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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-27190
PARAMOUNT FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3072768
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE JERICHO PLAZA, JERICHO, NEW YORK 11753
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(516) 938-3400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS
(OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO
FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
---------- --------
NUMBER OF SHARES OUTSTANDING AT NOVEMBER 11, 1998:
2,160,000 SHARES OF COMMON STOCK, PAR VALUE $0.04 PER SHARE.
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<PAGE>
PARAMOUNT FINANCIAL CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 . . . . 1
Consolidated Statements of Operations
Three Months Ended and Nine Months Ended
September 30, 1998 and 1997 . . . . . . . . . . 2
Consolidated Statement of Changes in
Stockholders' Equity Nine Months Ended
September 30, 1998 . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash
Flows Nine Months Ended September 30,
1998 and 1997 . . . . . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated
Financial Statements . . . . . . . . . . . . . . 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . 6-9
PART II - Other Information . . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
------ ------------ -------------
(UNAUDITED)
Cash and cash equivalents . . . . . $ 2,209,649 $ 3,181,405
Investments available for sale . . 3,524,456 --
Accounts receivable . . . . . . . . 1,138,479 1,955,340
Net investment in direct finance and
sales-type leases . . . . . . . . 39,941,764 32,841,631
Assets held under operating leases,
net of accumulated depreciation . 5,459,895 7,028,351
Deferred income taxes . . . . . . . -- 410,540
Other assets . . . . . . . . . . . 788,218 2,102,384
----------- -----------
Total assets . . . . . . . . . . . $53,062,461 $47,519,651
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable . . . . . . . . . . . $ 2,656,365 $ 4,236,402
Accounts payable . . . . . . . . . 1,307,496 1,205,652
Accounts payable - leases . . . . . 708,568 58,791
Accrued expenses . . . . . . . . . 383,097 438,523
Obligations for financed equipment -
non-recourse . . . . . . . . . . 40,287,404 34,675,921
Deferred income taxes . . . . . . . 73,848 --
----------- ------------
Total liabilities . . . . . . . . . 45,416,778 40,615,289
----------- ------------
Shareholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized, none
outstanding . . . . . . . . . . -- --
Common stock, $.04 par value;
17,500,000 shares authorized, and
2,160,000 shares issued and
outstanding . . . . . . . . . . . 79,900 86,400
Additional paid-in capital . . . . 13,644,228 14,456,728
Stock subscription receivable . . . -- (812,500)
Accumulated deficit . . . . . . . . (6,049,080) (6,775,661)
Treasury stock, 12,500 and 24,500 (29,365) (50,605)
shares at cost, respectively, . . ----------- ------------
Total shareholders' equity . . . . 7,645,683 6,904,362
----------- ------------
Total liabilities and shareholders' $53,062,461 $47,519,651
equity . . . . . . . . . . . . . =========== ============
See accompanying notes to financial statements.
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PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
UNAUDITED
---------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1997 1998 1997 1998
---- ---- ---- ----
REVENUES:
Sales . . . . . $13,364,035 $9,568,454 $20,114,906 $26,062,031
Lease revenue . 2,764,898 1,877,703 8,188,263 5,524,102
Fee, interest
and other
income . . . 76,800 113,375 857,764 573,000
----------- ---------- ----------- -----------
Total
revenues . 16,205,733 11,559,532 29,160,933 32,159,133
----------- ---------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales . 12,775,064 8,912,328 18,808,375 24,309,658
Lease expense . 2,679,478 1,844,557 7,870,158 5,310,222
Selling,
general and
administrative
expenses . . . 1,118,006 1,520,687 2,605,548 3,695,361
----------- ---------- ----------- -----------
Total
costs and
expenses . 16,572,548 12,277,572 29,284,081 33,315,241
----------- ---------- ----------- -----------
Income (loss)
before provision
(benefit) for
income taxes. (366,815) (718,040) (123,148) (1,156,108)
PROVISION (BENEFIT)
FOR INCOME
TAXES . . . (146,565) (254,276) (48,856) (429,527)
----------- ---------- ---------- -----------
Net income
(loss) . . $(220,250) $(463,764) $(74,292) $(726,581)
=========== ========= ========== ===========
Basic income
(loss) per
common
share . . $(0.11) $(0.23) $(0.04) $(0.37)
=========== ========= ========== ===========
Diluted income
(loss) per
common
share . . $(0.11) $(0.23) $(0.04) $(0.37)
=========== ========= ========== ===========
Shares used in
computing net
income (loss)
per share:
Basic . . . 1,995,577 1,978,500 1,993,178 1,979,213
=========== ========== =========== ===========
Diluted . . 1,995,577 1,978,500 1,993,178 1,979,213
=========== ========== =========== ===========
See accompanying notes to financial statements.
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PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------
UNAUDITED
---------
COMMON STOCK
------------ ADDITIONAL STOCK
PAID-IN- SUBSCRIPTION
SHARES AMOUNT CAPITAL RECEIVABLE
------ ------ ----------- ----------
BALANCE, DECEMBER
31, 1997 1,997,500 $79,900 $13,644,228 -
Net loss - - - -
Issuance of common
stock 162,500 6,500 812,500 ($812,500)
Purchase of
treasury stock - - - -
--------- ------- ----------- -----------
BALANCE, SEPTEMBER
30, 1998 2,160,000 $86,400 $14,456,728 ($812,500)
========= ======= =========== ===========
ACCUMULATED TREASURY
(DEFICIT) STOCK TOTAL
---------- -------- -----
BALANCE, DECEMBER
31, 1997 ($6,049,080) $(29,365) $7,645,683
Net loss (726,581) - (726,581)
Issuance of common
stock 6,500
Purchase of
treasury stock - (21,240) (21,240)
------------- ------------ ----------
BALANCE, SEPTEMBER
30, 1998 ($6,775,661) ($50,605) $6,904,362
============= ============ ==========
See accompanying notes to financial statements.
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PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
UNAUDITED
---------
1997 1998
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 145,958 $ (726,581)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Deferred income taxes -- (484,388)
Depreciation 3,790,698 3,314,312
Amortization of discounts on
investments (97,183) (26,953)
Amortization of goodwill -- 36,189
Changes in operating assets
and liabilities:
Accounts receivable (2,068,633) (816,861)
Other assets (72,092) (248,007)
Accounts payable (592,571) (101,844)
Accrued expenses 42,846 55,426
----------- -----------
Net cash provided by operating 1,149,023 1,001,293
activities ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment for direct
finance leases and sales-type
leases (25,381,098) (9,411,901)
Termination of direct finance
leases 4,236,465 3,159,587
Proceeds applied to direct
finance leases and sales-type
leases 5,012,761 13,263,485
Purchase of equipment for
operating leases (41,333) (6,930,505)
Termination of operating leases -- 251,168
Residual value sharing
arrangements 4,628,698 1,885,530
Payment for acquisition of
Deltaforce, net of cash
acquired -- (777,348)
Purchases of investments (10,156,296) (3,084,593)
Proceeds from sale/maturity of 8,940,000 6,636,003
investments ----------- -----------
Net cash (used in) provided by (12,760,803) 4,991,426
investing activities ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common
stock -- 6,500
Repurchase of common stock (18,574) (21,240)
Proceeds from notes payable 3,578,697 2,332,552
Repayment of notes payable (1,110) (1,077,515)
Decrease in amounts due on
purchases of equipment for
leases (17,448,765) (649,777)
Increase in non-recourse lease
financing 32,192,094 13,509,866
Termination of non-recourse
lease financing (885,700) (2,864,077)
Repayments and interest
amortization applied to (8,616,519) (16,257,272)
non-recourse lease financing ----------- -----------
Net cash provided by (used in) 8,800,123 (5,020,963)
financing activities ----------- -----------
Net increase (decrease) in cash and
cash equivalents (2,811,657) 971,756
CASH AND CASH EQUIVALENTS, 3,700,774 2,209,649
beginning of period ----------- -----------
CASH AND CASH EQUIVALENTS, end of $ 889,117 $3,181,405
period =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 28,210 $ 73,285
=========== ===========
Cash paid for interest $1,328,337 $2,018,903
=========== ===========
See accompanying notes to financial statements.
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PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions for
Form 10-Q and Regulation S-X related to interim period
financial statements and, therefore, do not include all
information and footnotes required by generally accepted
accounting principles. However, in the opinion of
management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair
presentation of the financial position of Paramount
Financial Corporation and subsidiaries (the "Company") at
September 30, 1998 and its results of operations and cash
flows for the three and nine months ended September 30, 1997
and 1998, respectively, have been included. The results of
operations for the interim periods are not necessarily
indicative of the results that may be expected for the
entire year. Reference should be made to the annual
financial statements, including footnotes thereto, included
in the Company's Form 10-K for the fiscal year ended
December 31,1997.
2. The financial statements for the three and nine months ended
September 30, 1998 are consolidated to include the results
of the Company's two wholly owned subsidiaries, Paratech
Resources, Inc. and Deltaforce Personnel Services, Inc
("Deltaforce"). All material intercompany balances and
transactions have been eliminated.
3. On January 9, 1998, the Company acquired 100% of the
outstanding shares of Deltaforce, a privately held New York
City-based staffing company, for approximately $723,000,
which included $325,000 of notes payable. The acquisition
was accounted for as a purchase and accordingly the
operating results of Deltaforce have been included in the
Company's consolidated statements since the date of the
acquisition. The excess of the aggregate purchase price
over the fair market value of the net assets acquired of
approximately $626,000 has been recorded as goodwill and is
being amortized over 15 years.
4. In April 1998, the Company entered into a term loan with a
bank collateralized by $600,000 in cash maintained in an
investment account. Principal payments of approximately
$41,600 and interest are due on a quarterly basis through
April 20, 2001.
5. Effective May 19, 1998 the Board of Directors approved a
reduction of the authorized number of shares of common stock
from 35,000,000 to 17,500,000 and authorized a one-for-four
reverse stock split of the Company's common stock. The par
value of the common stock was increased from $.01 to $.04
per share. Accordingly, all references in the financial
statements and notes to common share data have been adjusted
to reflect the reverse stock split. Preferred stock
remained unchanged.
6. On July 28, 1998, Deltaforce acquired certain assets from
RBW Staffing Resources, Inc., ("RBW") a privately held New
York City-based staffing company, for approximately
$325,000, which included $100,000 of notes payable. The
acquisition was accounted for as a purchase and accordingly
the operating results of RBW have been included in the
Company's consolidated statements since the date of the
acquisition. The excess of the aggregate purchase price
over the fair market value of the net assets acquired, net
of direct costs and expenses associated with the
acquisition, of approximately $440,000 has been recorded as
goodwill and is being amortized over 15 years. In
connection with this acquisition, Deltaforce entered into
noncompete agreements with two key executives of RBW for an
aggregate consideration of $460,000, $60,000 of which was
paid at closing with $150,000 due on July 28, 1999 and
$250,000 due on July 28, 2000. In addition, simultaneous
with the closing of the transaction, the Company entered
into a stock purchase agreement with the former shareholder
of RBW (the "Shareholder"). Under the terms of this
agreement, the Company sold 162,500 shares of newly issued
$.04 par value common stock to the Shareholder as follows:
(1) 81,250 shares at $4.00 per share, and (2) 81,250 shares
at $6.00 per share. The Shareholder paid for the stock with
cash equal to the par value of the shares issued, $6,500,
and by the issuance of two non-recourse secured promissory
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notes repayment of which is secured by the shares under a
stock pledge agreement. The notes mature on July 27, 2000
and July 27, 2001, respectively. Deltaforce also entered
into an employment agreement with the Shareholder for a term
of 24 months including a one-time sign-on bonus paid at
closing.
7. On October 23, 1998, the Company acquired 100% of the
outstanding shares of Abbey, Garrett and Seth, Ltd. (dba:
Comptech Resources), a privately held, Garden City based
systems consulting, software applications and Internet
commerce development firm. 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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with, and is qualified in its entirety by, the
unaudited financial statements, including the notes thereto,
appearing elsewhere in this 10-Q.
GENERAL
Paramount Financial Corporation and subsidiaries
("Paramount" or the "Company") is a comprehensive asset
management and business solution provider, offering customers a
wide range of integrated services, including lease finance,
information technology ("IT") consulting, network design and
implementation, and staffing services. The Company includes two
wholly owned subsidiaries, Paratech Resources, Inc. ("Paratech"),
and, as of January 1998, Deltaforce Personnel Services, Inc.
("Deltaforce").
During the nine months ended September 30, 1998, the Company
continued with its strategic diversification and expansion plans.
In January, the Company completed the acquisition of Deltaforce,
a privately held New York City based staffing company
specializing in legal support staff. This acquisition further
enhanced the Company's product offerings by including staffing
services to its expanding list of integrated services. This
acquisition was followed closely by the acquisition of RBW
Staffing Services, Inc. ("RBW"), another New York City based
staffing company. Following this second acquisition, the Company
merged the operations of RBW into Deltaforce. The combined
company now offers not only temporary legal support staff, but
also temporary and permanent IT, attorney and paralegal
placements.
In addition to the Deltaforce and RBW acquisitions, during
the nine months ended September 30, 1998, the Company continued
to invest in the expansion of its systems integration subsidiary,
Paratech Resources, Inc. Paratech continues to move ahead with
its growth plans in both personnel and product offerings. Both
Paratech and Deltaforce are important parts of the evolution of
Paramount from a lease finance company to a diversified business
solution provider. When comparing the first nine months of 1998
with the first nine months of 1997, it is important to note that
Deltaforce was not part of the Company in 1997 and Paratech was a
relatively insignificant part of the Company for the first
quarter of 1997. In addition, as a result of the acquisitions of
Deltaforce and RBW the Company incurred a number of one-time, non
repetitive charges during the nine months ended September 30,
1998 that had a negative impact of the Company's consolidated
results from operations for the period.
In October 1998, the Company completed the acquisition of
Abbey, Garrett & Seth, Ltd. (dba: Comptech Resources)
("Comptech"), a systems consulting, software application and
Internet commerce development firm. Comptech brings a
specialization in client-server accounting, sales-force
automation, web development and e-commerce applications, which
when combined with Paratech's systems integration and consulting
services, enables the Company to offer a full complement of
state-of-the-art technology solutions.
The Company remains committed to the growth of its lease
portfolio and continued to engage in this activity during the
nine months ended September 30, 1998. The Company believes that
continued expansion of the portfolio of IT equipment on lease
will create financial benefits over a continuum of time, since,
unlike other equipment, IT equipment is frequently upgraded
and/or enhanced during the term of its lease, resulting in
opportunities to lease new equipment and market displaced
equipment. Further, as an integrated lessor and business
solution provider, the Company believes that it is well
positioned to meet the ever-changing needs of its customers.
Fluctuations in Quarterly Results
---------------------------------
The operating results of Paramount are subject to quarterly
fluctuations resulting from a variety of factors, including the
volume of new leases written, product announcements by
manufacturers, economic conditions, interest rate fluctuations
and variations in the mix of leases written. In addition, the
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Company's revenue can fluctuate significantly from quarter to
quarter based on the closing date and nature of each particular
lease and/or sales transaction. The mix of leases written in a
quarter is a result of a combination of factors, including
changes in customer demands and/or requirements, new product
announcements, price changes, changes in delivery dates, changes
in maintenance policies and pricing policies of equipment
manufacturers and price competition from other lessors.
Leasing transactions (other than sales type leases), in
general, do not provide for significant earnings in the month of
lease origination. Instead, revenue, expense and profit from
lease transactions are recorded over the life of the asset and
the lease. Lease revenue and lease expense recognition is
dependent upon a number of factors, including the term of the
lease, the accounting classification of the lease (i.e.
operating, direct finance, or sales type) and the commencement
date of the lease and the lease financing within a particular
period. See "Lease Accounting."
The Company is aggressively working to maximize the returns
on the residual value investments made on its lease portfolio.
Such efforts, which are an ordinary but not a predictable part of
the Company's business, often result in equipment originally
leased under an operating lease, and accounted for as described
below, being upgraded or otherwise enhanced and extended at the
original account or leased to a different end-user. The
resulting lease may qualify under FAS 13 as a sales type lease,
in which the Company can record as sales revenue the fair market
value of the equipment and recognize as income the difference
between this amount and the equipment's cost or net book value.
Since a sales type lease is a form of direct finance lease, the
new lease is recorded over its remaining term as a direct finance
lease resulting in a reduction of lease rental income and lease
expense compared to the original operating lease accounting.
Marketing efforts may also result in the sale of the leased
asset to the customer which will result in an increase in revenue
and, to the extent the sales proceeds exceed the net book value,
net income, in the quarter in which the sale occurs. Any such
sale will also result in a reduction of revenue, expense and
profit expected in subsequent quarters since the equipment was
sold.
Given the possibility of such fluctuations as described
above, the Company believes that comparisons of the results of
its operations for preceding quarters are not necessarily
meaningful and that such results for one quarter should not be
relied upon as an indication of future performance.
Lease Accounting
----------------
In accordance with Statement of Financial Accounting
Standard No. 13, "Accounting for Leases" ("FAS 13"), the Company
classifies its leases as either operating leases or direct
finance leases. The allocation of income among accounting
periods within a lease term will vary depending upon the lease
classification, as described below.
Direct Finance Leases: Direct finance leases transfer
substantially all benefits and risks of equipment ownership to
the lessee. A lease is a direct finance lease if it meets one of
the following criteria: (1) the lease transfers ownership of the
equipment to the lessee by the end of the lease term; (2) the
lease contains a bargain purchase option; (3) the lease term at
inception is at least 75% of the estimated economic life of the
leased equipment; or (4) the present value of the minimum lease
payments is at least 90% of the fair value of the leased
equipment at lease inception.
At lease inception, the cost of equipment under a direct
finance lease is recorded as "Net investment in direct finance
leases". The difference between the gross lease payments
receivable, plus the estimated residual value of the equipment,
and the equipment cost is recognized as income over the life of
the lease using the effective interest method.
A lease transaction which meets all of the above criteria,
and in which the Company has made a dealer's profit, is recorded
as a sales type lease. A sales type lease is a type of direct
finance lease, but one in which the Company recognizes, at lease
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inception, revenue and profit which arises from the difference
between the fair market value of the leased equipment and its
acquisition cost.
Operating Leases: All lease contracts which do not meet the
criteria of direct finance leases are accounted for as operating
leases. Monthly lease payments are recorded as operating lease
revenue. Leased equipment is recorded at the Company's cost and
depreciated on a straight-line basis over the lease term to the
estimated residual value at the expiration of the lease term.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997
Net loss for the three months ended September 30, 1998 was
$464,000, after a benefit for income taxes of $254,000, as
compared with a net loss of $220,000 after a benefit for income
taxes of $147,000 for the comparable period in 1997.
For the three months ended September 30, 1998, the Company
recorded sales revenue of $9.6 million, a $3.8 million decrease
over the $13.4 million recorded during the three months ended
September 30, 1997. The decrease is primarily a result of the
transactional nature of the Company's leasing business and the
resulting quarterly fluctuations. See "General" and
"Fluctuations in Quarterly Results." Additionally, Paratech's
revenue decreased in the quarter by 11% to $935,000 when compared
with 1997. The decrease in sales at Paratech is a result of the
Company's efforts to de-emphasize low margin, high volume
hardware sales and increase higher margin, lower volume services
revenue. DeltaForce, which was not part of the Company in 1997,
contributed $1.4 million in revenue during the quarter.
As a result of the Company's ongoing marketing efforts with
respect to its lease portfolio, certain assets which were
recorded as operating leases during the first, second and third
quarters of 1997, have been upgraded and re-leased, providing the
Company with a return on its residual value investment. The
resulting lease has been accounted for as a sales type lease. As
a result of this activity, the effect of accounting for a lease
as a direct finance lease versus an operating lease, net of new
leases written in the third quarter, lease revenue and lease
expense decreased for the three months ended September 30, 1998
when compared to the three months ended September 30, 1997 by
32.1% and 31.2%, respectively. See "Fluctuations in Quarterly
Results" and "Lease Accounting."
During the three months ended September 30, 1998, the
Company entered into new lease transactions totaling $4.7 million
of equipment cost as compared with $12.1 million for the three
months ended September 30, 1997. See "General," "Fluctuations in
Quarterly Results" and "Lease Accounting." During the quarter
ended September 30, 1998, the Company entered into $3.0 million
of non-recourse lease financing arrangements, as compared with
$309,000 for the three months ended September 30, 1997. See
"Liquidity and Capital Resources."
During the three months ended September 30, 1998, the
Company generated $113,000 in fee, interest and other income,
compared to $77,000 for the comparable period last year.
Generally, fee income is generated as a result of the Company's
involvement in certain transactions in which it acted as an
arranger of financing for leases originated by third parties, or
otherwise assisted these companies in their lease related
transactions. These transactions come about as a result of the
Company's relationship with other lessors and financial
institutions. The Company cannot predict with any certainty the
timing and nature of any future such transactions. See
"General."
Selling, general and administrative expenses ("SG&A")
totaled $1.5 million for the three months ended September 30,
1998, representing an increase of 36.0% over the $1.1 million
recorded during the three months ended September 30, 1997. The
increase in SG&A is a result of the acquisition of Deltaforce and
RBW, which contributed $658,000 to the total increase, as well as
the continued growth Paratech, which contributed $330,000. In
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addition, included in the SG&A expense for the three months ended
September 30, 1998, was $180,000 of one time charges related
specifically to the acquisition of RBW. See "General."
The tax benefit of $254,000 for the three months ended
September 30, 1998 reflects the standard rate for federal and
state taxes. During the three months ended September 30, 1997,
the Company recorded a tax benefit of $147,000, reflecting the
same standard tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
Net loss for the first nine months of 1998 was $727,000,
after a benefit from income taxes of $430,000, as compared with
net loss of $74,000, after a benefit for income taxes of $49,000.
For the nine months ended September 30, 1998, the Company
recorded sales revenue of $26.0 million, a $5.9 million increase
over the $20.1 million recorded during the nine months ended
September 30, 1997. The majority of the sales volume in 1998 was
a result of marketing activities within the Company's existing
lease portfolio. In addition, Paratech's sales volume increased
by 36.9% to $3.5 million and Deltaforce contributed $2.7 million
in revenue. These factors contributed to the increase in revenue
as compared with the nine month period in 1997. See
"Fluctuations in Quarterly Results."
As a result of the Company's ongoing marketing efforts with
respect to its lease portfolio, certain assets which were
recorded as operating leases during the third quarter of 1997,
have been upgraded and re-leased, providing the Company with a
return on its residual value investment. The resulting lease has
been accounted for as a sales type lease. As a result of this
activity, and the effect of accounting for a lease as a direct
finance lease versus an operating lease, lease revenue and lease
expense each decreased for the nine months ended September 30,
1998 when compared to the nine months ended September 30, 1997 by
32.5%. See "Fluctuations in Quarterly Results" and "Lease
Accounting."
During the nine months ended September 30, 1998, the Company
entered into new lease transactions totaling $16.3 million of
equipment cost as compared with $37.5 million for the nine months
ended September 30, 1997. Of the total cost of equipment leased
during the quarter ended September 30, 1998, $9.4 million were
recorded as direct finance leases, and $6.9 million were recorded
as operating leases, compared to $37.5 million and $41,000
respectively, for the quarter ended September 30, 1997. See
"General", "Fluctuations in Quarterly Results" and "Lease
Accounting." During the nine months ended September 30, 1998,
the Company entered into $13.5 million of non-recourse lease
financing arrangements, as compared with $32.5 million for the
nine months ended September 30, 1997. See "Liquidity and Capital
Resources." Non-recourse debt entered into during the nine
months ended September 30, 1997 increased at a faster rate than
new lease origination as a result of the timing of the closing of
certain large lease transactions. Of the total amount of non-
recourse debt, $13.3 million related to leases that commenced in
December 1996, but for which the Company was not required to pay
for the equipment until January 1997.
During the nine months ended September 30, 1998, the Company
generated $573,000 in fee, interest and other income, compared to
$858,000 for the comparable period last year. Generally, fee
income is generated as a result of the Company's involvement in
certain transactions in which it acted as an arranger of
financing for leases originated by third parties, or otherwise
assisted these companies in their lease related transactions.
These transactions come about as a result of the Company's
relationship with other lessors and financial institutions. The
Company cannot predict with any certainty the timing and nature
of any future such transactions.
S,G&A expenses totaled $3.7 million for the nine months
ended September 30, 1998, representing an increase of 41.8% over
the $2.6 million recorded during the nine months ended September
30, 1997. The increase in SG&A is a result of the acquisition of
Deltaforce and RBW, which contributed $1.1 million to the total
increase, as well as Paratech, which contributed $991,000 to SG&A
expenses. In addition, included in the SG&A expense for the nine
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<PAGE>
months ended September 30, 1998, was $180,000 of one time charges
related specifically to the acquisition of RBW. See "General."
The tax benefit of $430,000 for the nine months ended
September 30, 1998 reflects the standard rate for federal and
state taxes. During the nine months ended September 30, 1997,
the Company recorded a tax benefit of $49,000, reflecting the
same standard tax rate.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $3.2 million in
cash and cash equivalents. Substantially all of this amount was
invested in interest-bearing savings accounts, money market
accounts established by major commercial banks or in United
States Government or other AA rated obligations. Primarily as a
result of the acquisition of Deltaforce and RBW, the continued
investment in Paratech and the Company's continuing investment in
its portfolio of IT equipment on lease, the Company experienced a
reduction in net cash and investments available for sale during
the first three quarters of 1998.
The Company's leasing business generates cash primarily from
the marketing of equipment within its portfolio, and uses cash to
acquire computer equipment to put on lease. In addition, the
Company's leasing business generates cash from fee related
transactions. The Company finances substantially all of its
leases by discounting the payment stream on a non-recourse basis
through various banks and financial institutions. Thus, the only
cash required in these lease transactions is the residual value
investment by the Company. The Company believes that it
currently has sufficient resources to make the residual value
investments required to grow its lease portfolio. In addition,
the Company has numerous options available to finance residual
value investments, including sales of equipment on lease to
equipment investors, residual value sharing arrangements,
recourse loans and non-recourse loans. The Company intends to
use, on an opportunistic basis, all such available resources in
order to maximize its portfolio of equipment on lease.
The Company continues to fund the growth of Paratech. In
addition, the Company is seeking to expand Paratech's operations
through both acquisitions and internal growth. Since Deltaforce
is now an established operation, the Company does not anticipate
investing significant additional cash in this business. However,
in order to expand Deltaforce's operations, which the Company is
aggressively seeking to accomplish, the Company will need to
utilize its cash balances to fund potential future acquisitions.
The Company is limited to its current cash balances for funding
such add-on acquisitions and internal growth, unless the Company
is able in the future to raise significant additional financing.
There can be no assurance that the Company will be able to raise
any such financing. Further, the Company's cash funds for
acquisitions might be limited to the extent that the Company's
current operations or the operations of any future acquisitions
require the funding of losses or the incurence of capital outlay.
During the nine months ended September 30, 1998, the Company
entered into several residual value sharing and financing
arrangements with an equipment investor totaling $2.3 million.
This investor (i) purchased a portion of the Company's residual
value of equipment on lease in exchange for the right to share in
remarketing proceeds generated from the equipment on lease, and
(ii) provided recourse financing for the remaining portion of the
Company's residual value investment. The equipment on lease and
the related leases serve as collateral for these financings.
During the nine months ended September 30, 1998, in connection
with the early extension of leases, the Company repaid $849,000
of such loans using the proceeds of these extensions. The
Company expects to repay the balance of these loans through the
proceeds generated from remarketing the subject equipment in the
future. These transactions allow the Company to continue to grow
and expand its lease portfolio without significantly affecting
its current cash balances.
At September 30, 1998, the Company had four types of credit
lines available:
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<PAGE>
Equipment Bridge Financing Lines: These lines allow the
Company to borrow up to $1.25 million in the aggregate and are
secured by equipment and contracts to sell or lease that
equipment. Borrowings under these lines bear interest at 1%
above the prime rate. In addition, one of these lines offers the
Company the ability to borrow up to $100,000 on an unsecured
basis. The purpose of these credit lines is to allow the Company
to pay its suppliers on a timely basis while waiting for the
customer to pay or for the non-recourse financing to occur.
During the quarter ended September 30, 1998, the Company did not
borrow any amounts from these lines, and accordingly had nothing
outstanding as of September 30, 1998. As a result of its cash
balances, the Company has been able to internally finance its
equipment purchases.
Lease Finance Line: This line allows the Company to borrow
up to $1 million to permanently finance, on a recourse basis, the
rental streams under certain lease transactions pledged as
collateral. The facility is secured by the individual leases
pledged and the associated equipment. The Company is required
to maintain certain financial ratios. Borrowings are financed at
a fixed rate spread over the US Treasury bill at the time of
funding. As of September 30, 1998, the Company had $179,000
outstanding under this line.
Term Loan: In April 1998, Paramount entered into a $500,000
term loan with a bank collateralized by $600,000 in cash
maintained in an investment account. Principal payments of
approximately $41,600 and interest are due on a quarterly basis
through April 20, 2001.
Deltaforce Revolving Credit Facility: Deltaforce has a
$500,000 revolving line of credit agreement with a bank secured
by accounts receivable which expires on January 11, 1999.
Interest on outstanding borrowings accrues at the bank's prime
rate plus 1%. Borrowings are limited to 80% of eligible accounts
receivable. As of September 30, 1998, Deltaforce had $500,000
outstanding under this line. In October of 1998, this line was
increased to $750.000.
During the year ended December 31, 1997, the Board of
Directors of the Company approved a plan that would allow for the
repurchase of up to $500,000 worth of Common Stock of the
Company. The repurchase program took effect immediately and is
authorized to continue for a period of two years. Subject to
applicable rules, the plan allows the Company to repurchase
shares at any time during the authorized period in any increments
it deems appropriate. During the first three quarters of 1998,
the Company repurchased 12,000 shares for a purchase price of
$21,240
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISK
Statements contained in this Form 10-Q which are not
historical facts are forward-looking statements. The Forward-
looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements made herein
contain a number of risks and uncertainties that could cause
actual results to differ materially. These risks and
uncertainties include, but are not limited to, the specific
factors impacting the Company's business discussed under the
caption "General", as well as increased competition; the
availability of computer equipment; the ability of the Company to
expand its operations and attract and retain qualified sales
representatives experienced in the purchase, sale and lease of
new and used computer equipment; the ability of the Company to
attract and retain IT professionals skilled in specific
applications; technological obsolescence of the Company's
portfolio of computer equipment; competition in the IT consulting
sector and general economic conditions.
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<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PARAMOUNT FINANCIAL CORPORATION
Date: November 13, 1998 By: /s/ Paul Vecker
----------------------------------
Paul Vecker, Senior Vice President
and Chief Fiancial Officer
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<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,181
<SECURITIES> 0
<RECEIVABLES> 1,955
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,520
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 6,904
<TOTAL-LIABILITY-AND-EQUITY> 47,520
<SALES> 9,568
<TOTAL-REVENUES> 11,560
<CGS> 8,912
<TOTAL-COSTS> 12,278
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (718)
<INCOME-TAX> (254)
<INCOME-CONTINUING> (464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (464)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
