION 2.23 FINDERS' FEES. There is no investment banker,
-------------
broker, finder or other intermediary which has been retained by or is
authorized to act on behalf of the Stockholders or Delta who might be
entitled to any fee or commission from the Stockholders or Delta upon
consummation of the Contemplated Transactions.
SECTION 2.24 DEPOSITARIES; POWERS OF ATTORNEY, ETC. Schedule 2.24
------------------------------------- -------------
sets forth (i) the name of each bank or similar entity in which Delta
has an account, lock box or safe deposit box and the names of all
persons authorized to draw thereon or to have access thereto, and (ii)
the name of each person holding a general or special power of attorney
from Delta and a description of the terms thereof.
SECTION 2.25 DISCLOSURE. Neither this Agreement, the Schedules
----------
hereto, nor any unaudited financial statements, documents or
certificates furnished or to be furnished to Purchaser or any of its
Representatives or Affiliates by or on behalf of the Stockholders or
Delta pursuant to this Agreement or in connection with the
Contemplated Transactions contains or will contain any untrue
statement of a material fact or omits or will omit to state a material
fact necessary in order to make the statements contained herein or
therein not misleading. All representations and warranties made by the
Stockholders will be deemed to have been relied on by Purchaser
(notwithstanding any investigation by Purchaser).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Stockholders, as
of the date of this Agreement and as of the Closing Date (as if each
such representation and warranty was remade on the Closing Date),
as follows:
SECTION 3.1 CORPORATE EXISTENCE AND POWER. Purchaser is a
-----------------------------
corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite
authority and power to own, lease and operate its properties and to
conduct its business as currently conducted. Purchaser is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property
owned or leased by it or the nature of its activities makes such
qualification necessary.
SECTION 3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Purchaser has
------------------------------------
full power and authority to execute and deliver this Agreement and
each other Transaction Document to which it is a party and to
consummate the Contemplated Transactions. The execution, delivery and
performance by Purchaser of this Agreement and the other Transaction
Documents to which it is a party and the consummation by it of the
Contemplated Transactions have been duly and validly authorized and
approved by Purchaser's board of directors, and no other corporate
proceedings on the part of Purchaser are necessary to authorize the
execution and delivery by Purchaser of this Agreement or the other
Transaction Documents to which Purchaser is a party or the
consummation of the Contemplated Transactions. This Agreement has been
duly and validly executed and delivered by Purchaser and constitutes,
and the other Transaction Documents to which Purchaser is a party when
executed and delivered by Purchaser will constitute (in each case
assuming the valid execution and delivery thereof by the other parties
thereto), the legal, valid and binding agreement of Purchaser,
enforceable against Purchaser in accordance with their respective
terms, except as such obligations and their enforceability may be
limited by applicable bankruptcy and other similar laws affecting the
enforcement of creditors' rights generally and except that the
availability of equitable remedies is subject to the discretion of the
court before which any proceeding therefor may be brought (whether at
law or in equity).
SECTION 3.3 NO CONFLICTS; CONSENTS. Neither the execution,
----------------------
delivery and performance by Purchaser of this Agreement and each other
Transaction Document to which it is a party nor the consummation of
the Contemplated Transactions (i) violates any provision of the
Certificate of Incorporation or By-laws of Purchaser; (ii) requires
Purchaser to obtain any consent, approval or action of or waiver from,
or make any filing with, or give any notice to, any Governmental Body
or any other person; (iii) violates, conflicts with or results in the
breach or default under (after the giving of notice or the passage of
time), or permits the termination of, any material Contract to which
Purchaser is a party or by which it or its assets may be bound or
subject; or (iv) violates any Law or Order of any Governmental Body
against, or binding upon, Purchaser or upon its assets or business.
SECTION 3.4 FINDERS' FEES. There is no investment banker, broker,
-------------
finder or other intermediary which has been retained by or is
authorized to act on behalf of Purchaser who might be entitled to any
fee or commission from Purchaser upon consummation of the Contemplated
Transactions.
ARTICLE IV
COVENANTS AND AGREEMENTS PRIOR TO
AND SUBSEQUENT TO CLOSING
SECTION 4.1 CONDUCT OF BUSINESS OF DELTA. (a) From the date
----------------------------
hereof through the Closing Date, the Stockholders agree to cause
Delta:
(i) To operate the Business in a reasonable and prudent
manner, to conduct its operations according to the ordinary and usual
course of the Business consistent with past practice, to preserve
intact its present business organization and structure, to keep
available the services of its present officers, agents and full-time
employees, to use reasonable efforts to preserve and maintain its
Assets and the goodwill of the Business and to use reasonable efforts
to preserve its relationships with customers, suppliers, independent
contractors, employees and other persons having business dealings with
it or material to the operation of the Business;
(ii) To maintain in the ordinary course of the
Business, consistent with past practice and in accordance with all
Contracts, the Real Property, all its material structures, equipment
and other tangible property in their present repair, order and
condition, subject to ordinary wear and tear;
(iii) To maintain the books and records relating to the
Business in the usual and ordinary manner and in a manner that fairly
and correctly reflects the income, expenses, Assets and Liabilities of
Delta consistent with GAAP, and to record and effect sales in the
usual and ordinary manner consistent with past practices;
(iv) Not to incur any Liability (other than Liabilities
incurred in the ordinary course of the Business, consistent with past
practice, which are not in the aggregate material thereto) or any
Company Debt (other than Company Debt incurred in the ordinary course
of the Business, consistent with past practices);
(v) Not to undertake (nor permit to be undertaken) any
of the actions specified in Section 2.9;
(vi) Not to pay, discharge or satisfy any material
Claim or Liability, other than the payment, discharge or satisfaction
in the ordinary course of the Business of Claims or Liabilities
incurred in the ordinary course of Business, consistent with past
practice;
(vii) Not to sell, transfer, convey, assign or
otherwise dispose of any of Assets, except in the ordinary course of
Business, or create, incur or assume any Lien on any Assets;
(viii) Not to waive, release or cancel any material
claims against third parties or debts owing to Delta or any material
rights which have any value or make any Tax election or settle or
compromise any federal, state, local or foreign income Tax liability,
or waive or extend the statute of limitations in respect of any such
Taxes;
(ix) Not to authorize for issuance, issue, sell,
deliver or agree or commit to issue, sell or deliver (whether through
the issuance or granting of options, warrants, convertible or
exchangeable securities, commitments, subscriptions, rights to
purchase or otherwise) any capital stock or other interests in Delta,
or amend any of the terms of any such securities; or
(x) Not to terminate, modify, amend or otherwise alter
or change any of the terms or provisions of any material Contract or
breach the terms of any material Contract or pay any amount not
required by Law or by any material Contract.
(b) From the date hereof through the Closing Date, the
Stockholders agree to use reasonable efforts to cause the affairs of
Delta to be conducted in such a manner so that the representations and
warranties of the Stockholders contained herein shall continue to be
true and correct on and as of the Closing Date as if made on and as of
the Closing Date.
(c) From the date hereof through the Closing Date, the
Stockholders shall cause Delta to consult with Purchaser prior to any
renewal, amendment, extension or termination of, waiver of any
material right under, or any failure to renew, any material Contract
and will not take any such action if Purchaser objects thereto in
writing.
(d) From the date hereof through the Closing Date, the
Stockholders shall cause Delta to continue to carry all existing
insurance applicable to the Business and shall not allow any breach,
default, termination or cancellation of such Insurance Policies or
agreements to occur or exist.
SECTION 4.2 CORPORATE EXAMINATIONS AND INVESTIGATIONS. Prior to
-----------------------------------------
the Closing Date, the Stockholders agree that Purchaser shall be
entitled, through its directors, officers, Affiliates, employees,
attorneys, accountants, representatives, lenders, consultants and
other agents (collectively, "Representatives"), to make such
---------------
investigation of the Assets, the Business and operations of Delta, and
such examination of the books, records and financial condition of
Delta, as Purchaser reasonably deems necessary. Any such investigation
and examination shall be conducted at reasonable times, under
reasonable circumstances and upon reasonable notice, and the
Stockholders shall, and shall cause Delta to, cooperate fully therein.
In that connection, the Stockholders shall make available and shall
cause Delta to make available to the Representatives of Purchaser
during such period, without however causing any unreasonable
interruption in the operations of the Business, all such information
and copies of such documents and records concerning the affairs of
Delta as such Representatives may reasonably request, shall permit the
Representatives of Purchaser access to the Assets of Delta and all
parts thereof and to its employees, customers, suppliers and others,
and shall cause Delta's Representatives to cooperate fully in
connection with such review and examination. No investigation by
Purchaser shall diminish or obviate any of the representations,
warranties, covenants or agreements of the Stockholders contained in
this Agreement.
SECTION 4.3 [INTENTIONALLY OMITTED].
SECTION 4.4 ADDITIONAL FINANCIAL STATEMENTS. Prior to the Closing
-------------------------------
Date, as soon as available and in any event within fifteen (15)
calendar days after the end of each monthly accounting period of Delta
ending after the date of the most recent Interim Statement, the
Stockholders shall furnish Purchaser with an unaudited consolidated
financial statement of Delta for such month in form and substance
comparable to the Interim Statements and with such other financial or
other information routinely prepared by Delta.
SECTION 4.5 CONSENTS, FILINGS AND AUTHORIZATIONS; EFFORTS TO
------------------------------------------------
CONSUMMATE. The Stockholders and Purchaser, as promptly as
- ----------
practicable, shall make, or cause to be made, all filings and
submissions under such Laws as are applicable to them or to their
respective Affiliates, as may be required for them to consummate the
Contemplated Transactions in accordance with the terms of this
Agreement and shall furnish copies thereof to each other party prior
to such filing and shall not make any such filing or submission to
which the Stockholders or Purchaser, as the case may be, reasonably
objects in writing. All such filings shall comply in form and content
in all material respects with applicable Law. Subject to the terms and
conditions herein, each party hereto, without payment or further
consideration, shall use its good faith efforts to take or cause to be
taken all action and to do or cause to be done all things necessary,
proper or advisable under applicable Laws, Permits and Orders, to
consummate and make effective, as soon as reasonably practicable, the
Contemplated Transactions, including, but not limited to, the
obtaining of all Company Required Consents and Permits or consents of
any third party, whether private or governmental, required in
connection with such party's performance of such transactions and each
party hereto shall cooperate with the other in all of the foregoing.
SECTION 4.6 [INTENTIONALLY OMITTED].
SECTION 4.7 NOTICES OF CERTAIN EVENTS. Prior to the Closing Date,
-------------------------
the Stockholders and Purchaser shall promptly notify the other of:
(a) any notice or other communication from any person
alleging that the consent of such person is or may be required in
connection with the Contemplated Transactions;
(b) any notice or other communication from any Governmental
Body in connection with the Contemplated Transactions;
(c) any event, condition or circumstance occurring from the
date hereof through the Closing Date that would constitute a violation
or breach of any representation or warranty, whether made as of the
date hereof or as of the Closing Date, or that would constitute a
violation or breach of any covenant of any party contained in this
Agreement; and
(d) any notice or other communication from a Governmental
Body relating to Taxes of Delta.
SECTION 4.8 PUBLIC ANNOUNCEMENTS. Prior to and after the Closing
--------------------
Date, the Stockholders and Purchaser will consult with each other
before issuing any press release or otherwise making any public
statement with respect to the Contemplated Transactions, and will not
issue any such press release or make any such public statement without
the prior approval of the Stockholders or Purchaser, as the case may
be, except as may be required by applicable Law in which event the
other party shall have the right to review and comment upon (but not
approve) any such press release or public statement prior to its
issuance.
SECTION 4.9 CONFIDENTIALITY. (a) Purchaser shall hold in strict
---------------
confidence, and shall use its best efforts to cause all its
Representatives to hold in strict confidence, unless compelled to
disclose by judicial or administrative process, or by other
requirements of Law, all information concerning the Stockholders and
Delta which it has obtained from the Stockholders or its
Representatives prior to, on or after the date hereof in connection
with the Contemplated Transactions, and Purchaser shall not use or
disclose to others, or permit the use of or disclosure of, any such
information so obtained, and will not release or disclose such
information to any other person, except its Representatives who need
to know such information in connection with this Agreement (and who
shall be advised of the provisions of this Section 4.9). The foregoing
provision shall not apply to any such information to the extent (i)
known by Purchaser prior to the date such information was provided to
Purchaser by the Stockholders in connection with the Contemplated
Transactions, (ii) made known to Purchaser from a third party not in
breach of any confidentiality requirement, or (iii) made public
through no fault of Purchaser or any of its Representatives.
(b) If this Agreement is terminated as provided herein and
the Contemplated Transactions are not consummated and if requested by
the Stockholders, Purchaser shall return to the Stockholders all
tangible evidence of such information regarding the Stockholders and
Delta.
SECTION 4.10 EXPENSES. Except as otherwise specifically provided
--------
in this Agreement, the parties hereto shall bear their respective
costs and expenses incurred in connection with the preparation,
negotiation, execution and performance of this Agreement and the
Contemplated Transactions, including, without limitation, all fees,
costs and expenses of their respective Representatives.
Notwithstanding the generality of the foregoing sentence, Purchaser
agrees to pay, on the Closing Date, the first $15,000 of such expenses
incurred by the Stockholders.
SECTION 4.11 SUPPLEMENTS TO DISCLOSURE SCHEDULES. It is
-----------------------------------
understood and agreed that, from time to time prior to the Closing,
the Company and the Stockholders may amend or supplement the Schedules
attached to this Agreement with respect to any matter that is required
to be set forth or described in such a Schedule or that is necessary
to complete or correct any information in any representation or
warranty of the Company and/or the Stockholders contained in this
Agreement; provided, that, the disclosure provided in any such
amended, supplemented or revised Schedule shall in no way affect or be
deemed to limit Purchaser's ability to terminate this Agreement and
the Contemplated Transactions prior to the Closing as provided in
Article VI hereof.
SECTION 4.12 CLAIMS UNDER INSURANCE POLICIES. After the Closing
-------------------------------
Date, the Stockholders shall, and shall cause its Affiliates to,
cooperate with Purchaser in respect of Claims made after the Closing
Date under occurrence-based Insurance Policies based upon events
occurring prior to the Closing Date. The Stockholders agree not to,
and shall not permit its Affiliates to, limit, modify or otherwise
compromise Purchaser's ability to make claims under any such Insurance
Policies.
SECTION 4.13 FURTHER ASSURANCES. The Stockholders hereby agree,
------------------
without further consideration, to execute and deliver following the
Closing such other instruments of transfer and take such other action
as Purchaser may reasonably request in order to put Purchaser in
possession of, and to vest in Purchaser, good, valid, and unencumbered
title to the Purchased Shares in accordance with this Agreement and to
consummate the Contemplated Transactions. Purchaser hereby agrees,
without further consideration, to take such other action following the
Closing and execute and deliver such other documents as the
Stockholders may reasonably request in order to consummate the
Contemplated Transactions in accordance with this Agreement.
ARTICLE V
CONDITIONS TO CLOSING
SECTION 5.1 CONDITIONS TO THE OBLIGATIONS OF THE STOCKHOLDERS AND
-----------------------------------------------------
PURCHASER. The obligations of Purchaser and the Stockholders to
- ---------
consummate the Contemplated Transactions are subject to the
satisfaction of the following conditions on or prior to the Closing
Date:
(a) No Injunction. No provision of any applicable Law and no
-------------
Order shall prohibit the consummation of the Contemplated
Transactions.
(b) No Proceeding or Litigation. No Claim instituted by any
---------------------------
person shall have been commenced or pending against the Stockholders,
Delta, Purchaser or any of their respective Affiliates, officers or
directors which Claim seeks to restrain, prevent, change or delay in
any material respect the Contemplated Transactions or seeks to
challenge any of the material terms or provisions of this Agreement or
seeks material damages in connection with any of such transactions.
SECTION 5.2 CONDITIONS TO THE OBLIGATIONS OF THE STOCKHOLDERS.
-------------------------------------------------
All obligations of the Stockholders to consummate the Contemplated
Transactions hereunder are subject to the fulfillment (or waiver by
the Stockholders) on or prior to the Closing of each of the following
further conditions:
(a) Performance. Purchaser shall have performed and complied
-----------
with all agreements, obligations and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Closing Date.
(b) Representations and Warranties. The representations and
------------------------------
warranties of Purchaser contained in this Agreement and in any
certificate or other writing delivered by Purchaser pursuant hereto
shall be true in all material respects at and as of the Closing Date
as if made at and as of such time.
(c) Purchase Price. The Purchase Price shall have been paid
--------------
by Purchaser in accordance with Section 1.1 on the Closing Date.
(d) Documentation. There shall have been delivered to the
-------------
Stockholders the following:
(i) A certificate, dated the Closing Date, of the
Chairman of the Board, the President or any Vice President of
Purchaser confirming the matters set forth in Section 5.2(a) and (b)
hereof.
(ii) A certificate, dated the Closing Date, of the
Secretary or Assistant Secretary of Purchaser certifying, among other
things, that attached or appended to such certificate (A) is a true
and correct copy of its Certificate of Incorporation and all
amendments if any thereto as of the date thereof; (B) is a true and
correct copy of its By-laws as of the date hereof; (C) is a true copy
of all corporate actions taken by it, including resolutions of its
board of directors authorizing the execution, delivery and performance
of this Agreement and each other Transaction Document to be delivered
by Purchaser pursuant hereto; and (D) are the names and signatures of
its duly elected or appointed officers who are authorized to execute
and deliver this Agreement, the Transaction Documents to which
Purchaser is a party and any certificate, document or other instrument
in connection herewith.
(e) Indebtedness of Delta. Purchaser shall either pay in
---------------------
full or assume all outstanding indebtedness of Delta under (i) loan
agreements with The Dime Savings Bank (the "Bank"), and (ii) certain
----
promissory notes of Delta due to the Stockholders and their
affiliates, a correct list of which indicating the payee and the
principal amount due is contained in Schedule 5.2(e).
---------------
SECTION 5.3 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. All
------------------------------------------
obligations of Purchaser to consummate the Contemplated Transactions
hereunder are subject to the fulfillment (or waiver by Purchaser) on
or prior to the Closing of each of the following further conditions:
(a) Performance. The Stockholders shall have performed and
-----------
complied with all agreements, obligations and covenants required by
this Agreement to be performed or complied with by it on or prior to
the Closing Date. Delta shall be in actual compliance with the
provisions of Section 4.1.
(b) Representations and Warranties. The representations and
------------------------------
warranties of the Stockholders contained in this Agreement and in any
certificate or other writing delivered by the Stockholders pursuant
hereto shall be true in all material respects at and as of the Closing
Date as if made at and as of such time.
(c) No Adverse Change. During the period from the Balance
-----------------
Sheet Date to the Closing Date, there shall not have been (i) any
material adverse change in the Condition of the Business; (ii) any
damage, destruction, casualty, determination or other event to or
affecting the Assets of Delta which has a material adverse effect on
the Assets or the Business; or (iii) any Claims or Liens filed or
threatened, against or affecting Delta or the Assets which, if
adversely determined, is reasonably likely to have a material adverse
effect on the Condition of the Business.
(d) Company Required Consents. All Company Required Consents
-------------------------
shall have been obtained.
(e) Bank Indebtedness. The Bank shall have delivered to
-----------------
Delta pay-off letters evidencing the repayment in full of all of
Delta's obligations to the Bank. In addition, Purchaser shall have
been provided evidence satisfactory to it of the filing of UCC-3
termination statements releasing all Liens in favor of the Bank.
(f) Documentation. There shall have been delivered to
-------------
Purchaser the following:
(i) A certificate, dated the Closing Date, of the
Stockholders confirming the matters set forth in Sections 5.3(a) and
(b).
(ii) A certificate, dated the Closing Date, of a duly
authorized executive officer of the Stockholders certifying, among
other things, that attached or appended to such certificate (A) is a
true and correct copy of the Certificate of Incorporation and By-laws
(or comparable instruments) of Delta, and all amendments if any
thereto as of the date thereof; (B) are the names of the directors and
officers of Delta; (C) is a true copy of all corporate actions taken
by the Board of Directors and the shareholders of Delta (which actions
shall have been taken prior to the date of entering into this
Agreement) to authorize the Contemplated Transactions; and (D) are the
names and signatures of the duly elected or appointed officers of
Delta who are authorized to execute and deliver this Agreement, the
Transaction Documents to which is a party and any certificate,
document or other instrument in connection herewith;
(iii) True, correct and complete copies of all the
Company Required Consents and Permits.
(iv) The stock certificates representing the Purchased
Shares.
(v) The resignations, dated on or before the Closing
Date, of each director and officer of Delta and such trustees of
Benefit Plans as may have been requested by Purchaser.
(vi) A certificate, dated the Closing Date, executed by
an executive officer of the Stockholders to the effect that as of the
Closing Date, (A) the Major Customers remain as customers, (B) there
has been no substantial reduction in the level of any Major Customer's
purchases of Delta's services, and (C) the Stockholders have no
knowledge or any indications that any Major Customer intends to
substantially reduce its purchases of Delta's services.
(vii) Possession and control of the Assets of Delta
(including all corporate books, bank accounts, records and documents).
(viii) A signed opinion of the Stockholders' counsel,
dated the Closing Date, addressed to Purchaser, substantially in the
form of opinion annexed as Exhibit B hereto.
(ix) An executed Employment Agreement between each of
the Stockholders and the Company.
(x) A termination of the stockholders' agreement
between the Stockholders and the Company.
ARTICLE VI
TERMINATION
SECTION 6.1 TERMINATION. This Agreement may be terminated and the
-----------
Contemplated Transactions may be abandoned at any time prior to the
Closing:
(a) [Intentionally Omitted].
(b) By mutual written consent of the parties hereto, and
after March 31, 1998, by an party hereto, if Closing has not occurred
by that date and if failure to close is not the result of a breach of
this Agreement or a willful failure to complete closing conditions by
such party.
(c) [Intentionally Omitted].
(d) By the Stockholders if (i) there has been a material
misrepresentation or breach of warranty on the part of Purchaser in
the representations and warranties contained herein and such material
misrepresentation or breach of warranty, if curable, is not cured
within thirty (30) days after written notice thereof from the
Stockholders, (ii) Purchaser has committed a material breach of any
covenant imposed upon it hereunder and fails to cure such breach
within thirty (30) days after written notice thereof from the
Stockholders, or (iii) any condition to the Stockholders' obligations
hereunder becomes incapable of fulfillment through no fault of the
Stockholders and is not waived by the Stockholders.
(e) By Purchaser if (i) there has been a material
misrepresentation or breach of warranty on the part of the
Stockholders in the representations and warranties contained herein
and such material misrepresentation or breach of warranty, if curable,
is not cured within thirty (30) days after written notice thereof from
Purchaser, (ii) the Stockholders have committed a material breach of
any covenant imposed upon it hereunder and fail to cure such breach
within thirty (30) days after written notice thereof from Purchaser,
or (iii) any condition to Purchaser's obligations hereunder becomes
incapable of fulfillment through no fault of Purchaser and is not
waived by Purchaser.
(f) By Purchaser or by the Stockholders if there shall be any
Law that makes consummation of the Contemplated Transactions illegal
or otherwise prohibited or that materially adversely affects the
Business, or if any Order enjoining Purchaser, the Stockholders or
Delta from consummating the Contemplated Transactions is entered and
such Order shall have become final and nonappealable.
SECTION 6.2 EFFECT OF TERMINATION; RIGHT TO PROCEED. In the event
---------------------------------------
that this Agreement shall be terminated pursuant to Section (b) or
(f), all further obligations of the parties under the Agreement shall
terminate without further liability of any party hereunder (except
with respect to Section 4.6, 4.8, 4.9 and 4.10 as provided below). The
agreements contained in Sections 4.6, 4.8, 4.9 and 4.10 shall survive
the termination hereof. In the event that a condition precedent to its
obligation is not met, nothing contained herein shall be deemed to
require any party to terminate this Agreement, rather than to waive
such condition precedent and proceed with the Contemplated
Transactions.
ARTICLE VII
INDEMNIFICATION
SECTION 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a)
------------------------------------------
Notwithstanding (i) any right of Purchaser fully to investigate the
affairs of Delta, and (ii) any knowledge of facts determined or
determinable by Purchaser to such investigation or right of
investigation, Purchaser has the right to rely fully upon the
representations, warranties, covenants and agreements of the
Stockholders contained in this Agreement, or listed or disclosed on
any Schedule hereto or in any instrument delivered in connection with
or pursuant to any of the foregoing. All of such representations,
warranties, covenants and agreements made by the Stockholders shall
survive the execution and delivery of this Agreement and the Closing
hereunder for the period of three (3) years.
(b) All representations and warranties, covenants and
agreements of Purchaser shall survive the execution and delivery of
this Agreement and the Closing hereunder for the period of three (3)
years.
SECTION 7.2 OBLIGATION OF THE STOCKHOLDERS. Subject to the
------------------------------
limitations set forth in Section 7.5, the Stockholders, jointly and
severally, hereby agree to indemnify, defend and hold harmless
Purchaser (and its directors, officers, employees, Affiliates,
successors and assigns) from and against all Claims, losses,
liabilities, damages, deficiencies, judgments, settlements, costs of
investigation or other expenses (including interest, penalties and
reasonable attorneys' fees and disbursements and expenses incurred in
enforcing this indemnification or in any litigation between the
parties or with third parties) (collectively, the "Losses") suffered
------
or incurred by Purchaser or any of the foregoing persons arising out
of (a) any breach of the representations, warranties, covenants and
agreements of the Stockholders contained in this Agreement or in the
Schedules or any Transaction Document, or (b) any Claim, including but
not limited to, any Claim arising out of or relating to Environmental
Laws, whether made before or after the date of this Agreement, or any
litigation, proceeding or governmental investigation, including but
not limited to, any Claim arising out of or relating to Environmental
Laws, whether commenced before or after the date of this Agreement,
arising out of the Business, or otherwise relating to the Stockholders
or Delta, prior to the Closing, or otherwise arising out of any act or
occurrence prior to, or any state or facts existing as of, the Closing
(regardless of whether or not referred to on a Schedule to this
Agreement or otherwise disclosed or known to Purchaser as of the
Closing), or (c) any Taxes of the Stockholders or Delta (in the case
of Delta only, attributable to the period prior to the Closing).
SECTION 7.3 OBLIGATION OF PURCHASER TO INDEMNIFY. Purchaser
------------------------------------
agrees to indemnify, defend and hold harmless the Stockholders from
and against any Losses suffered by the Stockholders by reason of (a)
any breach of the representations and warranties of Purchaser or of
the covenants and agreements of Purchaser contained in this Agreement
or in the Schedules or any Transaction Documents, or (b) the operation
of Delta after the Closing.
SECTION 7.4 NOTICE AND OPPORTUNITY TO DEFEND THIRD PARTY CLAIMS.
---------------------------------------------------
(a) Promptly after receipt by any party hereto (the "Indemnitee") of
----------
notice of any demand, claim, circumstance or Tax Audit which would or
might give rise to a claim or the commencement (or threatened
commencement) of any action, proceeding or investigation (an "Asserted
--------
Liability") that may result in a Loss, the Indemnitee shall give
- ---------
prompt notice thereof (the "Claims Notice") to the party or parties
-------------
obligated to provide indemnification pursuant to Section 7.2 or 7.3
(the "Indemnifying Party"). The Claims Notice shall describe the
------------------
Asserted Liability in reasonable detail and shall indicate the amount
(estimated, if necessary, and to the extent feasible) of the Loss that
has been or may be suffered by the Indemnitee.
(b) The Indemnifying Party may elect to defend, at its own
expense and with its own counsel, any Asserted Liability, unless (i)
the Asserted Liability seeks an Order, injunction or other equitable
or declaratory relief against the Indemnitee, or (ii) the Indemnitee
shall have reasonably concluded that (x) there is a conflict of
interest between the Indemnitee and the Indemnifying Party in the
conduct of such defense, or (y) the Indemnitee shall have one or more
defenses not available to the Indemnifying Party. If the Indemnifying
Party elects to defend such Asserted Liability, it shall within thirty
days (or sooner, if the nature of the Asserted Liability so requires)
notify the Indemnitee of its intent to do so, and the Indemnitee shall
cooperate, at the expense of the Indemnifying Party, in the defense of
such Asserted Liability. If the Indemnifying Party elects not to
defend the Asserted Liability, is not permitted to defend the Asserted
Liability by reason of the first sentence of this Section 7.4(b),
fails to notify the Indemnitee of its election as herein provided or
contests its obligation to indemnify under this Agreement with respect
to such Asserted Liability, the Indemnitee may pay, compromise or
defend such Asserted Liability at the sole cost and expense of the
Indemnifying Party. Notwithstanding the foregoing, neither the
Indemnifying Party nor the Indemnitee may settle or compromise any
claim over the reasonable written objection of the other, provided
that the Indemnitee may settle or compromise any claim as to which the
Indemnifying Party has failed to notify the Indemnitee of its election
as herein provided or is contesting its indemnification obligations
hereunder. In any event, the Indemnitee and the Indemnifying Party may
participate, at their own expense, in the defense of such Asserted
Liability. If the Indemnifying Party chooses to defend any Asserted
Liability, the Indemnitee shall make available to the Indemnifying
Party any books, records or other documents within its control that
are necessary or appropriate for such defense. Any expenses of any
Indemnitee for which indemnification is available hereunder shall be
paid upon written demand therefor.
SECTION 7.5 PAYMENT OF INDEMNIFICATION AMOUNTS.
----------------------------------
(a) Any payment pursuant to this Article VII shall be made
not later than thirty (30) days after receipt by the Indemnifying
Party of written notice from the Indemnitee stating that a Final
Determination of any Loss has occurred, and the amount thereof and of
the indemnity payment requested. WITHOUT LIMITING PURCHASER'S RIGHTS
IN ANY WAY WHATSOEVER, THE STOCKHOLDERS GRANT TO PURCHASER THE RIGHT
TO OFFSET FROM ANY AMOUNTS DUE STOCKHOLDERS PURSUANT TO THE DEFERRED
PURCHASE PRICE PROVISIONS UNDER SECTIONS 1.1(ii)(B) AND (C) HEREOF,
ANY PAYMENTS DUE FROM THE STOCKHOLDERS PURSUANT TO THIS ARTICLE VII.
(b) The Stockholders' indemnity liability under this
Agreement (i) shall not exceed the aggregate amount of the Purchase
Price paid hereunder for any and all Losses asserted, or (ii) arise
unless the cumulative total of such Losses exceeds $10,000 (and, in
such event, shall attach only to the extent of such Losses in excess
of $10,000).
SECTION 7.6 ADJUSTMENT. It is the intent of the parties that any
----------
amounts paid under Sections 7.2 or 7.3 shall represent an adjustment
of the Purchase Price and the parties will report such payments
consistent with such intent. Nevertheless, if any payment pursuant to
Section 7.2 or 7.3 hereof would be treated by any Tax Authority as
other than a Purchase Price adjustment and would, on that basis, be
includable in the gross income of the Indemnitee that is reported to
such Tax Authority, then such payment shall be increased by the amount
necessary so that the Indemnitee is fully and completely indemnified
on an after-tax basis.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 NOTICES. (a) Any notice or other communication
-------
required or permitted hereunder shall be in writing and shall be
delivered personally by hand or by recognized overnight courier or
mailed (by registered or certified mail, postage prepaid) as follows:
(i) If to Purchaser, one copy to:
Paramount Financial Corporation
One Jericho Plaza
Jericho, New York 11753
Attention: Jeff Nortman, Co-Chief Executive Officer
with a simultaneous copy to:
Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Attention: Danal F. Abrams, Esq.
(ii) If to the Stockholders, one copy to:
Mr. Lawrence P. Kagan
29 Lorijean Lane
East Northport, New York 11731
and
Mr. Steven Lippel
84 Dalton Street
Long Beach, New York 11561
with a simultaneous copy to:
Rubin, Bailin, Ortoli, Mayer, Baker &
Fry LLP
405 Park Avenue
New York, New York 10022
Attention: Paul H. Pincus, Esq.
(b) Each such notice or other communication shall be
effective when delivered at the address specified in Section 8.1(a).
Any party by notice given in accordance with this Section 8.1 to the
other party may designate another address (or telecopier number) or
person for receipt of notices hereunder. Notices by a party may be
given by counsel to such party.
SECTION 8.2 ENTIRE AGREEMENT. This Agreement (including the
----------------
Schedules and Exhibits hereto) and the collateral agreements executed
in connection with the consummation of the Contemplated Transactions
contain the entire agreement between the parties with respect to the
subject matter hereof and related transactions and supersede all prior
agreements, written or oral, with respect thereto.
SECTION 8.3 WAIVERS AND AMENDMENTS; NON-CONTRACTUAL REMEDIES;
------------------------------------------------
PRESERVATION OF REMEDIES. This Agreement may be amended, superseded,
- ------------------------
canceled, renewed or extended only by a written instrument signed by
the parties hereto. The provisions hereof may be waived in writing by
the parties hereto. No delay on the part of any party in exercising
any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of any party of any such
right, power or privilege, nor any single or partial exercise of any
such right, power or privilege, preclude any further exercise thereof
or the exercise of any other such right, power or privilege. Except as
otherwise provided herein, the rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that any
party may otherwise have at law or in equity.
SECTION 8.4 GOVERNING LAW. This Agreement shall be governed and
-------------
construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such
State, without regard to the conflict of laws rules thereof.
SECTION 8.5 ARBITRATION. Any disputes relating to or arising out
-----------
of this Agreement shall be determined by arbitration in the County of
New York, State of New York, in accordance with the then prevailing
Commercial Arbitration rules of the American Arbitration Association.
The award rendered by the arbitrator(s) shall be final and binding and
judgment may be entered thereon in any court of competent
jurisdiction.
SECTION 8.6 BINDING EFFECT; NO ASSIGNMENT. This Agreement and all
-----------------------------
of its provisions, rights and obligations shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors. This Agreement may not be assigned (including by operation
of Law) by a party without the express written consent of Purchaser
(in the case of assignment by the Stockholders) or of the Stockholders
(in the case of assignment by Purchaser) and any purported assignment,
unless so consented to, shall be void and without effect. Nothing
herein express or implied is intended or shall be construed to confer
upon or to give anyone other than the parties hereto and their
respective heirs, legal representatives and successors any rights or
benefits under or by reason of this Agreement and no other party shall
have any right to enforce any of the provisions of this Agreement.
SECTION 8.7 EXHIBITS. All Exhibits and Schedules attached hereto
--------
are hereby incorporated by reference into, and made a part of, this
Agreement.
SECTION 8.8 SEVERABILITY. If any provision of this Agreement for
------------
any reason shall be held to be illegal, invalid or unenforceable, such
illegality shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such illegal, invalid or
unenforceable provision had never been included herein.
SECTION 8.9 COUNTERPARTS. The Agreement may be executed in any
------------
number of counterparts, each of which shall be deemed to be an
original as against any party whose signature appears thereon, and all
of which shall together constitute one and the same instrument. This
Agreement shall become binding when one or more counterparts hereof,
individually or taken together, shall bear the signatures of all of
the parties reflected hereon as the signatories.
ARTICLE IX
DEFINITIONS
SECTION 9.1 DEFINITIONS. (a) The following terms, as used herein,
-----------
have the following meanings:
"Affiliate" of any person means any other person directly or
---------
indirectly through one or more intermediary persons, controlling,
controlled by or under common control with such person.
"Agreement" or "this Agreement" means, and the words "herein",
--------- -------------- ------
"hereof" and "hereunder" and words of similar import refers to, this
------ ---------
agreement as it from time to time may be amended.
"Assets" means properties, rights, interests and assets of every
------
kind, real, personal or mixed, tangible and intangible, used or usable
in the Business.
"Certificate of Incorporation" means, in the case of any
----------------------------
corporation, the certificate of incorporation, articles of
incorporation or charter of a corporation, howsoever denominated under
the laws of the jurisdiction of its incorporation.
"Company Debt" means (i) money borrowed by Delta from any person;
------------
(ii) any indebtedness of Delta arising under leases required to be
capitalized under GAAP or evidenced by a note, bond, debenture or
similar instrument; (iii) any indebtedness of Delta arising under
purchase money obligations or representing the deferred purchase price
of property and services (other than current trade payables incurred
in the ordinary course of the Business); and (iv) any Liability of
Delta under any guaranty, letter of credit, performance credit or
other agreement having the effect of assuring a creditor against loss.
"Contract" means any contract, agreement, indenture, note, bond,
--------
lease, conditional sale contract, mortgage, license, franchise,
instrument, commitment or other binding arrangement, whether written
or oral.
"Code" means the Internal Revenue Code of 1986, as amended.
----
The term "control", with respect to any person, means the power
-------
to direct the management and policies of such person, directly or
indirectly, by or through stock ownership, agency or otherwise, or
pursuant to or in connection with an agreement, arrangement or
understanding (written or oral) with one or more other persons by or
through stock ownership, agency or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the
----------- ----------
foregoing.
"Environmental Laws" means any and all Laws (including common
------------------
law), Orders, Permits, agreements or any other requirement or
restriction promulgated, imposed, enacted or issued by any federal,
state, local and/or foreign Governmental Bodies relating to human
health or the environment, including the emission, discharge or
Release of pollutants, contaminants, Hazardous Substances or wastes
into the environment (which includes, without limitation, ambient air,
surface water, ground water, or land), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, Hazardous
Substances or wastes or the clean-up or other remediation thereof.
"Environmental Permits" with respect to Delta means those Permits
---------------------
required to be obtained by Delta under Environmental Laws in
connection with the Business or the use and operation of the Assets
owned or leased by them.
"ERISA" means the Employee Retirement Income Security Act of
-----
1974, as amended.
"Final Determination" means (i) with respect to United States
-------------------
federal income Taxes, a "determination" as defined in Section 1313(a)
of the Code or execution of an Internal Revenue Service Form 870AD;
(ii) with respect to Taxes other than United States federal income
Taxes and any final determination of liability in respect of a Tax
provided for under applicable law, and shall include the payment of
Tax by Purchaser or Delta, whichever is responsible for payment of
such Tax under applicable law, with respect to any item disallowed by
a Taxing authority, provided that the other party is notified that
Purchaser or Delta, whichever is responsible, determines that no
action should be taken to recoup such disallowed item, and such other
party agrees with such determination; and (iii) any final
determination of liability in respect of a Loss provided for under
applicable law.
"Forfeiture Event" means any of the following which results in
----------------
the termination of a Stockholder's Employment Agreement: (i) a
conviction of, a plea of nolo contendere, a guilty plea or confession
---- ----------
by the Stockholder to an act of fraud, misappropriation or
embezzlement or to another felony relating to the Company; (ii) the
commission of a fraudulent act or practice by the Stockholder
affecting the Company; (iii) the willful misconduct by the Stockholder
that materially adversely affects the Company; and (iv) the material
breach by the Stockholder of sections 6 or 7 of his Employment Agreement.
"GAAP" means generally accepted accounting principles in effect
----
on the date hereof as set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting
profession of the United States.
"Hazardous Substances" means any dangerous, toxic, radioactive,
--------------------
caustic or otherwise hazardous material, pollutant, contaminant,
chemical, waste or substance defined, listed or described as any of
such in or governed by any Environmental Law, including but not
limited to, urea-formaldehyde, polychlorinated biphenyls, asbestos or
asbestos-containing materials, radon, explosives, known carcinogens,
petroleum and its derivatives, petroleum products, or any substance
which might cause any injury to human health or safety or to the
environment or might subject the owner or operator of the Real
Property to any Regulatory Actions or Claims.
"IRS" means the United States Internal Revenue Service.
---
The term "knowledge" with respect to (a) any individual means
---------
actual knowledge, and (b) any corporation means the actual knowledge
of the directors or the executive officers of such corporation; and
"knows" has a correlative meaning.
-----
"Liability" means any direct or indirect indebtedness, liability,
---------
assessment, claim, loss, damage, deficiency, obligation or
responsibility, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, actual or
potential, contingent or otherwise (including any liability under any
guaranties, letters of credit, performance credits or with respect to
insurance loss accruals).
"Lien" means, with respect to any Asset, any mortgage, lien
----
(including mechanics, warehousemen, laborers and landlords liens),
claim, pledge, charge, security interest, preemptive right, right of
first refusal, option, judgment, title defect or encumbrance of any
kind in respect of or affecting such Asset.
The term "person" means an individual, corporation, partnership,
------
joint venture, association, trust, unincorporated organization or
other entity, including a government or political subdivision or an
agency or instrumentality thereof.
"Prime Rate" means the rate of interest per annum publicly
----------
announced from time to time by Citibank, N.A. as its prime rate in
effect at its principal office in New York.
"Receivables" means as of any date any trade accounts receivable,
-----------
notes receivable, sales representative advances and other
miscellaneous receivables of Delta arising in the ordinary course of
the Business.
"Regulatory Actions" means any claim, demand, action, suit or
------------------
proceeding brought or instigated by any Governmental Body in
connection with any Environmental Law, including, without limitation,
civil, criminal and/or administrative proceedings, whether or not
seeking costs, damages, penalties or expenses.
"Release" means the intentional or unintentional, spilling,
-------
leaking, disposing, discharging or disturbance of, or emitting,
depositing, injecting, leaching, escaping or any other release or
threatened release, however defined, of any Hazardous Substance.
"Tax" (including, with correlative meaning, the terms "Taxes" and
--- -----
"Taxable") means (i) any net income, gross income, gross receipts,
-------
sales, use, ad valorem, transfer, transfer gains, franchise, profits,
license, withholding, payroll, employment, social security (or
similar), unemployment, disability, excise, severance, stamp, rent,
recording, registration, occupation, premium, real or personal
property, intangibles, environmental (including taxes under Code
ss.59A) or windfall profits tax, alternative or add-on minimum tax,
capital stock, customs duty or other tax, fee, duty, levy, impost,
assessment or charge of any kind whatsoever (including but not limited
to taxes assessed to real property and water and sewer rents relating
thereto), together with any interest and any fine, penalty, addition
to tax or additional amount or deductions imposed by any Governmental
Body (domestic or foreign) (a "Tax Authority") responsible for the
-------------
imposition of any such tax, whether disputed or not, including any
liability arising under any tax sharing agreement, with respect to
Delta, the Business or the Assets; (ii) any liability for the payment
of any amount of the type described in the immediately preceding
clause (i) as a result of Delta being a member of an affiliated or
combined group with any other corporation at any time on or prior to
the Closing Date; and (iii) any liability of Delta for the payment of
any amounts of the type described in the immediately preceding clause
(i) as a result of a contractual obligation to indemnify any other
person.
"Tax Return" means any return or report (including elections,
----------
declarations, disclosures, schedules, attachments, estimates and
information returns) relating to Taxes required to be supplied to any
Tax Authority, and including any amendment thereof.
"Transaction Documents" means, collectively, this Agreement, and
---------------------
each of the other agreements and instruments to be executed and
delivered by all or some of the parties hereto in connection with the
consummation of the transactions contemplated hereby.
The term "voting power" when used with reference to the capital
------------
stock of, or units of equity interests in, any person means the power
under ordinary circumstances (and not merely upon the happening of a
contingency) to vote in the election of directors of such person (if
such person is a corporation) or to participate in the management and
control of such person (if such person is not a corporation).
(b) The following additional terms are defined in the following
sections of this Agreement:
TERM SECTION
---- -------
Acquisition Recital
Annual Statements 2.5
Asserted Liability 7.4(a)
Bank 5.2(e)
Business Recital
Claims 2.13
Claims Notice 7.4(a)
Closing 1.3
Closing Date 1.3
Closing Date Balance Sheet 1.2(b)
Closing Net Worth 1.2(a)
Company Required Consents 2.3
Condition of the Business 2.9(a)
Contemplated Transactions Recital
Delta Recital
Employment Agreements Recital
Governmental Bodies 2.18
Gross Profit 1.1(ii)
Indemnifying Party 7.4(a)
Indemnitee 7.4(a)
Insurance Policies 2.17
Intellectual Property Rights 2.12
Latest Balance Sheet 2.5
Latest Balance Sheet Date 2.5
Laws 2.18
Losses 7.2
Major Customers 2.21
Orders 2.18
Permits 2.19
Purchase Price 1.1
Purchased Shares 1.1
Purchaser Recital
Representatives 4.2(a)
Resolving Accounting Firm 1.2(d)
Stockholder/Stockholders Recital
Tax Audit 2.14(a)
Tax Deficiency 2.14(a)
SECTION 9.2 INTERPRETATION. Unless the context otherwise
--------------
requires, the terms defined in Section 9.1 shall have the meanings
herein specified for all purposes of this Agreement, applicable to
both the singular and plural forms of any of the terms defined herein.
All accounting terms defined in Section 9.1, and those accounting
terms used in this Agreement not defined in Section 9.1, except as
otherwise expressly provided herein, shall have the meanings
customarily given thereto in accordance with GAAP. When a reference is
made in this Agreement to Sections, such reference shall be to a
Section of this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words
"without limitation."
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date set forth above.
PARAMOUNT FINANCIAL CORPORATION
By: /s/ Jeffrey Nortman
---------------------------------
Name: Jeffrey Nortman
Title: Co-Chief Executive Officer
/s/ Lawrence P. Kagan
---------------------------------
Lawrence P. Kagan
/s/ Steven Lippel
---------------------------------
Steven Lippel
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,209
<SECURITIES> 3,524
<RECEIVABLES> 1,138
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,062
<CURRENT-LIABILITIES> 0
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0
0
<COMMON> 80
<OTHER-SE> 7,565
<TOTAL-LIABILITY-AND-EQUITY> 53,062
<SALES> 21,405
<TOTAL-REVENUES> 32,395
<CGS> 19,933
<TOTAL-COSTS> 33,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (784)
<INCOME-TAX> (288)
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