<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 25, 2000
--------------
5B Technologies Corporation
----------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 0-27190 11-3529387
----------- ---------- -------------------
(STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
One Jericho Plaza, Jericho, New York 11753
-----------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code (516) 938-3400
----------------
Not Applicable
-------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE>
ITEM 5. OTHER EVENTS.
On May 2, 2000, 5B Technologies Corporation ("5B") sold the majority of
its computer lease portfolio (the "Assets") to Stamford Computer Group Inc.
("Stamford"), and 5B announced that it was discontinuing operations of its
leasing business which had been conducted by Paramount Operations Inc., a wholly
owned subsidiary of 5B. In exchange for the Assets, Stamford paid 5B cash
consideration of $700,114 and assumed $6,116,865 of indebtedness related to the
Assets. In conjunction with the discontinuance of its leasing business, 5B
recorded a predominantly non-cash, one-time pre-tax charge of approximately
$977,000 in the quarter ended March 31, 2000.
Attached hereto as Exhibit 99 is a restatement of the information required
by Item 6, Item 7 and Item 8 of Form 10-K as previously stated for the year
ended December 31, 1999. Specifically, Exhibit 99 includes the following
information, all of which gives effect to the sale of the Assets and the
discontinuance of 5B's leasing business: (i) Selected Financial Data, (ii)
Management's Discussion and Analysis of Financial Condition and Results of
Operations and (iii) the consolidated financial statements of 5B.
In addition, pursuant to Rule 601(c)(2)(iii) of Regulation S-K, attached
hereto as Exhibits 27.1 through 27.9, respectively, are Restated Financial Data
Schedules for each of the years ended December 31, 1997, 1998 and 1999 and the
quarters ended March 31, 1998, June 30, 1998, September 30, 1998, March 31,
1999, June 30, 1999 and September 30, 1999.
-2-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS.
27.1 Restated Financial Data Schedule for the year ended December
31, 1997
27.2 Restated Financial Data Schedule for the year ended December
31, 1998
27.3 Restated Financial Data Schedule for the year ended December
31, 1999
27.4 Restated Financial Data Schedule for the quarter ended March
31, 1998
27.5 Restated Financial Data Schedule for the quarter ended June
30, 1998
27.6 Restated Financial Data Schedule for the quarter ended
September 30, 1998
27.7 Restated Financial Data Schedule for the quarter ended March
31, 1999
27.8 Restated Financial Data Schedule for the quarter ended June
30, 1999
27.9 Restated Financial Data Schedule for the quarter ended
September 30, 1999
99 Restated Financial Information
-3-
<PAGE>
SIGNATURE
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 hereunto duly authorized.
5B TECHNOLOGIES CORPORATION
Date: May 25, 2000 By: /s/ Glenn Nortman
---------------------- -----------------------------
Glenn Nortman, Chief Executive
Officer
-4-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27.1 Restated Financial Data Schedule for the year
ended December 31, 1997
27.2 Restated Financial Data Schedule for the year
ended December 31, 1998
27.3 Restated Financial Data Schedule for the year
ended December 31, 1999
27.4 Restated Financial Data Schedule for the
quarter ended March 31, 1998
27.5 Restated Financial Data Schedule for the
quarter ended June 30, 1998
27.6 Restated Financial Data Schedule for the
quarter ended September 30, 1998
27.7 Restated Financial Data Schedule for the
quarter ended March 31, 1999
27.8 Restated Financial Data Schedule for the
quarter ended June 30, 1999
27.9 Restated Financial Data Schedule for the
quarter ended September 30, 1999
99 Restated Financial Information
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,210
<SECURITIES> 3,524
<RECEIVABLES> 796
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,530
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,349
<CURRENT-LIABILITIES> 1,308
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 7,560
<TOTAL-LIABILITY-AND-EQUITY> 9,349
<SALES> 3,775
<TOTAL-REVENUES> 3,775
<CGS> 3,062
<TOTAL-COSTS> 3,062
<OTHER-EXPENSES> 3,706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,693)
<INCOME-TAX> (1,076)
<INCOME-CONTINUING> (1,617)
<DISCONTINUED> 1,120
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (496)
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,495
<SECURITIES> 613
<RECEIVABLES> 2,359
<ALLOWANCES> 70
<INVENTORY> 0
<CURRENT-ASSETS> 4,463
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,739
<CURRENT-LIABILITIES> 3,267
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 5,711
<TOTAL-LIABILITY-AND-EQUITY> 9,739
<SALES> 9,370
<TOTAL-REVENUES> 9,370
<CGS> 7,620
<TOTAL-COSTS> 7,620
<OTHER-EXPENSES> 4,961
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,034)
<INCOME-TAX> (535)
<INCOME-CONTINUING> (2,499)
<DISCONTINUED> 665
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,834)
<EPS-BASIC> (0.89)
<EPS-DILUTED> (0.89)
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,004
<SECURITIES> 926
<RECEIVABLES> 2,789
<ALLOWANCES> 70
<INVENTORY> 0
<CURRENT-ASSETS> 4,709
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,275
<CURRENT-LIABILITIES> 3,532
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 5,498
<TOTAL-LIABILITY-AND-EQUITY> 9,275
<SALES> 16,825
<TOTAL-REVENUES> 16,825
<CGS> 11,672
<TOTAL-COSTS> 11,672
<OTHER-EXPENSES> 6,085
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (889)
<INCOME-TAX> 1
<INCOME-CONTINUING> (890)
<DISCONTINUED> 630
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 260
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,283
<SECURITIES> 0
<RECEIVABLES> 1,019
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,857
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,399
<CURRENT-LIABILITIES> 1,017
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 8,313
<TOTAL-LIABILITY-AND-EQUITY> 8,399
<SALES> 1,893
<TOTAL-REVENUES> 1,951
<CGS> 1,463
<TOTAL-COSTS> 1,463
<OTHER-EXPENSES> 1,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (527)
<INCOME-TAX> (206)
<INCOME-CONTINUING> (321)
<DISCONTINUED> 288
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,357
<SECURITIES> 0
<RECEIVABLES> 1,045
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,694
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,489
<CURRENT-LIABILITIES> 1,463
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 7,281
<TOTAL-LIABILITY-AND-EQUITY> 9,489
<SALES> 3,750
<TOTAL-REVENUES> 3,859
<CGS> 2,846
<TOTAL-COSTS> 2,846
<OTHER-EXPENSES> 2,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,119)
<INCOME-TAX> (441)
<INCOME-CONTINUING> (678)
<DISCONTINUED> 416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (262)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,181
<SECURITIES> 0
<RECEIVABLES> 1,595
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,839
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,115
<CURRENT-LIABILITIES> 2,344
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 6,818
<TOTAL-LIABILITY-AND-EQUITY> 10,115
<SALES> 6,088
<TOTAL-REVENUES> 6,242
<CGS> 4,581
<TOTAL-COSTS> 4,581
<OTHER-EXPENSES> 3,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,978)
<INCOME-TAX> (750)
<INCOME-CONTINUING> (1,228)
<DISCONTINUED> 501
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (727)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,136
<SECURITIES> 620
<RECEIVABLES> 2,600
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,516
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,540
<CURRENT-LIABILITIES> 3,273
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 5,597
<TOTAL-LIABILITY-AND-EQUITY> 9,540
<SALES> 4,005
<TOTAL-REVENUES> 4,019
<CGS> 2,931
<TOTAL-COSTS> 2,931
<OTHER-EXPENSES> 1,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (508)
<INCOME-TAX> 153
<INCOME-CONTINUING> (355)
<DISCONTINUED> 241
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (114)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 972
<SECURITIES> 631
<RECEIVABLES> 3,005
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,717
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,736
<CURRENT-LIABILITIES> 3,496
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 5,612
<TOTAL-LIABILITY-AND-EQUITY> 9,736
<SALES> 8,134
<TOTAL-REVENUES> 8,155
<CGS> 6,028
<TOTAL-COSTS> 6,028
<OTHER-EXPENSES> 3,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (896)
<INCOME-TAX> (310)
<INCOME-CONTINUING> (586)
<DISCONTINUED> 487
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 962
<SECURITIES> 636
<RECEIVABLES> 2,423
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,194
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,046
<CURRENT-LIABILITIES> 2,972
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 5,663
<TOTAL-LIABILITY-AND-EQUITY> 9,046
<SALES> 12,082
<TOTAL-REVENUES> 12,113
<CGS> 8,833
<TOTAL-COSTS> 8,833
<OTHER-EXPENSES> 4,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,181)
<INCOME-TAX> (439)
<INCOME-CONTINUING> (742)
<DISCONTINUED> 694
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
<PAGE>
EXHIBIT 99
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's
financial position and its results of operations for each of the five years in
the period ended December 31, 1999, set forth below has been derived from the
Company's consolidated financial statements. The selected financial data
presented below should be read in conjunction with the Consolidated Financial
Statements and related notes thereto in ITEM 8 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in ITEM 7. The
Company's financial position and results of operations have been restated to
reflect the discontinuance of the Company's leasing segment. See Note 13 to the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
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1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Revenues............... $ - $ 585,233 $ 3,774,673 $ 9,369,802 $16,824,712
Loss from continuing
operations............. (6,120,776) (1,856,908) (1,616,522) (2,499,128) (890,739)
Basic and diluted loss
per share from
continuing operations.. $ (0.95) $ (0.81) $ (1.21) $ (0.42)
BALANCE SHEET DATA:
Total assets............ $ 2,819,634 $ 9,865,827 $ 9,348,670 $ 9,739,458 $ 9,275,022
Long term debt.......... - - - 675,265 158,600
</TABLE>
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
5B Technologies Corporation (formerly Paramount Financial Corporation) and
subsidiaries ("5B" or the "Company") is a comprehensive business solution
provider, offering customers a wide range of integrated services, including
Internet solutions, information technology ("IT") consulting, systems
integration, staffing services and lease financing. The Company includes two
wholly owned subsidiaries, Paratech Resources, Inc. ("Paratech") and Deltaforce
Personnel Services, Inc. ("Deltaforce).
Paratech provides a complete range of advanced technological services,
including fully integrated solutions for Internet and e-commerce businesses,
Internet marketing, applications development, systems integration, hardware and
software procurement, multi-platform integration services and personnel
outsourcing.
Paratech's Internet solutions business is typically retained on a fixed
price, project-by-project basis. Revenue is recognized as earned when the work
is completed. Each project typically undergoes a four step process: (a) strategy
consulting, (b) design, (c) technology development, and (d) implementation. The
Company believes that these four phases are crucial to the success of its
Internet projects and uses this model to plan and price its projects. From time
to time the Company may accept small time-and-material projects, but it prefers
to align itself with its customers, developing long-term relationships as
opposed to performing one-time changes or fixes. During 1999, the Internet
solutions business began to review its pricing models and has adapted it to the
customers needs. Many of the Internet solution business's customers are small,
start-up companies which are pursuing the option to undertake an initial public
offering approximately six months to a year after their e-commerce solutions has
been implemented. Based on the growth potential and initial cash constraints of
these companies, Paratech may accept equity or revenue sharing in its customers.
This new pricing model may reduce the initial cash received, but the Company
believes that it can recognize greater benefits in the future as these customers
grow.
In contrast, Paratech's systems integration and consulting business is
typically retained on a time-and-material basis. Due to the complexity and
diversity of implementing integration and application solutions, the Company
prefers a time and material basis contract over a fixed price contract. The
Company perceives the growth in the integration business to be generated from
the Internet solutions business. As more businesses expand on to the Internet
the need for integrated accounting and sales force automation software will
become essential. Paratech's integration business continues to serve its core
clients as well as expanding its client base through the use of its internal
sales force and referrals from Paratech's Internet solutions business.
Paratech has established standard costs, per engineer, for all services
performed. This standard cost encompasses all associated expenses and gives the
Company a worst case scenario as it prices it projects.
In the temporary staffing industry, quality of service is generally a
function of two things: (1) the ability to effectively match an individual
worker to a specific assignment, and (2) the promptness with which the
assignment is filled. The Company believes that the experience of its management
and internal staff and its standing in the New York City market allows it to
effectively access a large supply of available temporary
2
<PAGE>
workers, select suitable individuals for a particular assignment and, in some
cases, train available workers in skills required for an assignment.
Following the acquisition of Deltaforce and Wordsmith, the Company made a
considerable investment in systems and process improvements to create a new and
improved infrastructure to enhance client servicing, applicant recruitment and
overall productivity. These systems, which are specific to the staffing
industry, provide The DeltaGroup with the platform to grow without incurring
additional administrative costs, as well as to provide a shift-based, 24 hour a
day seven day a week business.
On May 2, 2000, the Company sold the majority of its lease portfolio (the
"Assets"), which was maintained through a wholly owned subsidiary, Paramount
Operations Inc. ("Paramount"), for approximately $700,000 and the assumption
of approximately $6,117,000 of indebtedness related to the Assets.
Accordingly, Paramount has been presented as a discontinued operation for the
year ended December 31, 1999, and the balance sheets as of December 31, 1998
and 1999 and the statements of operations and cash flows for the years ended
December 31, 1997, 1998 and 1999 have been restated to conform with this
presentation. At March 31, 2000, the Company accrued the loss on disposal of
$860,000. The loss on disposal of Paramount includes provisions for estimated
losses of approximately $602,000 and a loss on sale of approximately
$254,000. The provision for estimated losses of approximately $602,000 is
based on management's estimate of future income and expenses relating to the
remaining lease portfolio and write-downs of certain related assets. Net
sales for Paramount were approximately $28,319,318, $28,937,455 and $9,125,164
for the years ended December 31, 1997, 1998 and 1999, respectively.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, the Company recorded sales revenue
of $16.8 million, a $7.4 million increase from the $9.4 million recorded during
the year ended December 31, 1998. Paratech's revenue for the year ended December
31, 1999 increased 76%, to $9.5 million, as compared to $5.4 million recorded
for the year ended December 31, 1998. The increase in sales at Paratech is a
result of the Company's growth in providing Internet and e-commerce services to
business in addition to growth in its systems integration division. DeltaGroup,
which was purchased in January 1998, contributed $7.3 million in revenue during
the year ended December 31, 1999, an 83% increase over the $4.0 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
acquisition of Wordsmiths in July 1998.
Cost of sales consists of all direct labor costs and other costs, such as
payroll taxes, employee benefits, outside contractors and equipment purchases,
related to each project or individual sale. For the year ended December 31,
1999, the Company recorded cost of sales of $11.7 million, an increase of $4.1
million compared to the $7.6 million recorded for the year ended December 31,
1998. Paratech reported cost of sales of $6.6 million, a 47% increase over the
$4.5 million reported for the year ended December 31, 1998. The reason for this
increase is the growth of Paratech and its increase in revenues. The DeltaGroup
posted cost of sales of $5.1 million, a 59%, increase compared to the $3.2
million recorded for the year ended December 31, 1998. The reason for the
increase is predominantly due to the increase in revenue which generated
corresponding increases in temporary salaries and associated payroll taxes.
3
<PAGE>
Selling, general and administrative ("SG&A") expenses totaled $6.1 million
for the year ended December 31, 1999, representing an increase of 23% over the
$5.0 million recorded during the year ended December 31, 1998. The increase in
SG&A is predominantly attributable to the growth of the Company's subsidiaries
through the acquisitions made in 1998. Paratech incurred $3.1 million in SG&A
for the year ended December 31, 1999, compared to $2.9 million incurred in 1998,
while DeltaGroup incurred $2.8 million in SG&A for the year ended 1999, compared
to $1.3 million in 1998. Within SG&A expense for the year ended December 31,
1999 for the DeltaGroup is $300,000 of non-recurring expenses.
The Company recorded a provision for income taxes from continuing
operations of $2,000 for the year ended December 31, 1999, compared to a tax
benefit of $535,000 in 1998. The provision for taxes for the year ended December
31, 1999 represents minimum state taxes payable. The tax benefit recorded in
1998 was the result of the net operating loss incurred for the year.
Pre-tax loss from continuing operations, for the year ended December 31,
1999 was $889,000, as compared with a pre-tax loss of $3.0 million for the year
ended December 31, 1998. The Company believes its operational improvement is
predominantly attributable to the Company's Paratech subsidiary, which posted a
pre-tax loss of $168,000, while DeltaGroup recorded a pre-tax loss of $571,000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, the Company recorded sales revenue
of $9.4 million, a $5.6 million increase over the $3.8 million recorded during
the year ended December 31, 1997. The increase was predominantly due to the
growth of the Company's Paratech subsidiary and the acquisition of the
DeltaGroup. Paratech's revenue increased by 42% to $5.4 million when compared
with 1997. The DeltaGroup, which was not part of the Company in 1997,
contributed $4.0 million in revenue during the 1998 year.
Cost of sales totaled $7.6 million for the year ended December 31, 1998, a
$4.5 million increase from the $3.1 million recorded in 1997. The increase is
predominantly due to the increase in sales. Paratech reported cost of sales of
$4.5 million, a 45% increase over the $3.1 million reported in 1997. The
DeltaGroup, which was not part of the Company in 1997, contributed $3.2 million
to cost of sales during 1998. The increases in Paratech is predominantly due to
the increase in sales.
SG&A totaled $5.0 million for the year ended December 31, 1998,
representing an increase of 32% over the $3.7 million recorded during the year
ended December 31, 1997. The increase in SG&A is attributed to the acquisitions
of Deltaforce and Wordsmiths, which contributed $1.3 million, as well as the
acquisition of Comptech and the continued growth of Paratech, which contributed
$2.9 million
The Company recorded tax benefits of $535,000 and $1.1 million for the
years ended December 31, 1998 and 1997, respectively due to the net operating
loss incurred in each year.
The Company recorded a loss from continuing operations for the year ended
December 31, 1998 of $2.5 million, as compared with a loss from continuing
operations of $1.6 million for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $2.1 million in cash and cash
equivalents and investments available for sale. Substantially this entire amount
was invested in interest-bearing savings accounts, money
4
<PAGE>
market accounts established by major commercial banks or in United States
Government, other AA rated obligations and mutual funds. Investments available
for sale also includes 250,000 shares and a warrant to purchase 50,000 shares of
a privately held company, which had a fair value of approximately $438,000.
Primarily as a result of the continued investment in Paratech and DeltaGroup and
the acquisitions it made in 1998 the Company experienced a reduction in net cash
and investments available for sale during the year ended December 31, 1999 of
$491,330.
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.
At December 31, 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 as a demand note. Interest payments are being made on this
additional borrowing and the Company is undergoing negotiations with the bank to
establish repayment terms. As of December 31, 1999, approximately $465,000
remained outstanding under these loans collateralized by $500,000 in cash
maintained in an investment account. Under the agreement, the Company's
Paramount subsidiary was not in compliance with the debt covenant requiring
minimum net worth of at least $7.0 million. Paramount has obtained a waiver from
the bank for non-compliance with the aforementioned covenant for the year ended
December 31, 1999. The Company is currently in negotiations to revise the
existing debt covenant.
DELTAGROUP REVOLVING CREDIT FACILITY: DeltaGroup has a $750,000 revolving
line of credit agreement with a bank secured by accounts receivable, which will
expire 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 December 31, 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, 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 December 31, 1999, Paratech had $665,000 outstanding
under this line. Under the agreement, the Company's Paratech subsidiary was not
in compliance with the debt covenant requiring a liability to net worth ratio of
less than 8 to 1. Paratech has obtained a waiver from the finance company for
non-compliance with the aforementioned covenant for the year ended December 31,
1999.
As the Company is in default with two of its existing debt agreements at
December 31, 1999, it is, pursuant to its respective debt agreements, in default
with all of its debt agreements. Accordingly, amounts
5
<PAGE>
outstanding, aggregating approximately $1,880,000, under these debt agreements
could become due immediately.
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 will
require additional financing after such date to fund its operations.
YEAR 2000
The Company completed its Year 2000 software program conversions,
compliance and contingency programs during the fourth quarter of 1999.
Subsequent to December 31, 1999, the Company has not experienced any Year 2000
problems either internally or from suppliers or other outside sources that had
an adverse impact on the Company's operations of financial condition. The
Company has no reason to believe that Year 2000 failures will materially affect
it in the future. However, since it may take several additional months before it
is known whether the Company or suppliers, vendors or customers may have
undergone Year 2000 problems, no assurance can be given that the Company will
not experience losses or disruptions of due to Year 2000 computer-related
problems. The Company will continue to monitor the operation of its software,
computers and microprocessor-based devices for any Year 2000 problems.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISK
Statements contained herein, which are not historical facts, are
forwarding-looking statements. The forward-looking statements in this press
release 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, specific factors impacting the Company's business, including increased
competition; the ability of the Company to expand its operations and attract and
retain qualified sales representatives and technically trained consultants
experienced in the Internet and IT sectors; the ability of the Company to
attract and retain Internet solutions and IT professionals skilled in specific
applications; the ability of the Company to attract and retain qualified
personnel in the legal staffing sector; the availability of computer equipment;
technological obsolescence of the Company's portfolio of computer equipment;
competition in the Internet solutions and IT consulting sector and general
economic conditions and the Company's need for additional capital to finance the
growth of its operations.
6
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(FORMERLY PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2-F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets as of December 31, 1998 and 1999 F-4
Statements of operations for each of the three years
in the period ended December 31, 1999 F-5
Statements of stockholders' equity for each of the
three years in the period ended December 31, 1999 F-6
Statements of cash flows for each of the three years
in the period ended December 31, 1999 F-7
Notes to consolidated financial statements F-8-F-25
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
5B Technologies Corporation and Subsidiaries
Jericho, New York
We have audited the accompanying consolidated balance sheet of 5B Technologies
Corporation and Subsidiaries (formerly Paramount Financial Corporation and
Subsidiaries) as of December 31, 1999, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year then ended.
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 audit.
We conducted our audit 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 audit provides 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 5B Technologies Corporation and
Subsidiaries (formerly Paramount Financial Corporation and Subsidiaries) as of
December 31, 1999, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Melville, New York
March 6, 2000,
except for Note 12,
which is as of April 17, 2000,
and Note 13, which is as of
May 2, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 5B Technologies Corporation and Subsidiaries:
Jericho, New York
We have audited the accompanying consolidated balance sheet of 5B Technologies
Corporation and Subsidiaries (formerly Paramount Financial Corporation and
Subsidiaries) as of December 31, 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1998. 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 5B Technologies Corporation and
Subsidiaries (formerly Paramount Financial Corporation and Subsidiaries) as of
December 31, 1998, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Melville, New York
March 12, 1999,
except for Note 13,
which is as of
May 19, 2000
F-3
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(FORMERLY PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1999
- --------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,495,082 $ 1,003,752
Investments available for sale 613,188 925,616
Accounts receivable, net of allowance for doubtful
accounts of $70,000 2,289,379 2,718,646
Other current assets 65,103 61,164
- --------------------------------------------------------------------------------------------
Total current assets 4,462,752 4,709,178
- --------------------------------------------------------------------------------------------
Investments available for sale -- 157,060
Goodwill 1,435,635 1,498,292
Net assets of discontinued operation 2,395,498 1,812,232
Other assets 1,445,573 1,098,260
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,739,458 $ 9,275,022
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,920,000 $ 2,227,775
Accounts payable 942,431 745,839
Accrued expenses 404,623 558,840
- --------------------------------------------------------------------------------------------
Total current liabilities 3,267,054 3,532,454
- --------------------------------------------------------------------------------------------
Notes payable 675,265 158,600
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,942,319 3,691,054
- --------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none outstanding -- --
Common stock, $.04 par value, 17,500,000 shares
authorized, 2,160,000 shares issued and outstanding 86,400 86,400
Additional paid-in capital 14,456,728 14,504,629
Stock subscription receivable (812,500) (812,500)
Accumulated deficit (7,882,884) (8,143,956)
Treasury stock at cost, 24,500 shares (50,605) (50,605)
- --------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,797,139 5,583,968
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,739,458 $ 9,275,022
============================================================================================
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(FORMERLY PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1997 1998 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 3,774,673 $ 9,369,802 $ 16,824,712
Cost of sales 3,062,135 7,620,412 11,672,084
- --------------------------------------------------------------------------------------------------------
Gross profit 712,538 1,749,390 5,152,628
- --------------------------------------------------------------------------------------------------------
Expenses:
Selling 609,681 694,968 1,745,238
General and administrative expenses 3,096,326 4,266,460 4,339,626
- --------------------------------------------------------------------------------------------------------
Total expenses 3,706,007 4,961,428 6,084,864
- --------------------------------------------------------------------------------------------------------
Loss from operations (2,993,469) (3,212,038) (932,236)
Interest and other income 300,850 178,234 43,037
- --------------------------------------------------------------------------------------------------------
Loss before provision for (benefit from) income
taxes and discontinued operations (2,692,619) (3,033,804) (889,199)
Provision for (benefit from) income taxes (1,076,097) (534,676) 1,540
- --------------------------------------------------------------------------------------------------------
Loss from continuing operations (1,616,522) (2,499,128) (890,739)
Discontinued operation:
Income from discontinued operation, net 1,120,184 665,324 629,667
of income taxes of $787,986, $525,390 and
$80,892, respectively
- --------------------------------------------------------------------------------------------------------
Net loss $ (496,338) $(1,833,804) $ (261,072)
========================================================================================================
Basic and diluted (loss) earnings per common share:
Continuing operations $ (0.81) $ (1.21) $ (0.42)
- --------------------------------------------------------------------------------------------------------
Discontinued operations $ 0.56 $ 0.32 $ 0.29
- --------------------------------------------------------------------------------------------------------
Net loss per share $ (0.25) $ (0.89) $ (0.12)
========================================================================================================
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(FORMERLY PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Stock
------------------------------ Paid-In Subscription Accumulated Treasury
Shares Amount Capital Receivable Deficit Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 7,990,000 $79,900 $13,644,228 $ - $(5,552,742) $ - $ 8,171,386
Purchase of treasury stock - - - - - (29,365) (29,365)
Net loss - - - - (496,338) - (496,338)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 7,990,000 79,900 13,644,228 - (6,049,080) (29,365) 7,645,683
One-for-four reverse
stock split (5,992,500) - - - - - -
Issuance of common stock 162,500 6,500 812,500 (812,500) - - 6,500
Purchase of treasury stock - - - - - (21,240) (21,240)
Net loss - - - - (1,833,804) - (1,833,804)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,160,000 86,400 14,456,728 (812,500) (7,882,884) (50,605) 5,797,139
Issuance of warrants - - 47,901 - - - 47,901
Net loss - - - - (261,072) - (261,072)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 2,160,000 $86,400 $14,504,629 $(812,500) $(8,143,956) $ (50,605) $ 5,583,968
====================================================================================================================================
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(FORMERLY PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (496,338) $ (1,833,804) $ (261,072)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Deferred income taxes (349,118) 540,095 --
Depreciation and amortization -- 171,538 461,008
Depreciation and amortization on discontinued operation 6,721,854 5,386,982 4,147,482
Amortization of discounts on investments (205,082) (26,953) --
Issuance of warrants -- -- 25,000
Equity received for services provided -- -- (438,000)
Changes in operating assets and liabilities:
Accounts receivable (639,166) (1,493,606) (429,267)
Other assets (53,010) (1,601,004) 6,981
Accounts payable 244,670 (365,065) (196,592)
Accrued expenses 96,642 82,980 154,218
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS 5,320,452 861,163 3,469,758
- ------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES FROM
DISCONTINUED OPERATIONS 1,512,999 (377,468) (552,544)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,833,451 483,695 2,917,214
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired -- (1,010,172) (95,331)
Purchase of investments (14,187,250) (3,697,782) (31,488)
Proceeds from sale/maturity of investments 14,031,717 6,636,003 --
- ------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS (155,533) 1,928,049 (126,819)
- ------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATION (27,603,888) 2,083,550 13,942,136
- ------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (27,759,421) 4,011,599 13,815,317
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock -- 6,500 --
Repurchase of common stock (29,365) (21,240) --
Proceeds from notes payable -- 4,326,635 158,600
Repayment of notes payable -- (1,731,370) (367,490)
- ------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS (29,365) 2,580,525 (208,890)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)INVESTING ACTIVITIES FROM
DISCONTINUED OPERATIONS 19,464,210 (7,790,386) (17,014,971)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS 19,434,845 (5,209,861) (17,223,861)
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,700,774 2,209,649 1,495,082
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,209,649 $ 1,495,082 $ 1,003,752
==================================================================================================================
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-7
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(FORMERLY PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
5B Technologies Corporation (formerly Paramount Financial Corporation) and
subsidiaries ("5B" or the "Company") is a comprehensive business solution
provider, offering customers a wide range of integrated services, including
Internet solutions, information technology ("IT") consulting, systems
integration and staffing services.
Effective February 11, 2000, 5B Technologies Corporation and Subsidiaries was
created as a holding company for Paramount Financial Corporation. Paramount
Financial Corporation became a wholly owned subsidiary of 5B Technology
Corporation and was renamed Paramount Operations Inc. Paramount Financial
Corporation was incorporated in the state of Delaware in July 1991. On May 2,
2000 the Company entered into a formal plan to sell the majority of its lease
portfolio and discontinue the operations of Paramount Operations Inc.
("Paramount") (See Note 13).
The Company operates primarily through two wholly owned subsidiaries:
Paratech Resources, Inc. ("Paratech") and Deltaforce Personnel Services, Inc.
("DeltaGroup").
Paratech provides a complete range of advanced technological services, including
fully integrated solutions for Internet and e-commerce businesses, Internet
marketing, applications development, systems integration, hardware and software
procurement, multi-platform integration services and personnel outsourcing to
small and mid-sized companies primarily in the New York Metropolitan area.
DeltaGroup is a provider of temporary and permanent placement staffing to the
legal industry. DeltaGroup offers its clients, which consist primarily of New
York based law firms and corporate legal departments, an array of experienced
legal support staff 24 hours a day seven days a week. DeltaGroup also provides
temporary and permanent placement of professionals to various businesses.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
CASH EQUIVALENTS
The Company considers all highly liquid debt and equity instruments with an
original maturity of three or less months 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
Marketable securities are stated in accordance with Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain 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. 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, 1998 and 1999, investments available for sale consist of United
States government and agency bonds with original maturities of one year or less
and a mutual fund. The cost of debt securities is adjusted for accretion of
discount to maturity and recorded as interest income and interest income is
recorded on the mutual fund as earned. At December 1998 and 1999, the cost basis
of these securities approximates market value.
During 1999, the Company received payment for services provided, in lieu of
cash, of 250,000 shares and a warrant to purchase 50,000 shares of a privately
held company. The fair value of these investments at December 31, 1999 was
approximately $438,000 (which equaled the fair value at the date shares and
warrants were received).
REVENUE RECOGNITION
The Company records revenues when products are shipped and title transfers to
the customer or services are provided to customers. From time to time, the
Company will receive payment prior to the transfer of title or purchase of the
related inventory or performance of services. The Company records such amounts
as unearned sales revenue on the balance sheet. Upon shipment and transfer of
title or performance of services, unearned sales revenue is reversed and
recorded as equipment sales or service revenues, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred income taxes are provided on the differences between
the carrying values of assets and liabilities for financial reporting and tax
purposes at the enacted rate.
NET LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Diluted loss per share reflect, in periods
in which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options and warrants.
F-9
<PAGE>
STOCK-BASED COMPENSATION
The Company accounts for its stock option awards under the intrinsic value based
method of accounting prescribed by Accounting Principles Board Option No. 25
"Accounting for Stock Issued to Employees". Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company makes pro forma disclosure of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by Statement of Financial Accounting Standards
("SFAS 123"), "Accounting for Stock-Based Compensation.
LONG-LIVED ASSETS
Long-lived assets, such as goodwill and property and equipment, are evaluated
for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to the fair market
value. No impairment losses have been necessary through December 31, 1999.
ACQUISITIONS
The net assets of businesses purchased are recorded at their fair value at the
acquisition date and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in goodwill and is amortized on
a straight-line basis over periods not exceeding 15 years. Certain acquisitions
provide for contingent consideration, primarily cash, to be paid in the event
certain financial performance targets are satisfied over periods typically not
exceeding two years from the date of acquisition.
The Company's policy is to record a liability for such amounts when it becomes
probable that targets will be met.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term debt
approximates fair value because certain of the underlying instruments are at
variable rates, which are repriced frequently. The remaining portion of
long-term debt approximates fair value because the interest approximates current
market rates for financial instruments with similar maturities and terms.
F-10
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(FORMERLY PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Acquisitions
(A) Web Business Systems, Inc.
On March 3, 1999, Paratech acquired certain assets of Web Business
Systems, Inc. ("Web"), a privately held New York based web hosting and
development company for a total purchase price of $73,000. The purchase
price consisted of $50,000 in cash and a warrant, which expires in
February 2004, to purchase 10,000 shares of the Company's common stock
at $2.34, which equaled the market value of the Company's common stock
on the date of acquisition. The acquisition was accounted for as a
purchase. The acquisition agreement provided for additional
consideration of $30,000 to be paid if the acquired entity's results of
operations exceed certain targeted levels. This additional
consideration was earned during 1999. The excess of the aggregate
purchase price over the net assets acquired of approximately $118,000
is being amortized over 10 years.
(B) Abbey, Garrett and Seth, Ltd.
On October 23, 1998, Paratech acquired 100% of the outstanding shares
of Abbey, Garrett and Seth, Ltd, (d/b/a Comptech Resources)
("Comptech'), a privately held, systems consulting, software
applications and Internal commerce development firm for approximately
$272,000. The acquisition was accounted for as a purchase. The excess
of the aggregate purchase price over the net assets acquired of
approximately $551,000 is being amortized over 10 years. In connection
with this acquisition the Company entered into non-compete agreements
with three key executives for an aggregate consideration of $380,000,
$105,000 of which was paid at closing with $25,000 due quarterly
through October 23, 2001 (See Note 2(b)).
(C) RBW Staffing Resources, Inc.
On July 28, 1998, Deltaforce, a wholly owned subsidiary of the Company,
acquired certain assets from RBW Staffing Resources, Inc. (d/b/a
Wordsmiths) ("Wordsmiths"), a privately held New York City based
staffing company for approximately $440,000, which included $100,000 of
notes payable. The acquisition was accounted for as a purchase. The
excess of the aggregate purchase price over the net assets acquired of
approximately $440,000 is being amortized over 15 years. In connection
with this acquisition Deltaforce entered into non-compete agreements
with two key executives of Wordsmiths 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. Such non-compete
agreements are included in other assets and are being amortized over
the terms of the agreement of 5 years. In addition, simultaneous with
the closing of the transaction, the Company entered into a stock
purchase agreement with the former shareholder of Wordsmiths (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
F-11
<PAGE>
by the issuance of two non-recourse secured promissory notes and stock
pledge agreements restricting the issuance of the stock until the notes
are paid in full. The notes mature on July 27, 2000 and 2001,
respectively. The operations of Wordsmiths was merged into Deltaforce
to create the DeltaGroup.
(D) Deltaforce Personnel Services, Inc.
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, for approximately $560,000, which included
$162,500 of notes payable. The acquisition was accounted for as a
purchase. The acquisition agreement provided for additional
consideration of $162,500 to be paid if the acquired entity's results
of operations exceeded certain targeted levels and certain forfeiture
events do not occur. During 1999, a forfeiture event occurred and the
additional consideration earned was reduced to $81,250. The excess of
the aggregate purchase price over the net assets acquired of
approximately $545,000 is being amortized over 15 years.
Note 2: Notes Payable and Other Financing
Notes payable were comprised of:
DECEMBER 31, 1998 1999
-------------------------------------------------------
Credit facilities (a) $ 1,657,765 $ 1,880,125
Notes payable (b) 937,500 506,250
-------------------------------------------------------
2,595,265 2,386,375
Less: current portion 1,920,000 2,227,775
-------------------------------------------------------
$ 675,265 $ 158,600
=======================================================
(A) The Company maintains a $2,000,000 revolving line of credit agreement with
a finance company for its subsidiary Paratech, secured by accounts
receivable of Paratech. Interest on outstanding borrowings accrues at the
prime rate (8.50% at December 31, 1999) plus 1-1/2%. Borrowings are limited
to 85% of eligible accounts receivable. 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 December
31, 1999, Paratech had $978,000 outstanding under this line, of which
$665,000 was classified as debt. Under the agreement, the Company's
Paratech subsidiary was not in compliance with the debt covenant requiring
a liability to net worth ratio of less that 8 to 1. Paratech has obtained a
waiver from the finance company for non-compliance with the aforementioned
covenant for the year ended December 31, 1999.
In addition, in connection with the acquisition of Comptech, the Company
assumed all outstanding obligations under a similar arrangement between
Comptech and the same finance company. This facility has been repaid in
full.
F-12
<PAGE>
In April 1998, the Company entered into a $500,000 term loan with a bank
collateralized by $600,000 in cash maintained in an investment account.
Interest accrues at a rate of 8.03% and principal payments of approximately
$41,600 and interest are due on a quarterly basis through April 20, 2001.
As of December 31, 1999, approximately $250,000 remains outstanding under
this agreement. Under the agreement, the Company was not in compliance with
the debt covenant requiring minimum net worth of at least $7.0 million.
Paramount has obtained a waiver from the bank for non-compliance with the
aforementioned covenant for the year ended December 31, 1999.
In addition, the Company entered into a demand note with the same bank, in
July 1999, collateralized by the same $600,000 in cash as the term loan for
$215,000. Interest accrues at the prime rate (8.50% at December 31, 1999)
plus 1% and is paid quarterly. As of December 31, 1999, approximately
$215,000 remains outstanding.
In January 1998, the Company entered into a $750,000 revolving line of
credit agreement with a bank secured by accounts receivable which expires
on June 30, 2000. Interest on outstanding borrowings accrues at the bank's
prime rate (8.5% at December 31, 1999) plus 1%, and interest is paid
monthly. Borrowings are limited to 80% of eligible accounts receivable. As
of December 31, 1999, $750,000 was outstanding under this line.
(B) In connection with the acquisitions described in Note 1, the Company
entered into promissory notes with several individuals. Interest on such
notes ranges from 0% to 8.5%. The interest components of those non-interest
bearing notes are immaterial. Annual maturities are $350,000 and $75,000 in
2000 and 2001, respectively.
Note 3: Income Taxes
The provision for (benefit from) income taxes is comprised of:
YEARS ENDED DECEMBER 31, 1997 1998 1999
------------------------------------------------------
Current:
Federal $ - $ - $ 73,795
State 63,703 43,328 8,637
-------------------------------
63,703 43,328 82,432
-------------------------------
Deferred:
Federal (251,928) (532,055) (72,730)
State (99,886) (82,362) (6,241)
-------------------------------
(351,814) (614,417) (78,971)
-------------------------------
Valuation allowance - 561,803 78,971
-------------------------------
Total $(288,111) $ (9,286) $ 82,432
===============================
Significant components of deferred income tax assets and (liabilities) are:
F-13
<PAGE>
1998 1999
-------------------------------------------------------
Depreciation $ 655,323 $ 369,668
Lease transactions treated
differently for tax and
financial reporting
purposes (726,226) (45,187)
Net operating loss
carryforwards 600,320 354,361
Other 122,386 51,932
Valuation allowance (651,803) (730,774)
-------------------------------------------------------
Net deferred income tax $ - $ -
-------------------------------------------------------
The Company has net operating loss carryforwards for income tax reporting
purposes of approximately $719,000 expiring through 2013 and an alternative
minimum tax credit carryforward of $73,795. A full valuation allowance has been
provided against the net deferred tax asset due to the uncertainty at December
31, 1999 as to their realization.
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, 1997 1998 1999
---------------------------------------------------------
<S> <C> <C> <C>
Federal income tax
expense (benefit)
at U.S. statutory
rate $(266,713) $(626,651) $(60,738)
Permanent differences - - 47,588
Alternative minimum
tax - - 73,795
Change in valuation
allowance - 561,803 -
State taxes, net of
federal benefit 39,547 43,328 5,700
All other, net (60,945) 12,234 16,087
----------------------------------
$(288,111) $ (9,286) $ 82,432
==================================
</TABLE>
Note 4: Stockholders' Equity
(A) Class A and Class B Warrants
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 consisted of two shares of common
stock and two redeemable Class A warrants. The common stock and Class A
warrants were detachable and trade separately. The Class A warrants were
exercisable commencing one year from the Effective Date. Four Class A
warrants entitle the holder to purchase one share of common stock at $16.00
per share (after giving effect to a one-for-four reverse
F-14
<PAGE>
stock split of the common stock effected May 19, 1998 and 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 $36.00 per share (after giving effect to
the one-for-four reverse stock split) 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 have been exercised to date.
In connection with the Company's initial public offering, 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 (consisting of an aggregate of 1,500,000 shares of common stock and
Class A warrants to purchase an aggregate of 1,500,000 shares of common
stock), 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. The Class B warrants are identical to Class A
warrants, except that their exercise price is $16.80 per share (after
giving effect to the one-for-four reverse stock split). 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
Class B warrants have been exercised to date.
(B) Authorized Shares Outstanding
Effective May 19, 1998, the Board of Directors of the Company 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. The preferred stock remained
unchanged. All shareholders' equity accounts and per share date were
retroactively adjusted to reflect this split.
(C) Treasury Shares
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 was authorized to continue for a period of two
years. Subject to applicable rules, the plan allowed the Company to
repurchase shares at any time during the authorized period in any
increments it deems appropriate. As of December 31, 1998 and 1999, the
Company had repurchased 24,500 shares for a cash purchase price of $50,605.
(D) Warrants
In January 1999, the Company, in connection with a service agreement,
issued warrants, which expire in January 2002, to a third party to purchase
100,000 shares of the Company's common stock at an exercise price of $0.85
per share for 50,000 shares and $1.25 per share for 50,000 shares. The fair
value of the warrants was approximately $25,000, which has been recorded as
compensation expense.
Note 5: Stock Option Plans
(A) Employee Stock Option Plan
F-15
<PAGE>
On August 28, 1995, the Board of Directors adopted and the Company's
shareholders approved the Employee Stock Option Plan (the "Stock Option
Plan") for all senior executive officers, key employees and consultants of
the Company pursuant to which 187,500 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 187,500 shares, for a total of 375,000. Additionally, in June
1999 the Board of Directors approved an amendment to increase the
aggregate number of shares of common stock reserved for issuance by
125,000 shares, for a total of 500,000. Options granted under the Stock
Option Plan may be either incentive stock options ("ISO"), which are
intended to meet the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended, or non-qualified stock options ("NSO's"). Under
the Stock Option Plan, the Board of Directors may grant (i) ISO's at an
exercise price per share which is not less than the fair market value of a
share of common stock on the date on which such ISO's are granted (and not
less than 110% of the fair market value in the case of any optionee who
beneficially owns more than 10% of the total combined voting power of the
Company), and (ii) NSO's at an exercise price per share which is
determined by the Board of Directors (and which may be less than the fair
market value of a share of common stock on the date on which such NSO's
are granted). The Stock Option Plan further provides that the maximum
period in which options may be exercised will be determined by the Board
of Directors, except that ISO's may not be exercised after the expiration
of ten years from the date the ISO was initially granted (and five years
in the case of any optionee who beneficially owns more than 10% of the
total combined voting power of the Company). Any option granted under the
Stock Option Plan will be nontransferable and may be exercised upon
payment of the option price in cash, a cash equivalent, common stock or
any other form of consideration, which is acceptable to the Board of
Directors.
The following table summarizes the activity under the Stock Option Plan
for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Weighted
Average
Excise Exercise
Shares Price Price
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, December 31,
1997 41,250 $1.50-$2.38 $2.00
Granted 150,000 0.44-2.50 1.02
Forfeited (5,250) 0.44-1.50 .99
Outstanding, December 31,
1998 186,000 0.44-2.38 1.24
Granted 95,750 1.08-2.06 1.62
Forfeited (70,100) 0.44-2.38 .85
Outstanding, December 31,
1999 211,650 0.44-2.38 1.41
Shares exercisable
December 31, 1998 23,800 1.50-2.38 2.10
Shares exercisable
December 31, 1999 27,346 0.44-2.38 .90
</TABLE>
The 211,650 options outstanding as of December 31, 1999 have a weighted
average remaining contractual life of 8.71 years.
F-16
<PAGE>
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation has been recorded. As of December 31, 1999 the Company has
not issued any options to consultants. 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 in the following pro
forma amounts:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $(496,338) $(1,833,804) $(261,069)
Pro forma (518,148) (1,849,110) (310,134)
Basic and diluted loss
income per common share As reported $ (0.25) $ (0.89) $ (0.15)
Pro forma $ (0.26) $ (0.89) $ (0.15)
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1998 1999
-------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value $0.25 $0.59 $1.63
Expected life (years) 3.45 3.87 2.45
Risk-free interest rate 6.5% 4.8% 5.3%
Volatility 71% 73% 68%
Dividend yield 0% 0% 0%
</TABLE>
The pro forma effects of applying SFAS 123 are not indicative of future
amounts because stock option awards are anticipated in future years.
(B) 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 12,500 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 500 shares of common stock per annum at an exercise price equal
to the fair market value of such shares at the time of grant of such
options. Each option is immediately exercisable for a period of ten
years from the date of grant but generally may not be exercised more
than 90 days after the date an optionee ceases to serve as a director of
the Company. As of December 31, 1999, there were options to purchase
1,000 shares of common stock granted to directors under the Director
Plan.
Note 6: Earnings Per Share
A reconciliation of shares used in calculating basic and diluted
earnings per share follows:
Shares used in computing net (loss) from continuing operations per
share:
F-17
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1998 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic 1,991,117 2,067,842 2,135,500
Effect of assumed conversion of employee sock options and
warrants - - -
-----------------------------------
Diluted 1,991,117 2,067,842 2,135,500
===================================
</TABLE>
Shares used in computing net (loss) from discontinued operation per
share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1998 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic 1,991,117 2,067,842 2,135,500
Effect of assumed conversion of employee sock options and
warrants - - -
-----------------------------------
Diluted 1,991,117 2,067,842 2,135,500
===================================
</TABLE>
Options to purchase approximately 211,650 shares of common stock at
exercise prices ranging from $0.44 to $2.38 per share and warrants to
purchase approximately 110,000 shares of common stock at prices ranging
from $0.85 to $2.34 per share were outstanding during a portion of 1999
but were not included in the computation of diluted earnings per share of
continuing operations because they are anti-dilutive. (See Notes 5(a) and
10(d)). These options and warrants expire through 2009 and 2004,
respectively. Options to purchase approximately 186,000 shares of common
stock at exercise prices ranging from $0.44 to $2.38 per share were
outstanding during a portion of 1998 but were not included in the
computation of diluted earnings per share because they were
anti-dilutive. Options to purchase approximately 41,250 shares of common
stock at exercise prices ranging from $1.50 to $2.38 per share were
outstanding during portions of 1997 and were not included in the
computation of diluted earnings per share because they were
anti-dilutive.
Note 7: Employee Savings Plan
The Company has an employee savings plan, which covers all employees who
have completed at least one year or 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, 1998 and 1999, the Company contributed
$0 and $34,500, respectively.
Note 8: Segment Information
Historically, the Company's results of operations were reviewed and
managed through three segments (i) high technology equipment leasing
("Paramount"), (ii) Internet, e-commerce and systems integration
("Paratech") and (iii) legal support staff ("DeltaGroup"). In connections
with the sale and discontinuance of Paramount (see Note 13), the Company
now reviews and manages its segments through (i) corporate overhead
("5B"), (ii) Paratech and (iii) DeltaGroup. The Company evaluated segment
performance based on net income (loss) for the years ended December 31,
1997 and 1998. During 1999, the Company decided to change the way in
which it evaluated its segments by using pre-tax income (loss), and has
restated the schedule for this change. The accounting policies of the
segments are the same as those described in the Summary of Significant
Accounting Policies. The following represents selected financial
information for the Company's segments for the years ended December 31,
1997, 1998 and 1999:
F-18
<PAGE>
<TABLE>
<CAPTION>
5B Paratech DeltaGroup Total
----------------------------------------------------------------------
1997
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ - $3,774,673 $ - $3,774,673
Cost of sales - 3,062,135 - 3,062,135
Pre-tax net loss 656,200 2,036,419 - 2,692,619
Assets 8,128,555 1,220,115 - 9,348,670
1998
----------------------------------------------------------------------
Revenues - 5,387,107 3,982,695 9,369,802
Cost of sales - 4,453,016 3,167,396 7,620,412
Pre-tax net loss 570,123 1,939,900 523,781 3,033,804
Assets 4,538,085 2,652,444 2,548,929 9,739,458
1999
----------------------------------------------------------------------
Revenues - 9,505,458 7,319,254 16,824,712
Cost of sales - 6,595,490 5,076,594 11,672,084
Pre-tax loss 149,738 168,201 571,260 889,199
Assets 3,148,226 3,778,877 2,347,919 9,275,022
======================================================================
</TABLE>
Note 9: Significant Customers and Concentrations of Credit
For the years ended December 31, 1997, 1998 and 1999, there were no
significant customers that represented in excess of 10% of total revenues
for the respective years.
Note 10: Commitments and Contingencies
(A) Operating Leases
The Company leases two office facilities and office equipment under
operating leases expiring through November 2002. Total rent expense
amounted to approximately $90,000, $184,000 and $245,000 in 1997, 1998
and 1999, respectively. Total minimum lease payments due under
non-cancelable operating leases are as follows:
2000 $231,000
2001 207,000
2002 59,000
(B) Employment Agreements
In 1999, employment agreements with 2 executives automatically renewed
and will expire through the end of 2000 (subject to automatic renewal
provisions) with aggregate minimum payments totaling $650,000.
In connection with the acquisitions described in Note 1, the Company
has also entered into employment agreements with 4 executives expiring
through the end of 2000 with aggregate minimum payments totaling
$589,000.
F-19
<PAGE>
(C) Legal Proceedings
The Company is named in an action to the Company's relates to the
Company's initial public offering in January 1996, in which the
Plaintiffs allegedly bought shares of the Company (and shares of two
other named defendants). The case principally focuses on various
alleged activities of the Company's underwriter and the underwriter's
principals and a broker in the initial public offering and alleges that
the Plaintiffs suffered various damages as a result of a range of
alleged counts. The Company believes that the Plaintiffs' allegations
are without merit and intends to defend the suit vigorously.
The Company is subject to legal proceedings and claims that a rise in
the ordinary course of its business. In the opinion of the management,
the amount of the ultimate outcome of these actions will not materially
affect the Company's financial position, results of operations or cash
flows.
(D) Warrants
A service agreement dated May 8, 1997 between the Company and its
former investment adviser provided for a portion of compensation in the
form of a warrant to purchase shares of the Company's common stock.
Pursuant to the agreement the advisor was granted warrants to purchase
33,333 shares of the Company's common stock at $1.50 per share (after
giving effect to the one-for-four reverse stock split).
Note 11: Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for income taxes $ 7,192 $ 17,305 $ 4,808
Cash paid for income taxes for discontinued operation $ 41,382 $ 69,927 $ 28,247
Cash paid for interest $ - $ 84,476 $ 152,441
Cash paid for interest for discontinued operation $2,936,823 $2,630,314 $1,913,193
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets acquired $ - $ 2,365,376 $ -
Liabilities assumed - (2,570,194) -
Notes issued - (262,500) -
Warrants issued - - (22,901)
Purchase price in excess of net assets acquired - 1,477,490 118,232
Cash paid for acquisitions $ - $ 1,010,172 $ 95,331
</TABLE>
Note 12: Subsequent Event
On April 17, 2000, the Company received an equity investment of
$1,000,000 from La Vista Investors, LLC, a fund managed by WEC Asset
Management LLC ("La Vista"), a New York-based investment company. In
connection with its investment, La Vista received (i) 1,000 shares of
the Company's Series A 6% Convertible Preferred Stock, par value $0.01
per share (the "Series A Preferred Stock"), and (ii) a warrant
convertible into 100,000 shares of the Company's Common Stock at an
exercise price of $10.00 per share of Common Stock, subject to certain
anti-dilution adjustments for stock splits, subdivisions, other similar
events and certain below-market price
F-20
<PAGE>
issuances of Common Stock. Each share of Series A Preferred Stock is
convertible into such number of shares of Common Stock as is determined
by dividing $1,000, plus the amount of any accrued and unpaid
dividends, by the Conversion Price (as defined below) in effect at the
time of conversion. The Conversion Price at which shares of Common
Stock shall be deliverable upon conversion of Series A Preferred Stock,
without the payment of additional consideration by the holder thereof,
shall be the lower of (i) nine dollars ($9.00) or (ii) 80% of the
average of the three lowest Closing Bid Prices (as defined in the
Certificate of Designations of the Series A Preferred Stock) of the
Company's Common Stock during the thirty (30) trading days immediately
preceding the date of notice from a holder of the Series A Preferred
Stock of any such conversion.
Note 13: Discontinued Operations
On May 2, 2000, the Company sold the majority of its lease portfolio
(the "Assets") which was maintained through, a wholly owned subsidiary,
Paramount, for approximately $700,000 and the assumption of
approximately $6,117,000 of indebtedness related to the Assets.
Accordingly, Paramount has been presented as a discontinued operation
for the year ended December 31, 1999, and the balance sheets as of
December 31, 1998 and 1999 and the statements of operations and cash
flows for the years ended December 31, 1997, 1998 and 1999 have been
restated to conform with this presentation. At March 31, 2000, the
Company accrued a loss on disposal of $860,000. The loss on disposal of
Paramount includes provisions for estimated losses of approximately
$602,000 and a loss on sale of approximately $254,000. The provision
for estimated losses of approximately $602,000 is based on management's
estimate of future income and expenses relating to the remaining lease
portfolio and write-downs of certain related assets. Net sales for
Paramount were approximately $28,319,318 $28,937,455 and $9,125,164 for
the years ended December 31, 1997, 1998 and 1999, respectively.
The components of net assets of discontinued operation included in the
Company's Consolidated Balance Sheets at December 31, 1998 and
1999, are as follows:
1998 1999
------------ ------------
Accounts receivable $ 342,879 $ 274,613
Net investment in direct finance and 30,059,378 16,232,749
sales-type leases
Assets held under operating leases, net of
accumulated depreciation 7,263,181 2,990,213
Other assets 237,212 537,990
Accrued expenses (353,769) (84,922)
Notes payable (1,717,924) (1,382,902)
Obligations for financed equipment -
non-recourse (33,435,459) (16,755,509)
------------ ------------
$ 2,395,498 $ 1,812,232
============ ============
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
F-21
<PAGE>
NET INVESTMENT IN DIRECT FINANCE AND SALES-TYPE LEASES
The net investment in direct finance and sales-type leased assets
consists of the present value of the future minimum lease payments plus
the present value of the residual value, if any (collectively referred to
as the "net investment"). The residual value is the estimated fair market
value of the leased assets at lease expiration.
Completed lease contracts which qualify as direct finance and sales-type
leases, as defined by Statement of Financial Accounting Standards No. 13,
("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 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 $4,453,000 and $6,055,000 at December 31,
1998 and 1999, respectively. During the fourth quarter of 1999,
additional depreciation expense of $182,000 was recorded in order to
record the residual value associated with certain operating leases to
fair value.
Lease revenue includes the contractual lease payments and is recognized
on a straight-line basis over the lease term.
RESIDUAL VALUES
The Company's residual value estimates are based on current market
conditions and published residual value projections, as determined at
lease inception. On an ongoing basis, the Company compares its residual
value estimates against currently published independent forecasts of
equipment values at lease expiration as well as other known market
conditions. If the residual value is determined to be excessive and the
decline in residual value is judged to be other than temporary, the
Company revises its residual values accordingly with corresponding
adjustments to income and unearned income. During the year ended December
31, 1998, 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 a
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.
F-22
<PAGE>
REVENUE RECOGNITION
The Company records revenues when products are shipped and title
transfers to the customer or services are provided to customers. 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 a payment from the broker.
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.
(B) Direct Finance and Sales-Type Leases
The net investment in direct finance and sales-type leases was comprised
of the following:
DECEMBER 31, 1998 1999
-------------------------------------------------------
Total minimum lease
payments receivable $30,895,900 $16,282,746
Estimated residual value of
equipment 1,727,787 1,071,785
-------------------------------------------------------
32,623,687 17,354,531
Less: Unearned income 2,564,309 1,121,782
-------------------------------------------------------
Net investment in direct
finance and sales-type
leases $30,059,378 $16,232,749
=======================================================
During the fourth quarter 1999, the Company wrote down the residual
value of certain lease contracts by approximately $289,000.
(C) Future Minimum Lease Payments
Future minimum lease rentals to be received by the Company under
non-cancelable direct finance, sales-type and operating leases are as
follows:
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<PAGE>
Direct
Finance and
YEARS ENDING Sales-Type Operating
DECEMBER 31, Leases Leases
-------------------------------------------------------
2000 $9,155,536 $1,224,061
2001 4,996,532 524,564
2002 1,123,881 25,084
2003 513,065 -
(D) 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. In exchange for these future rentals, the Company
receives a discounted cash payment. These notes provide for an
assignment of future lease rentals to these institutions at effective
interest rates (which range between 6.0% and 10.8%). In the event of
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 book value totaled approximately $37.3 million and $19.4 million
at December 31, 1998 and 1999.
Future maturities on non-recourse notes are:
YEARS ENDING
DECEMBER 31, Lease Payments
---------------------------------------------------
2000 $10,340,623
2001 5,573,738
2002 1,211,732
2003 520,349
---------------------------------------------------
17,646,442
Less: Interest 890,933
---------------------------------------------------
$16,755,509
===================================================
(E) Notes Payable and Other Financing
Notes payable were comprised of:
DECEMBER 31, 1998 1999
---------------------------------------------------------------
Notes payable to financial
institutions (a) $1,601,990 $1,363,933
Credit facilities (b) 115,934 18,970
---------------------------------------------------------------
$1,717,924 $1,382,903
===============================================================
(A) During 1998, the Company entered into a total of nine notes payable
agreements totaling approximately $2,925,000 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, 1999) plus 0.25%. Interest is
F-24
<PAGE>
payable quarterly and the principal amount is due 60 days after lease
expiration. These notes mature through 2001. The equipment on lease and the
related lease serve as collateral for the notes payable.
The Company entered into a similar notes payable in the amount of
$18,036 with the same institution in 1998, respectively, and repaid the
loans in the same year.
No such transactions were entered into during 1999.
(B) In December 1997, the Company entered into a loan agreement with a bank for
a $2,000,000 credit facility, which expired on December 30, 1998, to
finance the purchase of equipment on leases that are approved by the bank.
The bank will receive 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's Paramount
subsidiary was not in compliance with the debt covenant requiring tangible
net worth of at least $8 million. As of December 31, 1999, the Company had
$19,000 outstanding at a rate of 8.08%. The loan will mature in 2000.
(F) Significant Customers and Concentrations of Credit
For the years ended December 31, 1997, 1998 and 1999, the following
customers represented in excess of 10% of total revenues for the respective
years:
Customer 1997 1998 1999
------------------------------------------------------
A 35% - -
B 11% 54% 12%
C - 12% -
F-25
