- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 0-27190
PARAMOUNT FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3072768
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE JERICHO PLAZA, JERICHO, NEW YORK 11753
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(516) 938-3400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
NUMBER OF SHARES OUTSTANDING AT NOVEMBER 12, 1999:
2,160,004 SHARES OF COMMON STOCK, PAR VALUE $0.04 PER SHARE.
- --------------------------------------------------------------------------------
<PAGE>
PARAMOUNT FINANCIAL CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
Page No.
--------
PARTI - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
December 31, 1998 and September 30, 1999.......... 1
Consolidated Statements of Operations for
the Three Months Ended and Nine Months
Ended September 30, 1998 and 1999................. 2
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1998
and 1999.......................................... 3
Notes to Unaudited Consolidated Financial
Statements........................................ 4-5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 6-12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk....................................... 12
PART II - Other Information..................................... 13
SIGNATURES...................................................... 14
<PAGE>
PART I: FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1999
------ ------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents......................... $ 1,495,082 $ 961,788
Investments available for sale.................... 613,188 636,265
Accounts receivable............................... 2,632,258 3,041,683
Net investment in direct finance and
sales-type leases............................... 30,059,378 19,659,791
Assets held under operating leases, net of
accumulated depreciation........................ 7,263,181 4,217,648
Other assets...................................... 3,183,523 2,733,953
----------- -----------
Total assets...................................... $45,246,610 $31,251,128
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable..................................... $ 4,313,189 $ 3,625,695
Accounts payable.................................. 942,431 835,514
Accounts payable - leases......................... 100,000 --
Accrued expenses.................................. 658,392 544,115
Obligations for financed equipment-- non-recourse. 33,435,459 20,496,540
----------- -----------
Total liabilities................................. 39,449,471 25,501,864
----------- -----------
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 2,160,004 shares issued and
outstanding..................................... 86,400 86,400
Additional paid-in capital........................ 14,456,728 14,456,728
Stock subscription receivable..................... (812,500) (812,500)
Accumulated deficit............................... (7,882,884) (7,930,759)
Treasury stock, 24,500 shares at cost............. (50,605) (50,605)
----------- -----------
Total shareholders' equity........................ 5,797,139 5,749,264
----------- -----------
Total liabilities and shareholders' equity........ $45,246,610 $31,251,128
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-1-
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Sales.................................... $ 9,568,454 $ 4,543,088 $ 26,062,031 $14,528,622
Lease revenue............................ 1,877,703 1,454,581 5,524,102 4,772,927
Fee, interest and other income........... 113,375 63,020 573,000 520,927
----------- ----------- ------------ -----------
Total revenues..................... 11,559,532 6,060,689 32,159,133 19,822,476
----------- ----------- ------------ -----------
COSTS AND EXPENSES:
Cost of sales............................ 8,912,328 3,084,966 24,309,658 10,694,782
Lease expense............................ 1,844,557 1,465,594 5,310,222 4,634,986
Selling, general and administrative expenses 1,520,687 1,456,036 3,695,361 4,536,024
----------- ----------- ------------ -----------
Total costs and expenses........... 12,277,572 6,006,596 33,315,241 19,865,792
----------- ----------- ------------ -----------
(Loss) income before (benefit) provision for
income taxes........................... (718,040) 54,093 (1,156,108) (43,316)
----------- ----------- ------------ -----------
(Benefit) provision for income taxes .... (254,276) 2,992 (429,527) 4,559
----------- ----------- ------------ -----------
Net (loss) income ................. $ (463,764) $ 51,101 $ (726,581) $ (47,875)
=========== =========== ============ ===========
Basic (loss) income per common share $(0.23) $0.02 $(0.37) $(0.02)
=========== =========== ============ ===========
Diluted (loss) income per common share $(0.23) $0.02 $(0.37) $(0.02)
=========== =========== ============ ===========
Shares used in computing net (loss) income
per share:
Basic.............................. 1,978,500 2,160,004 1,979,213 2,160,004
=========== =========== ============ ===========
Diluted............................ 1,978,500 2,345,154 1,979,213 2,160,004
=========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (726,581) $ (47,875)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes (484,388) --
Depreciation and amortization 3,350,501 3,424,251
Amortization of discounts on investments (26,953) --
Changes in operating assets and liabilities:
Accounts receivable (816,861) (409,425)
Other assets (248,007) 172,178
Accounts payable (101,844) (106,920)
Accrued expenses 55,426 (114,277)
----------- -----------
Net cash provided by operating activities 1,001,293 2,917,932
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Accounts payable - leases -- (100,000)
Purchase of equipment for direct finance leases and sales-type
leases (9,411,901) (3,017,741)
Termination of direct finance leases 3,159,587 1,696,089
Proceeds applied to direct finance leases and sales-type leases 13,263,485 11,721,242
Purchase of equipment for operating leases (6,930,505) (325,806)
Termination of operating leases 251,168 289,312
Residual value sharing arrangements 1,885,530 --
Payment for acquisitions, net of cash acquired (777,348) (64,832)
Purchases of investments (3,084,593) (23,077)
Proceeds from sale/maturity of investments 6,636,003 --
----------- -----------
Net cash provided by investing activities 4,991,426 10,175,187
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 6,500 --
Repurchase of common stock (21,240) --
Proceeds from notes payable 2,332,552 1,343,693
Repayment of notes payable (1,077,515) (2,031,187)
Decrease in amounts due on purchases of equipment for leases (649,777) --
Increase in non-recourse lease financing 13,509,866 2,685,256
Termination of non-recourse lease financing (2,864,077) (1,138,707)
Repayments and interest amortization applied to non-recourse
lease financing (16,257,272) (14,485,468)
----------- -----------
Net cash used in financing activities (5,020,963) (13,626,413)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 971,756 (533,294)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 2,209,649 1,495,082
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,181,405 $ 961,788
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 19,245 $ 9,736
=========== ===========
Cash paid for interest $ 2,018,903 $ 1,653,140
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
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, 1999 and its results of operations and cash
flows for the three and nine months ended September 30, 1998 and 1999,
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, 1998.
The financial statements for the three and nine months ended September 30,
1999 are consolidated to include the results of the Company's two wholly
owned subsidiaries, Paratech Resources, Inc. ("Paratech") and Deltaforce
Personnel Services, Inc. ("DeltaGroup"). All material intercompany balances
and transactions have been eliminated.
2. Business Acquisitions
---------------------
On March 3, 1999, Paratech acquired certain assets of Web Business Systems,
Inc., a privately held New York based web hosting and development company,
for a total purchase price of $80,000. 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
market values at the date of acquisition. The excess of the acquisition
costs over the fair value of the identifiable net assets will be amortized
on a straight-line basis over 15 years. The results of operations of Web
Business Systems, Inc. have been included in the consolidated financial
statements commencing with the acquisition date; pro forma information has
not been included as it is immaterial.
3. Segment Information
-------------------
The following represents selected financial information for the Company's
segments for the three and nine months ended September 30, 1998 and 1999:
THREE MONTHS ENDED
SEPTEMBER 30, 1998 Paramount Paratech DeltaGroup Total
------------------ --------- -------- ---------- -----
Revenues $9,127,302 $1,002,191 $ 1,430,039 $11,559,532
Cost of sales and
lease expense 8,935,239 858,496 963,150 10,756,885
Net loss (96,422) (175,104) (192,238) (463,764)
Assets 44,619,206 854,101 2,046,344 47,519,651
THREE MONTHS ENDED
SEPTEMBER 30, 1999 Total
------------------ -----
Revenues $2,112,534 $1,980,429 $1,967,726 $6,060,689
Cost of sales and
lease expense 1,745,121 1,435,410 1,370,029 4,550,560
Net income (loss) 124,510 67,892 (141,301) 51,101
Assets 26,478,321 2,859,973 1,912,834 31,251,128
4
<PAGE>
NINE MONTHS ENDED
SEPTEMBER 30, 1998 Paramount Paratech DeltaGroup Total
------------------ --------- -------- ---------- -----
Revenues $25,971,313 $3,492,090 $2,695,730 $32,159,133
Cost of sales and
lease expense 24,952,443 2,917,155 1,750,282 29,619,880
Net loss (111,548) (417,113) (197,920) (726,581)
Assets 44,619,206 854,101 2,046,344 47,519,651
NINE MONTHS ENDED
SEPTEMBER 30, 1999 Total
------------------ -----
Revenues $7,696,851 $6,729,311 $5,352,344 $19,822,476
Cost of sales and
lease expense 6,496,802 5,113,406 3,719,560 15,329,768
Net income (loss) 598,992 (136,989) (509,878) (47,875)
Assets 26,478,321 2,859,973 1,912,834 31,251,128
4. Net Income Per Share
--------------------
A reconciliation of shares used in calculating basic and diluted net income
per share follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic 1,978,500 2,160,004 1,979,213 2,160,004
Effect of assumed conversion
of employee stock options -- 185,150 -- --
----------- ----------- ----------- -----------
Diluted 1,978,500 2,345,154 1,979,213 2,160,004
=========== =========== =========== ===========
</TABLE>
Options to purchase 185,150 shares of common stock at exercise prices
ranging from $0.44 to $2.50 per share were outstanding during the nine
month period ended September 30, 1999, but were not included in the
computation of diluted earnings per share because they were anti-dilutive.
Options to purchase 68,650 shares of common stock at an exercise price of
$0.44 to $2.50 per share were outstanding during the three and nine months
ended September 30, 1998, but were not included in the computation of
diluted earnings per share because they were anti-dilutive. These options
expire through 2009.
5
<PAGE>
ITEM 2. 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.
RECENT DEVELOPMENTS
Paramount Financial Corporation and subsidiaries ("Paramount" or the
"Company") is a comprehensive business solution provider, offering customers a
wide range of integrated services, including information technology ("IT")
consulting, e-commerce, Internet design, network design and implementation,
staffing services and lease financing. The Company includes two wholly owned
subsidiaries, Paratech Resources, Inc. ("Paratech") and Deltaforce Personnel
Services, Inc. ("DeltaGroup").
The third quarter of 1999 is significant in that the Company has maintained
profitability and achieved record sales levels for Paratech and DeltaGroup. The
sales growth has been achieved by the Company's continued commitment to its
subsidiaries and de-emphasis on its lease portfolio. The Company has focused its
efforts on aggressively expanding Paratech's services through acquisitions and
start-up divisions and expanding its client base by partnering with hardware and
software vendors, as well as expanding its sales force and aggressively seeking
new customers.
Paratech achieved record sales levels and profits in the third quarter of
1999. The driving force for these sales has been the development and rapid
expansion of its Internet division. Paratech has been engaged by established, as
well as start-up companies that are looking to capitalize on the e-commerce
marketplace. Paratech has developed effective e-commerce solutions for these
companies and is now in the process of developing a state-of-the art Internet
site for a new customer. The site will feature live video broadcasts and may
eventually be linked to a back-office accounting application and a sales force
automation tool. The Company believes that a complete state-of-the-art turnkey
e-commerce solution is what sets Paratech apart from its competitors in the
emerging Internet marketplace.
The IT temporary and permanent placement division, which was started during
the second quarter of 1999, has been well received by Paratech's current
customer base. The Company believes that there is an ever-growing need for IT
professionals on a temporary and permanent basis. While the revenues generated
by the IT placement division are not currently material compared to the overall
revenue generated by Paratech, the Company believes that this division will
represent a significant amount of revenue in the future. While this is a new
division of Paratech, the Company has obtained the operational and technological
knowledge for growing this type of business from the DeltaGroup, which has
numerous years of expertise in this industry.
DeltaGroup continued to penetrate the legal temporary staffing industry
during the three months ended September 30, 1999. The permanent placement
division of the DeltaGroup has increased its revenue from permanent placements
by 81% for the three months ended September 30, 1999 when compared to the three
months ended September 30, 1998. The Company is considering expanding the
division to better meet the opportunities that it is presented. The Company
believes that its success at attaining increased revenue and market share is
directly attributable to the fact that DeltaGroup can consistently match
well-trained and professional candidates with its customers' needs. To ensure
that this goal is achieved, the DeltaGroup interviews, tests and verifies the
references of every candidate that is presented. Only after passing this
extensive process is the candidate accepted as a DeltaGroup employee and matched
with customers that are looking for that individual's exact skill set and
6
<PAGE>
personality. While this process is extensive, the Company believes that it is
the best way to ensure its customers' needs are satisfied.
The Company maintains its lease portfolio and continued to selectively
engage in leasing transactions during the three months ended September 30, 1999.
The Company believes that by acting as an integrated lessor and business
solution provider it is well positioned to meet the ever-changing needs of its
customers.
FLUCTUATIONS IN QUARTERLY RESULTS
The operating results of Paramount are subject to quarterly fluctuations
resulting from a variety of factors, including the volume of new leases written,
product announcements by manufacturers, economic conditions, interest rate
fluctuations and variations in the mix of leases written. In addition, the
Company's revenue can fluctuate significantly from quarter to quarter based on
the closing date and nature of each particular lease and/or sales transaction.
The mix of leases written in a quarter is a result of a combination of factors,
including changes in customer demands and/or requirements, new product
announcements, price changes, changes in delivery dates, changes in maintenance
policies and pricing policies of equipment manufacturers and price competition
from other lessors.
Leasing transactions (other than sales type leases), in general, do not
provide for significant earnings in the month of lease origination. Instead,
revenue, expense and profit from lease transactions are recorded over the life
of the asset and the lease. Lease revenue and lease expense recognition is
dependent upon a number of factors, including the term of the lease, the
accounting classification of the lease (i.e., operating, direct finance, or
sales type) and the commencement date of the lease and the lease financing
within a particular period. See "Lease Accounting."
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 Statement of Financial Accounting Standard No. 13, "Accounting for
Leases" ("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 also, 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 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
7
<PAGE>
lease contains a bargain purchase option; (3) the lease term at inception is at
least 75% of the estimated economic life of the leased equipment; or (4) the
present value of the minimum lease payments is at least 90% of the fair value of
the leased equipment at lease inception.
At lease inception, the cost of equipment under a direct finance lease is
recorded as "Net investment in direct finance leases". The difference between
the gross lease payments receivable, plus the estimated residual value of the
equipment, and the equipment cost is recognized as income over the life of the
lease using the effective interest method.
A lease transaction which meets all of the above criteria, and in which the
Company has made a dealer's profit, is recorded as a sales type lease. A sales
type lease is a type of direct finance lease, but one in which the Company
recognizes, at lease inception, revenue and profit which arises from the
difference between the fair market value of the leased equipment and its
acquisition cost.
Operating Leases: All lease contracts which do not meet the criteria of
direct finance leases are accounted for as operating leases. Monthly lease
payments are recorded as operating lease revenue. Leased equipment is recorded
at the Company's cost and depreciated on a straight-line basis over the lease
term to the estimated residual value at the expiration of the lease term.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
For the three months ended September 30, 1999, the Company recorded sales
revenue of $6.0 million, a $5.6 million decrease over the $11.6 million recorded
during the three months ended September 30, 1998. The decrease was primarily due
to the de-emphasis on the Company's leasing segment. The Company is focusing on
the growth of its two subsidiaries, Paratech and DeltaGroup. Paratech's revenue
for the three months ended September 30, 1999 increased by 100% to $2.0 million
as compared to $1.0 million recorded in 1998. The increase in sales at Paratech
is a result of the Company's aggressive sales and marketing focus as well as the
growth of its Internet division. DeltaGroup, which was purchased in January
1998, contributed $2.0 million in revenue during the three months ended
September 30, 1999, a 43% increase over the $1.4 million recorded in 1998. The
Company believes that this increase was due to DeltaGroup's ability to
consistently provide its customers with well-trained temporary personnel on a
timely basis and the expansion of its customer base.
As a result of the Company's limited activities with respect to its lease
portfolio, certain assets which were recorded as operating leases during the
second quarter of 1999 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. Accounting for a lease as a direct finance
lease versus an operating lease resulted in a decrease in lease revenue and
lease expense for the three months ended September 30, 1999 by 23% and 21%,
respectively, when compared to the three months ended September 30, 1998. See
"Fluctuations in Quarterly Results" and "Lease Accounting."
During the three months ended September 30, 1999, the Company entered into
new lease transactions totaling $468,000 of equipment cost as compared with
$4.7 million for the three months ended September 30, 1998. During the quarter
ended September 30, 1999, the Company entered into $704,000 of non-recourse
lease financing arrangements, as compared with $3.0 million for the three months
ended September 30, 1998. See "Liquidity and Capital Resources."
During the three months ended September 30, 1999, the Company generated
$63,000 in fee, interest and other income, compared to $113,000 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
8
<PAGE>
financial institutions. The Company cannot predict with any certainty the timing
and nature of any future such transactions.
Selling, general and administrative ("SG&A") expenses totaled $1.5 million
for the three months ended September 30, 1999, representing a decrease of 4%
over the $1.5 million recorded during the three months ended September 30, 1998.
The decrease was primarily due to the restructuring of senior management
compensation. Paratech and DeltaGroup contributed $315,000 and $684,000,
respectively, for the three months ended September 30, 1999 as compared to
$330,000 and $658,000, respectively, for the three months ended September 30,
1998.
The tax provision of $3,000 for the three months ended September 30, 1999
reflects the standard tax rate for federal and state taxes after utilization of
the net operating loss carryforward. During the three months ended September 30,
1998, the Company recorded a tax benefit of $254,000, reflecting the same
standard tax rate.
Net income for the three months ended September 30, 1999 was $51,000, after
a provision for income taxes of $3,000, as compared with a net loss of $464,000,
after a benefit for income taxes of $254,000, for the three months ended
September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
For the nine months ended September 30, 1999, the Company recorded sales
revenue of $19.8 million, a $12.4 million decrease over the $32.2 million
recorded during the nine months ended September 30, 1998. The decrease was
primarily due to the de-emphasis on the Company's leasing segment. Paratech's
sales volume increased by 93%, to $6.7 million, such increase being a result of
the Company's aggressive sales and marketing focus as well as the growth of its
Internet division. DeltaGroup revenue increased by 99% to $5.3 million. The
Company believes that this increase was due to DeltaGroup's ability to
consistently provide its customers with well-trained temporary personnel on a
timely basis and the expansion of its customer base.
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 nine months ended September 30, 1999 have been upgraded and re-leased,
providing the Company with a return on its residual value investment. The
resulting lease has been accounted for as a sales type lease. As a result of
this activity, and the effect of accounting for a lease as a direct finance
lease versus an operating lease, lease revenue and lease expense decreased by
14% and 13%, respectively, for the nine months ended September 30, 1999 when
compared to the nine months ended September 30, 1998. See "Fluctuations in
Quarterly Results" and "Lease Accounting."
During the nine months ended September 30, 1999, the Company entered into
new lease transactions totaling $3.3 million of equipment cost as compared with
$16.3 million for the nine months ended September 30, 1998. Of the total cost of
equipment leased during the nine months ended September 30, 1999, $3.0 million
were recorded as direct finance leases and $326,000 was recorded as operating
leases, compared to $9.4 million and $6.9 million respectively, for the nine
months ended September 30, 1998. During the nine months ended September 30,
1999, the Company entered into $2.7 million of non-recourse lease financing
arrangements, as compared with $13.5 million for the nine months ended
September 30, 1998.
During the nine months ended September 30, 1999, the Company generated
$521,000 in fee, interest and other income, compared to $573,000 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.
9
<PAGE>
SG&A expenses totaled $4.5 million for the nine months ended
September 30, 1999, representing an increase of 22% over the $3.7 million
recorded during the nine months ended September 30, 1998. The increase in SG&A
is a result of the growth of the Company's two subsidiaries, Paratech and
DeltaGroup, which contributed $1.2 million and $2.0 million, respectively, for
the nine months ended September 30, 1999 and $1.0 million and $1.1 million,
respectively, for the nine months ended September 30, 1998.
The tax provision of $5,000 for the nine months ended September 30, 1999
reflects the standard rate for federal and state taxes after utilization of the
net operating loss carryforward. During the nine months ended September 30,
1998, the Company recorded a tax benefit of $430,000, reflecting the same
standard tax rate.
Net loss for the first nine months of 1999 was $48,000, after a provision
for income taxes of $5,000, as compared with net loss of $727,000, after a
benefit for income taxes of $430,000, for the nine months ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had $1.6 million in cash and cash
equivalents and investments available for sale ($500,000 is restricted, see
"Term Loan"). Substantially this entire amount was invested in interest-bearing
savings accounts, money market accounts established by major commercial banks or
in United States Government, other AA rated obligations and mutual funds.
Primarily as a result of the continued investment in Paratech and DeltaGroup,
its acquisition of Web Business Systems, Inc. and the Company's investment in
its portfolio of IT equipment on lease, the Company experienced a reduction in
net cash and investments available for sale during the nine months ended
September 30, 1999.
The Company continues to use its cash balances to fund its operations. In
order to expand its operations, which the Company is aggressively seeking to
accomplish, the Company will need to utilize its cash balances to promote
internal growth and fund potential future acquisitions. However, the Company is
limited to its current cash balances for funding such internal growth and add-on
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 of any future acquisitions require the funding of losses or the
incurrence of capital outlay.
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 maintain 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.
At September 30, 1999, the Company had three types of credit lines
available:
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. On July 20, 1999 the Company borrowed an
additional $215,000 under this term loan. Interest payments are being made on
this additional borrowing and the Company is undergoing negotiations with the
10
<PAGE>
bank to establish repayment terms. As of September 30, 1999, approximately
$507,000 remained outstanding under this loan collateralized by $500,000 in cash
maintained in an investment account.
DeltaGroup Revolving Credit Facility: DeltaGroup has a $750,000 revolving
line of credit agreement with a bank secured by accounts receivable which will
expired on June 30, 2000. 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, 1999, DeltaGroup had $750,000 outstanding under
this line.
Paratech Equipment Acquisition Credit Facility: Paratech has a $2,000,000
revolving line of credit agreement with a finance company secured by accounts
receivable and inventory. Interest on outstanding borrowings accrues at the
prime rate plus 1 1/2 %. Borrowings are limited to 85% of eligible accounts
receivable and 99% of eligible inventory, as defined. This facility allows the
Company to purchase computer hardware from its vendors with net 30-day terms
interest free. At the expiration of the net 30-day period, the Company has the
option of paying the amount due or, provided the Company has sufficient eligible
collateral, borrowing under the credit facility. As of September 30, 1999,
Paratech had $322,000 outstanding under this line.
The Company believes that cash generated from operations, amounts available
under its credit facilities, and/or other third party financing will be
sufficient to fund necessary capital expenditures and to provide adequate
working capital for at least the next 12 months. There can be no assurance,
however, that the Company will not require additional financing prior to such
date to fund its operations, or that if required, such financing will be
available on commercially reasonable terms. In addition, the Company may require
additional financing after such date to fund its operations.
IMPACT OF YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year.
These programs were frequently designed and developed without addressing the
impact of the upcoming change in the century. If not corrected, many computer
software applications could fail or create erroneous results before, at or
beyond the Year 2000.
The Company has developed a Year 2000 Readiness Plan. This plan addresses
three main areas: (a) information technology systems (including the Company's
business systems, both hardware and software related), (b) non-information
technology systems (including embedded technology such as microcontrollers,
typically found in such equipment as telephone systems, fax systems, elevators,
security systems, HVAC, etc.), and (c) supply chain readiness or third party
issues (including customers as well as inventory and non-inventory suppliers).
The Company has not identified any material potential deficiencies related
to Year 2000 in its information technology systems. The Company upgraded its
business and computing system in 1997 and is now Year 2000 compliant (according
to the Company's software providers). The Company expects to complete
remediation, testing and implementation of its internal systems in the fourth
quarter of 1999. In terms of non-information technology systems, the Company
will be identifying those material items which may require remediation or
replacement. The Company is in the process of addressing those items and expects
to complete remediation or replacement and testing of its non-information
technology systems in the fourth quarter of 1999. As for third parties, the
Company is in the process of identifying and contacting suppliers, both
inventory and non-inventory, as well as customers. This process includes the
solicitation of written responses to questionnaires and/or meetings with certain
third parties. The Company expects to have a better understanding of the Year
2000 readiness of these third parties by the end of the fourth quarter.
Based upon the Company's current estimates, additional out-of-pocket costs
associated with its Year 2000 compliance are not expected to be material. These
costs are anticipated to be incurred primarily in 1999 and include third party
consultants, remediation or replacement of embedded chips.
11
<PAGE>
Such costs do not include internal management time and the deferral of other
projects, the effects of which are not expected to be material to the Company's
results of operations or financial condition.
At this point in time, the Company believes that it is difficult to
specifically identify the cause of the most reasonable worst case Year 2000
scenario. As with all businesses, a reasonable worst case scenario would be the
result of failures of third parties (including, without limitation, governmental
entities and entities with which the Company has no direct involvement) that
continue for more than several days in specific industries from which the
Company's inventory and components are sourced or to which the Company's
products are sold. In connection with the purchase of inventory and components,
the Company is considering various contingency plans. Continuing failures in
these specific industries would limit procurement or delivery of product, and
most likely would have a material adverse effect on the Company's results of
operations. The extent of such lost revenue cannot be estimated at this time;
however, the Company is considering contingency plans to limit, to the extent
possible, the effect of such lost revenue on the Company's result of operations.
Any such plans would necessarily be limited to matters over which the Company
can reasonably control.
The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and the
ability of third parties with whom the Company relies on directly, or
indirectly, to be Year 2000 compliant.
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 captions
"Fluctuations in Quarterly Results" and "Lease Accounting," 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
"Quantitative and Qualitative Disclosure About Market Risk", on page 25 of
the Company's Annual Report on Form 10-K is incorporated herein by reference. No
material changes have occurred from the disclosure in Form 10-K through the nine
months ended September 30, 1999.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None.
13
<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 12, 1999 By: /s/ Glenn Nortman
-----------------------------------
Glenn Nortman, Chief Executive Officer
14
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 962
<SECURITIES> 636
<RECEIVABLES> 3,042
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,251
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 5,663
<TOTAL-LIABILITY-AND-EQUITY> 31,251
<SALES> 14,529
<TOTAL-REVENUES> 19,822
<CGS> 10,695
<TOTAL-COSTS> 15,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (43)
<INCOME-TAX> 5
<INCOME-CONTINUING> (48)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
