UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-14888
PRIME CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3347311
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
10275 West Higgins Road, Suite 200, Rosemont, Illinois 60018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 294-6000
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 ___
As of June 30, 1994, there were 4,280,165 shares of common stock outstanding.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Operations --
Three and Six Months Ended
June 30, 1994 and 1993 . . . . . . . . . . . . . 3
Consolidated Balance Sheets --
June 30, 1994 and December 31, 1993. . . . . . . 4
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1994 and 1993. . . . . 5
Notes to Consolidated Financial Statements . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . 7-9
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . 9
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . .10
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1994 1993 1994 1993
Revenues:
Rentals on leased equipment $ 183,692 $ 59,836 $ 265,735 $ 137,318
Direct financing leases 194,878 85,030 274,080 137,968
Fee income 162,848 455,182 450,980 1,026,944
Gain on sale of leased
equipment 40,777 459,246 237,928 1,327,569
Interest 126,348 38,996 175,999 116,364
Other income 41,736 295,204 63,746 476,298
Total revenues 750,279 1,393,494 1,468,468 3,222,461
Expenses:
Amortization of deferred
finance costs 746 19,160 3,791 46,941
Depreciation of leased
equipment 126,495 6,194 164,927 14,606
Selling, general and
administrative 1,202,642 1,221,980 2,258,664 2,215,517
Interest 144,058 --- 159,515 244
Net capitalized initial
direct costs (83,963) (8,449) (154,434) (12,418)
Total expenses 1,389,978 1,238,885 2,432,463 2,264,890
Income (loss) before
income tax expense (639,699) 154,609 (963,995) 957,571
Income tax expense --- --- --- ---
Net income (loss) $ (639,699) $ 154,609 $ (963,995) $ 957,571
Net income (loss) per common
and common equivalent share: $(0.15) $0.03 $(0.23) $0.22
See accompanying notes to consolidated financial statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
1994 1993
ASSETS
Cash and cash equivalents $ 2,004,636 $ 4,060,079
Receivables:
Rentals on leased equipment 29,717 64,192
Due from equipment trusts 38,210 190,975
Other 1,979,947 2,462,782
Net investment in direct financing leases 12,632,090 2,458,694
Leased equipment, net of accumulated
depreciation of $164,927 at June 30, 1994 5,124,526 --
Deposits on equipment 2,051,094 163,779
Property and equipment, net of accumulated
depreciation of $889,355 and $830,792
at June 30, 1994 and December 31, 1993,
respectively 319,687 368,243
Other assets 1,751,180 882,147
Total assets $25,931,087 $10,650,891
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse notes payable to banks $14,169,096 $1,092,258
Accounts payable for equipment 3,651,136 418,380
Accrued expenses and other liabilities 1,876,714 2,027,648
Deposits and advances 551,158 326,896
Discounted lease rentals 25,833 164,564
Total liabilities 20,273,937 4,029,746
Stockholders' equity
Common stock, $0.05 par value:
authorized 10,000,000 shares; issued and
outstanding 4,374,365 shares at June 30, 1994
and December 31, 1993 218,718 218,718
Additional paid-in capital 9,681,225 9,681,225
Accumulated deficit (3,942,993) (2,978,998)
Treasury stock, at cost; 94,200 shares
at June 30, 1994 and December 31, 1993 (299,800) (299,800)
Total stockholders' equity 5,657,150 6,621,145
Total liabilities and stockholders' equity $25,931,087 $10,650,891
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (963,995) $ 957,571
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation 223,490 83,889
Amortization of unearned income (274,326) (137,968)
Amortization of deferred finance costs on
direct finance leases 3,791 46,941
Changes in assets and liabilities:
Rentals on leased equipment and other receivables 517,309 1,778,696
Deferred charges 152,766 (106,183)
Other assets (233,280) (67,092)
Accrued expenses and other liabilities (641,140) (115,973)
Due from equipment trusts (150,934) (644,914)
Net cash provided (used) by operating activities (1,366,319) 1,794,967
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired for lease (20,164,937) (19,811,434)
Proceeds from sale of assets 475,994 487,152
Net cash used in investing activities (19,688,943) (19,324,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Discounted lease proceeds and proceeds from
sale of fully leveraged finance leases 5,922,981 17,883,350
Proceeds from notes payable to banks 13,076,838 ---
Net cash provided by financing activities 18,999,819 17,883,350
Increase (decrease) in cash and cash equivalents (2,055,443) 354,035
Cash and equivalents:
Beginning of period 4,060,079 2,088,870
End of period $ 2,004,636 $ 2,442,905
Cash paid during the period for:
Interest $ 159,515 $ 244
Supplemental schedule of noncash financing activities:
Discounted lease rentals on direct finance leases
collected by financial institutions $ 142,522 $ 689,067
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Since 1992, the Company has implemented certain strategic initiatives designed
to enhance the Company's operating results. These initiatives included
(i) re-engineering the Company's operations, (ii) establishing a broader
earnings base by diversifying into vendor finance, and (iii) increasing the
overall profitability of the Company's equipment financing transactions
through the use of asset securitizations. Although certain of the these
measures negatively impact near-term reported earnings, Management believes
that these initiatives will have a positive long-term impact on the
Company's growth and earnings.
During the first six months of 1994, the Company originated and funded, or
committed to fund, approximately $58 million in equipment finance transactions,
compared to about $40 million during the same period in 1993 (an increase of
45%). Management estimates that the net income the Company will realize from
the securitization of loan and lease receivables originated during the first
six months of 1994 will be substantially greater than the net income the
Company realized from leases and loans originated during the comparable
period of 1993.
The Company intends to continue to pursue a strategy of periodically
securitizing aggregated pools of warehoused transactions as the primary
methodology of permanently funding the Company's equipment loan and lease
originations. Funding through asset securitization vehicles should be subject
to lower interest rates and therefore less expensive for the Company than the
individual sale of transactions. As a result, the increased use of this
technique by the Company should maximize reportable earnings, particularly if,
as anticipated, the volume of equipment financing transactions continues to
increase as a result of the Company's expansion into vendor finance.
Management believes that the Company would have reported significant net income
for the quarter ended June 30, 1994 and for the six month period ended June 30,
1994, if the Company had elected to permanently fund its leases with
long-term debt, instead of warehousing its leases pending securitization. By
not permanently funding its transactions, the Company forgoes the immediate
one-time recognition of income received when transactions are sold outright.
During the "warehousing" period between the origination and transfer of the
Company's equipment financing transactions to securitization vehicles, the
Company reports net finance income computed in accordance with generally
accepted accounting principles. The rules, in effect, spread income over the
term of the transaction (usually five years). The Company's operating
expenses are largely recognized as incurred. Upon securitization, the
Company accelerates the cash and reportable earnings inherent in the
transactions. Management believes that when these inherent gains are
realized through the securitization of the loan and lease receivables that
have been warehoused throughout the first six months of 1994, the Company
will report profitable results. Although reportable earnings are adversely
impacted during periods when the Company is accumulating transactions for
securitization, Management believes that the Company will ultimately
maximize the profits that can be realized from its leases through its strategy
of aggregating and securitizing its lease receivables.
Management anticipates reporting profitable operating results on a quarterly
basis from and after such time as the Company's expansion into vendor finance
results in a volume of loan and lease originations that will enable the
Company to securitize its contract receivables on a more frequent basis than
is now practicable. Although the strategy of aggregating and securitizing
transactions was successfully executed in 1993, there can be no assurance
that the requisite volume of transactions, warehouse financing or securitized
asset sales will continue to be available to the Company on terms and
conditions that will enable the Company to attain its profitability and debt-
to-equity objectives.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1994
Net Income (Loss)
Net loss for the three months ended June 30, 1994 was approximately $640,000
or $(0.15) per share, as compared to net income of approximately $155,000
or $0.03 per share for the same quarter of 1993. In general, the
reportable loss largely results from the impact of generally accepted
accounting principles as they apply to the recognition of revenue and income
relating to warehoused assets. In particular, the decrease in net income
resulted primarily from (i) a reduction in fee income as a result of
Management's decision to warehouse transactions during the second quarter
of 1994 in anticipation of a contemplated asset securitization, rather than
to engage in the sale or permanent financing of individual transactions that
would have resulted in immediately reportable fee income for the Company and
(ii) a reduction in gains realized from the remarketing of certain
equipment under various programs which the Company manages on behalf of various
investors. The reduction is attributable to a decrease in the amount of
equipment available for remarketing as a result of the continued
expiration of the remaining operating leases which the Company manages on
behalf of third-party investors.
Revenues
Revenues for the three months ended June 30, 1994 were approximately $750,000
as compared to revenues of approximately $1,393,000 for the same period last
year. The decrease was largely attributable to (i) a decrease in gain on
sale of leased equipment and (ii) a reduction in fee income.
One component of gains from equipment sales, gains from the remarketing of
equipment on behalf of third-party investors, decreased approximately
$415,000 in the second quarter of 1994 as compared to the same period in
1993. Reportable remarketing gains represent the Company's share of realized
residual values on investor-owned equipment. The reduction is primarily a
result of the expiration of the remaining leases in third-party investor
programs.
Fee income decreased approximately $292,000 in the second quarter of 1994 as
compared to the same period in 1993 as a result of Management's decision to
warehouse transactions during the second quarter of 1994 in anticipation of
a contemplated asset securitization, rather than to engage in the sale or
permanent financing of individual transactions that would have resulted in
a greater level of immediately reportable fee income for the Company.
Expenses
Expenses for the three months ended June 30, 1994 were approximately
$1,390,000 compared to approximately $1,239,000 during the same period of
1993, an increase of approximately 12%. A sharply lower level of
amortized deferred finance costs and an increase in net capitalized initial
direct costs were offset by increases in depreciation expense and interest
expense.
Depreciation expense increased approximately $120,000 for the three months
ended June 30, 1994 compared to the same period last year as a result of
the Company originating and retaining a higher volume of equipment
subject to operating leases.
Interest expense increased due to the Company's decision to warehouse
originations pending securitization.
The increase in net capitalized initial direct costs reflects the sharply
higher volume of leased assets originated and retained by the Company in
the second quarter of 1994 as compared to the second quarter of 1993.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1994
Net Income (Loss)
Net loss for the six months ended June 30, 1994 was approximately $964,000 or
$(0.23) per share compared to net income of approximately $958,000 or $0.22
per share for the same period of last year. In general, the net loss
reported by the Company for the first six months of 1994 is substantially
attributable to an approximate 54% decrease in reported revenues for the
first six months of 1994 compared to the same period of 1993 (approximately
$1.5 million for 1994 vs. approximately $3.2 million for 1993). This
decrease in reportable revenues is a direct consequence of Management's
decision to warehouse financed assets during 1994. Both the volume and
projected profitability of the Company's originations are up significantly
for the first six months of 1994 compared to the same period of 1993. As a
result, Management believes that the Company's net income would have shown
a significant increase if the Company had employed its historic practice of
funding its transactions through an outright sale. Notwithstanding the
negative near-term accounting results associated with the Company's
decision to warehouse originations until a securitizable critical mass has
been attained, Management believes that securitization vehicles will
ultimately maximize the cash flow and net income that can be realized
from the Company's equipment financing transactions.
Revenues
Revenues for the six months ended June 30, 1994 were approximately $1,468,000
versus $3,222,000 for the same six months of last year. The decrease of
approximately 54% is primarily due to (i) a decrease in the gain on the
sale of equipment the Company remarkets on behalf of third-party investors,
attributable to a decline in the amount of equipment available for
remarketing and (ii) a reduction in fee income as a result of Management's
decision to warehouse assets in anticipation of an asset securitization.
Gain on sale of equipment decreased approximately 82% for the first six
months of 1994 versus the same period during 1993, as operating leases
managed by the Company continue to expire.
Fee income decreased by approximately $576,000 or 56% for the first six
months of 1994 versus 1993. This decrease is due to a lower volume of new
leases having been discounted or sold during that period.
Expenses
Expenses for the first six months of 1994 were approximately $2,432,000 versus
approximately $2,265,000 for the comparable period of 1993.
Financial Condition
The Company's financial condition will continue to be dependent upon certain
critical elements. First, the Company must be able to obtain recourse and
nonrecourse financing to fund future acquisitions of equipment financing
receivables. Second, the Company must originate a sufficient volume of
equipment lease and loan receivables structured and priced in such a way
that the Company covers its costs and realizes profits from its finance
asset originations.
Uncertainty continues to exist in the Company's core health care equipment
leasing business as a result of the national debate over various healthcare
reform proposals. The Company is seeking to offset the negative impact
of such uncertainty by expanding into vendor finance.
Although the Company continues to diversify into niche markets that Management
believes offer the Company attractive returns consistent with its underwriting
criteria, there can be no assurance that the Company will achieve operating
results comparable to those realized in 1993.
Liquidity and Capital Resources
The Company believes that existing cash balances, cash flows from its
activities, available warehouse and permanent non-recourse borrowings, and
securitized asset sales will be sufficient to meet its foreseeable financing
needs, provided the Company is able to originate a sufficient volume of
transactions which meet its credit quality and profitability standards.
PART II - OTHER INFORMATION
Items omitted in Part II are either not applicable or the answer to the items
is no.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME CAPITAL CORPORATION
(Registrant)
August 19, 1994 /s/ David L. Daum_____________________
David L. Daum, Senior Vice President
David L. Daum is the Principal Financial and
Accounting Officer and has been duly authorized
to sign on behalf of the Registrant
August 19, 1994 /s/ James A. Friedman
James A. Friedman, Chief Executive Officer.