UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 or the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 or the transition period from _______ to _______
Commission File Number 0-27190
5B TECHNOLOGIES CORPORATION
(formerly Paramount Financial Corporation)
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-3529387
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Jericho Plaza
Jericho, New York 11753
(Address of Principal Executive Offices)
(516) 938-3400
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Units, each consisting of two shares of
Common Stock and two Class A Warrants
-------------------------------------
(Title of class)
Class A Warrants, each to purchase one share of Common Stock
------------------------------------------------------------
(Title of class)
Common Stock, $0.04 par value per share
---------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrant on February 25, 2000 was approximately
$16,425,842 based on the closing sales price of such stock on such date, as
reported by the Nasdaq SmallCap Market.
The number of shares outstanding of the Registrant's Common Stock, as
of February 25, 2000 was: 2,160,004 shares of Common Stock, $0.04 par value.
--------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
Explanatory Note:
5B Technologies Corporation (formerly Paramount Financial Corporation), pursuant
to Rule 12b-15 under the Securities Exchange Act of 1934, is hereby filing,
under the cover of Form 10-K/A, Amendment No. 2, its Consolidated Financial
Statements for the year ended December 31, 1998, in order to correct a
typographical error contained in Note 1 to the Consolidated Financial
Statements. Specifically, the fifth sentence of the second paragraph of Note 1
to the Consolidated Financial Statements should read as follows:
"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 stock split of the common stock effected
May 19, 1998 (see Note 9) and subject to adjustment for
anti-dilution) during the four year period commencing one year
from the Effective Date."
The foregoing correction to Note 1 to the Consolidated Financial Statements does
not have any impact on reported earnings or earnings per share for any periods
presented.
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for each of the three years ended
December 31, 1998 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998 F-6
Notes to Consolidated Financial Statement F-7 - F-24
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Paramount Financial Corporation:
We have audited the accompanying consolidated balance sheets of Paramount
Financial Corporation and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three 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 Paramount Financial Corporation
and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
March 12, 1999
F-2
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31,
------------------------
ASSETS 1997 1998
------ ---- ----
Cash and cash equivalents $2,209,649 $1,495,082
Investments available for sale 3,524,456 613,188
Accounts receivable, net 1,138,479 2,632,258
Net investment in direct finance and sales-type leases 39,941,764 30,059,378
Assets held under operating leases, net of accumulated
depreciation 5,459,895 7,263,181
Other assets 788,218 3,183,523
----------- -----------
Total assets $53,062,461 $45,246,610
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Notes payable $2,656,365 $4,313,189
Accounts payable 1,307,496 942,431
Accounts payable - leases 708,568 100,000
Accrued expenses 383,097 658,392
Obligations for financed equipment - non-recourse 40,287,404 33,435,459
Deferred income taxes 73,848 -
---------- ----------
Total liabilities 45,416,778 39,449,471
----------- ----------
COMMITMENTS (Note 14)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none outstanding outstanding - -
Common stock, $.04 par value; 17,500,000 shares
authorized, 1,997,500 and 2,160,000 shares issued
and outstanding, respectively 79,900 86,400
Additional paid-in capital 13,644,228 14,456,728
Stock subscription receivable - (812,500)
Accumulated deficit (6,049,080) (7,882,884)
Treasury stock, 12,500 and 24,500 shares,
respectively (29,365) (50,605)
----------- ----------
Total shareholders' equity 7,645,683 5,797,139
----------- ----------
Total liabilities and shareholders' equity $53,062,461 $45,246,610
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Years Ended December 31,
--------------------- ---------------------- -----------------------------
1996 1997 1998
---- ---- ----
REVENUES:
Sales and Service $27,159,894 $21,405,788 $30,391,446
Lease revenue 3,680,924 9,829,991 7,478,750
Fee, interest and other income 511,698 1,159,062 615,295
----------- ----------- -----------
Total revenues 31,352,516 32,394,841 38,485,491
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 25,785,022 19,933,213 28,157,266
Lease expense 3,419,600 9,499,365 7,172,273
Selling, general and administrative
expenses 2,447,884 3,746,712 4,947,718
Interest expense 6,209 -- 51,324
----------- ----------- -----------
Total costs and expenses 31,658,715 33,179,290 40,328,581
----------- ----------- -----------
Loss before provision for (benefit
from) income taxes (306,199) (784,449) (1,843,090)
Provision For (Benefit From) Income
Taxes 498,212 (288,111) (9,286)
----------- ----------- -----------
Net loss $(804,411) $(496,338) $(1,833,804)
=========== =========== ===========
Basic loss per common share $(0.41) $(0.25) $(0.89)
=========== =========== ===========
Diluted loss per common share $(0.41) $(0.25) $(0.89)
=========== =========== ===========
Shares used in computing net loss per share:
Basic 1,954,493 1,991,117 2,067,842
=========== =========== ===========
Diluted 1,954,493 1,991,117 2,067,842
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
<TABLE>
Paid-In Subscription Accumulated Treasury
Common Stock Capital Receivable Deficit Stock Total
----------------------- ----------- ----------- ----------- ----------- -----------
Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 3,500,000 $35,000 $5,282,049 $ - $(4,748,331) - $ 568,718
Issuance of common stock in the initial 2,990,000 29,900 8,377,179 - - - 8,407,079
public offering, net of offering costs of
approximately $2,057,921
Issuance of common stock to bridge lenders 1,500,000 15,000 (15,000) - - - -
Current year net loss - - - - (804,411) - (804,411)
----------- ---------- ----------- ----------- ----------- --------- -----------
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)
Current year 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) - - - - - -
Issuances of common stock 162,500 6,500 812,500 (812,500) - - 6,500
Purchase of treasury stock - - - - - (21,240) (21,240)
Current year 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
========== =========== =========== =========== =========== ========== ===========
</TABLE>
The accompanying notes arean integral part of these consolidated statements.
F-5
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31,
-------------------------------------
1996 1997 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(804,411) $(496,338) $(1,833,804)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Deferred income taxes 425,662 (351,814) (73,848)
Depreciation and amortization 2,037,472 6,721,854 5,558,520
Amortization of discounts on investments (162,296) (205,082) (26,953)
Amortization of unearned operating lease
revenue from sublease transactions (19,928) - -
Amortization of prepaid operating lease
expense from sublease transactions 25,067 - -
Changes in operating assets and liabilities:
Accounts receivable (2,153,219) 1,121,534 (1,493,779)
Other assets 279,659 (396,901) (1,556,671)
Accounts payable 642,602 245,270 (365,065)
Accrued expenses (105,576) 194,928 275,295
-------- ---------- -----------
Net cash provided by operating activities 165,032 6,833,451 483,695
-------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Accounts payable - leases 18,107,528 (17,525,950) (608,568)
Purchase of equipment for direct finance
leases and sales-type leases (21,773,460) (38,158,975) (11,787,818)
Termination of direct finance leases 1,591,822 4,499,046 3,159,587
Proceeds applied to direct finance
leases and sales-type leases 5,685,159 12,327,521 18,159,432
Purchase of equipment for operating
leases (31,913,845) (346,733) (8,178,032)
Termination of operating leases 12,749,549 6,972,505 481,980
Residual value sharing arrangements - 4,628,698 856,969
Payments for acquisitions, net of
cash acquired - - (1,010,172)
Purchases of investments (19,495,594) (14,187,250) (3,697,782)
Proceeds from sale/maturity of
investments 16,494,049 14,031,717 6,636,003
---------- ----------- -----------
Net cash (used in) provided by
investing activities (18,554,792) (27,759,421) 4,011,599
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 8,407,079 - 6,500
Repurchase of common stock - (29,365) (21,240)
Proceeds from notes payable - 3,894,286 5,183,606
Repayment of notes payable (1,593,313) (1,256,305) (3,526,782)
Increase in non-recourse lease financing 31,559,769 38,818,439 19,139,928
Termination of non-recourse lease
financing (9,978,194) (3,463,973) (2,864,077)
Repayments and interest amortization
applied to non-recourse lease financing (7,458,283) (18,528,237) (23,127,796)
---------- ----------- -----------
Net cash provided by (used in) financing
activities 20,937,058 19,434,845 (5,209,861)
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 2,547,298 (1,491,125) (714,567)
CASH AND CASH EQUIVALENTS, beginning
of period 1,153,476 3,700,774 2,209,649
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,700,774 $ 2,209,649 $ 1,495,082
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 24,437 $ 48,574 $ 87,232
=========== =========== ===========
Cash paid for interest $ 1,358,539 $ 2,936,823 $ 2,714,790
=========== =========== ===========
DETAILS OF ACQUISITIONS:
Fair value of assets acquired $ - $ - $ 2,365,376
Liabilities assumed - - (2,570,194)
Notes issued - - (262,500)
Purchase price in excess of net
assets acquired - - 1,477,490
----------- ---------- -----------
Cash paid for acquisitions $ - $ - $ 1,010,172
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. COMPANY BACKGROUND:
Paramount Financial Corporation ("Paramount" or the "Company") was incorporated
in the state of Delaware in July 1991. Paramount is a comprehensive business
solutions provider, offering customers a wide range of integrated services
including lease finance, network design and implementation. The Company is not
tied to any one manufacturer and thus can provide customers with available
technical and financial alternatives regardless of the specific hardware
platform. Paramount's customer base is mostly comprised of large, domestic,
creditworthy customers in a variety of industries. Prior to 1996, the Company
generated most of its revenue from wholesale trading of new and used equipment.
However, in 1996, the Company aggressively expanded its leasing operations,
which now accounts for most of its revenue. In July 1996, Paramount formed a new
wholly owned subsidiary, Paratech Resources Inc. ("Paratech"), which offers
comprehensive information technology solutions, including network design and
integration, software applications, training and value added support services.
In January 1998, the Company acquired Deltaforce Personnel Services, Inc.
("Deltaforce"), which offers temporary and permanent legal support staff.
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 are 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 stock split of the common stock effected May 19, 1998 (see Note 9) 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 issued in
connection with the initial public offering have been exercised to date. Net
proceeds of the offering totaled approximately $8,400,000, after deducting
underwriting discount and commissions, underwriter's non-accountable expense
allowance and other offering expenses.
In connection with the offering, 300,000 shares of common stock owned by the
Company's two original shareholders (the "Selling Securityholders") were also
offered and sold to the public. Additionally, there was a secondary offering of
securities by certain non-affiliated lenders of the Company (the "Selling
F-7
<PAGE>
Lenders"). The Selling Lenders registered 750,000 units, identical to the
initial public offering units described above, as well as an additional
1,500,000 shares of common stock issuable upon the exercise of class B warrants
(Note 8). 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 aforementioned class A or class B warrants have
been exercised to date.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements as of and for the years ended December 31,
1996 and 1997 includes the accounts of the Company and its wholly owned
subsidiary, Paratech Resources Inc. The consolidated financial statements as of
and for the year ended December 31, 1998 includes the accounts of the Company
and its wholly owned subsidiaries, Paratech Resources Inc. and Deltaforce
Personnel Services, Inc. All intercompany balances and transaction have been
eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid debt and equity instruments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents include investments in money market funds and are stated at cost,
which approximates market value.
Investments Available for Sale
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting
for Certain Investments in Debt and Equity Securities" addresses the accounting
and reporting for investments in debt and equity securities. Securities
classified as available for sale are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity (on an after tax basis). Gains and losses on the
disposition of securities are recognized on the specific identification method
in the period in which they occur.
At December 31, 1997 and 1998, 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 31, 1997 and 1998, the cost
basis of these securities approximates market value.
Net Investment in Direct Finance and Sales-Type Leases
The net investment in direct finance and sales-type leased assets consists of
the present value of the future minimum lease payments plus the present value of
F-8
<PAGE>
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 the unearned income. The unearned lease income represents
the excess of the total minimum lease payments and the estimated residual value
expected to be realized, over the cost of the related equipment. The unearned
income is recognized as revenue over the term of each lease by applying a
constant periodic rate of return to the declining net investment in each lease.
Lease revenue includes that portion of unearned income amortized into income
during the current period. Revenue recognized at the inception of a sales-type
lease is recorded in sales.
Assets Held Under Operating Leases
Assets held under operating leases consist of the equipment at cost, net of
accumulated depreciation. Depreciation is recognized on a straight-line basis
over the lease term up to the Company's estimate of the equipment's residual
value at lease expiration. Accumulated depreciation was approximately $5,148,000
and $4,453,000 at December 31, 1997 and 1998, respectively.
Lease revenue includes the contractual lease payments and is recognized on a
straight-line basis over the lease term.
Residual Values
The Company's residual value estimates are based on current market conditions
and published residual value projections, as determined at lease inception. On
an ongoing basis, the Company compares its residual value estimates against
currently published independent forecasts of equipment values at lease
expiration as well as other known market conditions. If the residual value is
determined to be excessive and the decline in residual value is judged to be
other than temporary, the Company revises its residual values accordingly with
corresponding adjustments to income and unearned income. During the years ended
December 31, 1997 and 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 the
right to share in re-marketing proceeds received upon lease expiration. The
proceeds received were used to reduce the cost basis and the residual value in
the leased assets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
F-9
<PAGE>
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.
Revenue Recognition
The Company records revenues when products are shipped and title transfers to
the customers 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 payment from the
broker.
From time to time, the Company will receive payment prior to the transfer of
title or purchase of the related inventory. The Company records such amounts as
unearned sales revenue on the balance sheet. Upon shipment and transfer of
title, unearned sales revenue is reversed and recorded as equipment sales.
The Company records revenue from the sale of leased equipment to an equipment
investor upon transfer of title to the equipment. Subsequent to a sale of this
variety, the Company generally is a party to a re-marketing agreement under
which it may earn additional income from the asset's future re-lease or sale
value upon lease termination or expiration.
See Net Investment in Direct Finance and Sales-Type Leases and Assets Held Under
Operating Leases for a discussion of revenues earned under leasing transactions.
Sublease Transactions
From time to time, the Company enters into certain transactions in which it acts
as both lessee and sublessor of equipment. Since both the lease and sublease are
operating leases, no related assets or liabilities are recorded on the Company's
balance sheet, other than transactions that are prepaid.
Lease Expense
Lease expense includes depreciation on assets held under operating leases,
interest expense on obligations for financed equipment and sublease rental
expense. The cost of equipment recognized at the inception of a sales-type lease
is reflected in cost of sales.
Income Taxes
At its inception, the Company elected status as an S corporation and, therefore,
through December 31, 1995 was not subject to federal income tax as a separate
entity. Instead, the shareholders were taxed on the Company's income, whether or
not distributed, and they were entitled to deduct Company losses, if any, to the
extent of the tax basis each shareholder had in the Company's common stock. The
Company had been subject to certain corporate taxes on the state level. In
connection with its initial public offering described above, the Company
F-10
<PAGE>
terminated its S election and is currently taxable as a C corporation. The
adjustment to record deferred income taxes upon termination of the Company's S
election was to record a net deferred income tax liability of approximately
$430,000 in 1996.
Deferred income taxes are provided for temporary differences between the
carrying values of assets and liabilities for financial reporting and tax
purposes at the enacted rate at which these differences are expected to reverse
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
Net Loss Per Common Share
Effective December 31, 1997, the Company adopted the disclosure-only Statement
of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share". In
accordance with SFAS 128, basic loss per common share is computed by dividing
net loss by the weighted average number of common shares outstanding. Common
stock equivalents are excluded from the computation as they would have an
anti-dilutive effect.
Stock-Based Compensation
In 1996, the Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", by continuing to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," while
providing the required pro forma disclosures as if the fair value method had
been applied (Note 10).
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. ACQUISITIONS
Deltaforce Personnel Services, Inc.
On January 9, 1998, the Company acquired 100% of the outstanding shares of
Deltaforce Personnel Services, Inc. ("Deltaforce"), a privately held New York
City-based staffing company, for approximately $560,000, which included $162,500
of notes payable. The acquisition agreement provides for additional
consideration of $162,500 to be paid if the acquired entity's results of
operations exceed certain targeted levels. This additional consideration will be
recorded when earned as additional purchase price. The acquisition was accounted
for as a purchase and accordingly the operating results of Deltaforce have been
included in the Company's consolidated financial statements since the date of
the acquisition. The excess of the aggregate purchase price over the net assets
acquired of approximately $463,500 is being amortized over 15 years.
F-11
<PAGE>
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 and accordingly the operating
results of WordSmiths have been included in the Company's consolidated financial
statements since the date of the acquisition. 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 term of the agreement of 5 years. In addition, simultaneous with the closing
of the transaction, the Company entered into an employment 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 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 July 27, 2001, respectively (Note 7). The
operations of WordSmiths were merged into Deltaforce to create The DeltaGroup.
Abbey, Garrett and Seth, Ltd.
On October 23, 1998, Paratech Resources, Inc., a wholly owned subsidiary of the
Company, 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 Internet commerce development firm, for
approximately $272,000. The acquisition was accounted for as a purchase and
accordingly the operating results of Comptech have been included in the
Company's consolidated financial statements since the date of the acquisition.
The excess of the aggregate purchase price over the net assets acquired of
approximately $574,000 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.
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<PAGE>
4. DIRECT FINANCE AND SALES-TYPE LEASES:
The net investment in direct finance and sales-type leases at December 31, 1997
and 1998 was comprised of the following:
1997 1998
---- ----
Total minimum lease payments receivable $39,434,601 $30,895,900
Estimated residual value of equipment 3,777,595 1,727,787
----------- -----------
43,212,196 32,623,687
Less: unearned income 3,270,432 2,564,309
----------- -----------
Net investment in direct finance and sales-type leases $39,941,764 $30,059,378
5. FUTURE MINIMUM LEASE PAYMENTS:
Future minimum lease rentals to be received by the Company under non-cancelable
direct finance, sales-type and operating leases expiring through 2003 are as
follows:
Years Ending Direct Finance and Operating
December 31, Sales-Type Leases Leases
------------ ----------------- ------
1999 $24,351,494 $4,247,253
2000 12,736,497 1,123,815
2001 4,942,645 447,032
2002 857,975 -
2003 451,393 -
6. OBLIGATIONS FOR FINANCED EQUIPMENT - NON-RECOURSE:
Under various arrangements with banks and financial institutions, the Company
finances substantially all of its equipment leases with non-recourse notes.
These notes provide for an assignment of future lease rentals to these
institutions at fixed interest rates (which range between 6.0% and 10.8%). In
exchange for these future rentals, the Company receives a discounted cash
payment. 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
F-13
<PAGE>
the Company's assets under direct finance, sales-type and operating leases,
which book value totalled approximately $45.3 million and $37.3 million at
December 31, 1997 and 1998, respectively.
Future maturities through 2003 on the non-recourse notes described above are as
follows:
Years Ending December 31, Lease Payments
1999 $19,631,397
2000 9,632,886
2001 5,034,509
2002 866,600
2003 452,918
-----------
35,618,310
Less: Interest 2,182,851
$33,435,459
===========
7. NOTES PAYABLE AND OTHER FINANCING:
Notes payable were comprised of the following at December 31, 1997 and 1998:
1997 1998
---- ----
Notes payable to financial institutions (a) $2,324,611 $1,601,990
Credit facilities (b) 331,754 1,773,699
Notes payable related to acquisitions (c) - 937,500
---------- ----------
$2,656,365 $4,313,189
========== ==========
(a) During 1997 and 1998, the Company entered into a total of nine notes
payable agreements totalling 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, 1998) plus
0.25%. Interest is payable quarterly and the principal amount is due 60
days after lease expiration. These notes mature through the year 2001.
The equipment on lease and the related lease serve as collateral for
the notes payable.
Also in 1997, the Company entered into a similar arrangement with the
same institution for $238,056 of residual value financing bearing
interest at prime (8.50% at December 31, 1998) plus 0.50% payable
F-14
<PAGE>
semi-annually. The entire principal amount is due 60 days after lease
expiration (November 30, 1999). The equipment on lease and the related
lease serve as collateral for this note payable.
The Company entered into similar notes payable in the amount of
$1,254,000 and $18,036 with the same institution in early 1997 and
1998, and repaid the loans in the same year.
(b) In December 1997, the Company entered into a loan agreement with a bank
for a $2,000,000 credit facility, which expires on December 30, 1998,
to finance the purchase of equipment on leases that are approved by the
bank. The bank will issue notes equal to the discounted rental payments
under the leases being financed using the bank's current interest rate.
The notes are payable monthly as the lease payments become due. As
collateral for the notes, the bank has a first priority security
interest in the equipment and the underlying lease. Under the agreement
the Company is required to maintain certain financial ratios. As of
December 31, 1998, the Company was not in compliance with the debt
covenant requiring tangible net worth of at least $6.7 million. As of
December 31, 1998, the Company had $106,000 outstanding at a rate of
8.08%. Annual maturities are $87,000 and $19,000 in 1999 and 2000,
respectively.
The Company maintains a $2,000,000 revolving line of credit agreement
with a finance company, for it's subsidiary Paratech, secured by
accounts receivable of Paratech. Interest on outstanding borrowings
accrues at the prime rate (8.50% at December 31, 1998) 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, 1998, Paratech had
$464,000 outstanding under this line, of which $194,000 was classified
as debt.
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. As of December 31, 1998,
approximately $440,000 remained outstanding under this facility. This
facility must be repaid in full by July 23, 1999.
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, 1998, approximately $417,000 remains
outstanding under this agreement.
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, 1999. Interest on outstanding borrowings accrues at
the bank's prime rate (8.50% at December 31, 1998) plus 1%, and
interest is paid monthly. Borrowings are limited to 80% of eligible
accounts receivable. As of December 31, 1998, $600,000 was outstanding
under this line.
F-15
<PAGE>
(c) In connection with the acquisitions described in Note 3, the Company
entered into promissory notes with several individuals. Interest on
such notes ranges from 0% to 8.50%. The interest components of those
non-interest bearing notes are immaterial. Annual maturities are
$512,500, $350,000 and $75,000 in 1999, 2000 and 2001, respectively.
Additional Financing
During 1997, the Company entered into several residual value sharing agreements
whereby a financial institution agreed to purchase a portion of the residual
values of the equipment on lease for approximately $4,629,000 in exchange for
the right to share in re-marketing proceeds received upon lease expiration. The
proceeds received were used to reduce the Company's cost basis and residual
value in the leased assets.
Secured Bridge Line
This facility has been arranged with three banks in the total amount of
$1,250,000, for the purpose of financing the cost of equipment purchased for
sale or lease, on a short-term basis, generally payable in 30 to 90 days. The
lending banks are given a first security interest in both the equipment and the
contract for sale or lease. The above secured line also includes a $100,000
unsecured working capital line. The interest rate charged for these borrowings
is a floating 1% over the banks' prime lending rate, 8.5% and 9% at December 31,
1997 and 1998, respectively. As of December 31, 1997 and 1998, no amounts were
outstanding under these facilities. Both lines expired on June 30, 1998.
8. INCOME TAXES:
The provision for (benefit from) income taxes is comprised of the following:
F-16
<PAGE>
Years Ended December 31,
------------------------------------
1996 1997 1998
---- ---- ----
Current:
Federal $ -- $ -- $ --
State 72,550 63,703 43,328
------- -------- --------
72,550 63,703 43,328
------- -------- --------
Deferred:
Federal (82,583) (251,928) (532,055)
------- -------- --------
State (12,145) (99,886) (82,362)
------- -------- --------
(94,728) (351,814) (614,417)
------- -------- --------
Valuation allowance 90,000 -- 561,803
== ------- -------- --------
Termination of Subchapter "S" election 430,390 -- --
-------- -------- --------
Total $498,212 $(288,111) $(9,286)
======== ========= =========
Significant components of deferred income tax assets and (liabilities) are as
follows:
1997 1998
---- ----
Depreciation $263,757 $655,323
Lease transactions treated differently for tax
and financial reporting purposes (803,095) (726,226)
Net operating loss carry forward 471,698 600,320
Other 83,792 122,386
Valuation allowance (90,000) (651,803)
-------- ---------
Net deferred income tax (liability) $ (73,848) $ --
========= =========
The following reconciliation presents the principal reasons for the difference
between income taxes calculated at the United States federal statutory income
tax rate (34%) and the provision for (benefit from) income taxes:
F-17
<PAGE>
Years Ended December 31,
----------------------------------
1996 1997 1998
---- ---- ----
Federal income tax benefit at U.S statutory
rate $(104,108) $(266,713) $(626,651)
Subchapter "C" impact of SFAS 109 430,390 - -
Change in valuation allowance 90,000 - 561,803
State taxes, net of federal benefit 36,583 39,547 43,328
All other, net 45,347 (60,945) 12,234
--------- --------- ----------
Provision for (benefit from) income taxes $498,212 $(288,111) $ (9,286)
======== ========= ===========
The Company has net operating loss carryforwards for income tax reporting
purposes of approximately $1,539,000 expiring through 2013. A full valuation
allowance has been provided against the net deferred tax asset due to the
uncertainty at December 31, 1998 as to their future realization.
9. SHAREHOLDERS' EQUITY:
In connection with the recapitalization of the Company in contemplation of its
initial public offering, in August 1995, the Company's Board of Directors
approved a stock split of approximately 33,018.86792-to-one, in the form of a
stock dividend to the Company's common shareholders. Par value changed to $0.01
per share from $1.00 per share. The stock dividend resulted in the issuance of
3,499,894 additional shares of common stock, for a total of 3,500,000 shares
outstanding subsequent to the split. This action required an amendment to the
Company's Articles of Incorporation, which increased the number of authorized
shares of common stock from 1,000 to 35,000,000 and authorized 5,000,000 shares
of preferred stock. Effective May 19, 1998, the Board of Directors approved a
reduction of the authorized number of shares of common stock from 35,000,000 to
17,500,000 and authorized a one-for-four reverse stock split of the Company's
common stock. The par value of the common stock was increased from $0.01 to
$0.04 per share. The preferred stock remained unchanged. All shareholders'
equity accounts and per share data have been retroactively adjusted to reflect
this reverse split.
See Note 1 for a description of the Company's initial public offering of its
securities.
During the year ended December 31, 1997, the Board of Directors of the Company
approved a plan that would allow for the repurchase of up to $500,000 worth of
common stock of the Company. The repurchase program took effect immediately and
is authorized to continue for a period of two years. Subject to applicable
rules, the plan allows the Company to repurchase shares at any time during the
authorized period in any increments it deems appropriate. As of December 31,
F-18
<PAGE>
1997 and 1998, the Company had repurchased 12,500 and 24,500 shares for a cash
purchase price of $29,365 and $21,240, respectively.
10. STOCK OPTION PLANS:
Employee Stock Option Plan
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. Options granted under the Stock Option Plan may
be either incentive stock options ("ISO's"), which are intended to meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options ("NSO's"). Under the Stock Option Plan, the Board of
Directors may grant (i) ISO's at an exercise price per share which is not less
than the fair market value of a share of common stock on the date on which such
ISO's are granted (and not less than 110% of the fair market value in the case
of any optionee who beneficially owns more than 10% of the total combined voting
power of the Company), and (ii) NSO's at an exercise price per share which is
determined by the Board of Directors (and which may be less than the fair market
value of a share of common stock on the date on which such NSO's are granted).
The Stock Option Plan further provides that the maximum period in which options
may be exercised will be determined by the Board of Directors, except that ISO's
may not be exercised after the expiration of ten years from the date the ISO was
initially granted (and five years in the case of any optionee who beneficially
owns more than 10% of the total combined voting power of the Company). Any
option granted under the Stock Option Plan will be nontransferable and may be
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.
Of the total options granted, 21,250 options in 1997 and 0 options in 1998 are
exercisable after one year and the remaining 20,000 and 144,750 options are
exercisable in whole or in part 20% per year from the date of grant,
respectively. As of December 31, 1998, none of the options were exercisable.
The following table reflects activity under the Stock Option Plan for the years
ended December 31, 1997 and 1998 :
F-19
<PAGE>
Weighted
Average
Shares Exercise Price Exercise Price
Outstanding, December 31, 1996 - - $ -
Granted 52,500 $0.59 -- $2.38 1.81
Canceled (11,250) 0.59 -- 1.76 1.11
--------
Outstanding, December 31, 1997 41,250 1.50 -- 2.38 2.00
-------- -------------- ------
Granted 150,000 0.44 -- 2.50 1.02
Canceled (5,250) 0.44 -- 1.50 .99
-------- -------------- ------
Outstanding, December 31, 1998 186,000 $0.44 -- $2.38 $1.24
======== ============== ======
The 186,000 options outstanding as of December 31, 1998 have a weighted average
remaining contractual life of 9.25 years.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation has been recorded. Had compensation cost for the plan been
determined in accordance with SFAS 123, the Company's net loss and basic loss
per common share would have been decreased to the following pro forma amounts:
1997 1998
---- ----
Net Loss As Reported $496,338 $1,833,804
Pro Forma 518,148 1,849,110
Basic loss per common share As Reported $.25 $.89
Pro Forma $.26 $.89
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:
1997 1998
---- ----
Fair value $0.25 $0.59
Expected life (years) 3.45 3.87
Risk-free interest rate 6.5% 4.8%
Volatility 71% 73%
Dividend yield 0% 0%
F-20
<PAGE>
The pro form effects of applying SFAS 123 are not indicative of future amounts
because stock option awards are anticipated in future years.
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.
The Company has adopted SFAS 123 to account for stock-based compensation awards
granted to non-employee directors, under which a compensation cost is recognized
for the fair value of the options granted as of the date of grant. As of
December 31, 1998, there were no options granted to directors under the Director
Plan.
11. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan which covers all employees who have
completed at least one year of service with the Company and permits participants
to make contributions by salary reduction pursuant to section 401(k) of the
Internal Revenue Code. Company contributions are discretionary. As of December
31, 1997 and 1998, the Company did not make any contributions to the plan.
12. SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". Reportable operating
segments are determined based upon the Company's management approach. The
management approach, as defined by SFAS No. 131, is based on the way that the
chief operating decision maker organizes the segments within an enterprise for
making operating decisions and assessing performance. While the Company's
results of operations are primarily reviewed on a consolidated basis, the chief
operating decision maker also manages the enterprise in three segments: (i) high
technology equipment leasing ("Paramount"), (ii) business integration
("Paratech"), and (iii) legal support staff ("DeltaGroup"). The following
represents selected financial information for the Company's segments for the
years ended December 31, 1996, 1997 and 1998:
F-21
<PAGE>
Paramount Paratech DeltaGroup Total
--------- -------- ---------- -----
1996
----
Revenues $31,195,984 $156,532 $ -- $31,352,516
Cost of sales 25,643,426 141,596 -- 25,785,022
Net loss (783,271) (21,140) -- (804,411)
Assets 51,181,503 380,017 -- 51,561,520
1997
----
Revenues 28,620,168 3,774,673 -- 32,394,841
Cost of Sales 16,871,078 3,062,135 19,933,213
Net income (loss) 231,251 (727,589) -- (496,338)
Assets 51,956,164 1,106,297 -- 53,062,461
1998 Total
---- -----
Revenues 29,090,851 5,411,945 3,982,695 38,485,491
Cost of sales 20,536,854 4,453,016 3,167,396 28,157,266
Net loss (784,797) (545,290) (503,717) (1,833,804)
Assets 40,559,376 2,581,710 2,105,524 45,246,610
F-22
<PAGE>
13. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT:
For the years ended December 31, 1996, 1997 and 1998, the following customers
represented in excess of 10% of total revenues for the respective years:
Customer 1996 1997 1998
-------- ---- ---- ----
A 40% - -
B 25% - -
C - 47% -
D - 14% 51%
E - - 11%
The Company's net investment in direct finance and sales-type leases is
concentrated primarily with end users of the computer equipment. The Company has
various arrangements with banks and financial institutions in which lease
receivables are assigned to the institutions in exchange for a discounted cash
payment. This financing is in the form of non-recourse notes, in which the
financial institution has a first lien on the underlying equipment with no
further recourse against the Company. Therefore, the Company has no credit
exposure from these assigned leases.
14. COMMITMENTS:
Operating Leases
The Company leases two office facilities and office equipment under operating
leases expiring through November 2002. Total rent expense amounted to
approximately $45,000, $90,000 and $184,000 in 1996, 1997 and 1998,
respectively. Total minimum lease payments due under non-cancelable operating
leases are as follows:
1999 $202,480
2000 156,000
2001 156,000
2002 143,000
Employment Agreements
In 1998, the Company has entered into employment agreements with two executives
expiring through the end of 1999 with aggregate minimum payments totalling
$655,000.
F-23
<PAGE>
In connection with the acquisitions described in Note 3, the Company has also
entered into employment agreements, with five executives through the end of 1999
with aggregate minimum payments totaling $770,000.
15. SUBSEQUENT EVENT (UNAUDITED)
On March 3, 1999, Paratech acquired certain assets of Web Business Systems,
Inc., a privately held New York based web hosting and development company, for a
total purchase price of $80,000. The acquisition will be accounted for as a
purchase; accordingly the purchase price will be allocated to the underlying
assets and liabilities based on their respective estimated fair values at the
date of acquisition.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 23 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PARAMOUNT FINANCIAL CORPORATION
Dated: February 29, 2000 By: /s/
Glenn Nortman,
Chief Executive Officer
