-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D49/frZypMPji6QMuxhTAuItvmhyL+Qi+bZ++ngCG42fzULpdhN/1B7nioKR3DJP qJbDOyvxNoTkqcZOOU5RIg== 0001006199-00-000015.txt : 20000307 0001006199-00-000015.hdr.sgml : 20000307 ACCESSION NUMBER: 0001006199-00-000015 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 20000303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 5B TECHNOLOGIES CORP CENTRAL INDEX KEY: 0001000179 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER RENTAL & LEASING [7377] IRS NUMBER: 113529387 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-27190 FILM NUMBER: 560572 BUSINESS ADDRESS: STREET 1: ONE JERICHO PLAZA CITY: JERICHO STATE: NY ZIP: 11753 BUSINESS PHONE: 9169383400 MAIL ADDRESS: STREET 1: ONE JERICHO PLZ CITY: JERICHO STATE: NY ZIP: 11753 FORMER COMPANY: FORMER CONFORMED NAME: PARAMOUNT FINANCIAL CORP DATE OF NAME CHANGE: 19950906 10-K/A 1 ANNUAL REPORT 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 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. 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 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 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 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 PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------ CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ----------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 ---------------------------------------------------- Paid-In Subscription Accumulated Treasury Common Stock Capital Receivable Deficit Stock Total ----------------------- ----------- ----------- ----------- ----------- ----------- Shares Amount 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 ========== =========== =========== =========== =========== ========== ===========
The accompanying notes arean integral part of these consolidated statements. F-5 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 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 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 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 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 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 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. F-12 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 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 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 (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 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 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 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 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 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 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 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 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 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 -----END PRIVACY-ENHANCED MESSAGE-----