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, 1997
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: (847)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, 1997, there were 4,292,165 shares of common stock
outstanding.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations --
Three and Six Months Ended
June 30, 1997 and 1996
Consolidated Balance Sheets --
June 30, 1997 and December 31, 1996
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit Index
Reports on Form 8-K
SIGNATURE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
_____1997_____________1996___ _____1997___ _____1996___
Revenues:
Fee income $ 147,932 $ 1,716,191 $ 6,731,502 $ 6,095,429
Direct financing
leases 951,695 477,779 2,535,617 628,297
Rentals on leased
equipment 274,982 249,091 481,293 298,997
Interest 302,799 140,949 573,616 583,319
Other income 62,950 41,188 130,806 119,760
Total revenues 1,740,358 2,625,198 10,452,834 7,725,802
Expenses:
Depreciation on
leased equipment 159,596 119,570 259,673 138,724
Interest 815,028 465,662 1,992,311 1,150,266
Provision for
credit losses 1,500,000 - 4,000,000 -
Selling, general
and administra-
tive 2,104,635 1,732,826 3,972,341 3,238,615
Net capitalized
initial direct
costs (148,755) (160,532) (263,911) (189,856)
Total expenses 4,430,504 2,157,526 9,960,414 4,337,749
Income (loss)
before income
taxes and
dividends (2,690,146) 467,672 492,420 3,388,053
Income taxes - - - -
Preferred
dividends 56,250 -___ 112,500 -___
Net income
available to
common share-
holders (2,746,396) 467,672 379,920 3,388,053
Net income (loss)
per common and
common equiva-
lent share $ (0.56) $ 0.10 $ 0.08 $ 0.74
Number of common
and dilutive
common equiva-
lent shares out-
standing 4,867,367 4,582,915 4,854,537 4,548,591
See accompanying notes to consolidated financial statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
1997 1996
(Unaudited) (Audited)
ASSETS
Cash and cash equivalents $ 2,549,765 $ 7,063,398
Restricted cash 9,885,852 7,873,004
Receivables:
Rentals on leased equipment 256,440 172,758
Due from equipment trusts - 46,948
Securitization receivables, net
of loss reserves 3,753,938 3,181,112
Other 1,088,170 4,039,720
Net investment in direct financing
leases and loans 41,217,843 56,004,417
Leased equipment, net of accumulated
depreciation of $160,465 and
$78,885 at June 30, 1997 and
December 31, 1996 2,690,472 1,370,289
Deposits on equipment 2,618,974 134,487
Property and equipment, net of
accumulated depreciation of
$1,233,474 and $1,156,512 at
June 30, 1997 and December 31, 1996 594,371 364,499
Other assets 777,006 761,317
Total assets $65,432,831 $81,011,949
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $29,420,234 $46,418,920
Accounts payable for equipment 9,582,446 7,780,691
Accrued expenses and other
liabilities 8,891,800 8,162,837
Deposits and advances 3,100,705 4,592,210
Subordinated debt 5,000,000 5,000,000
Total liabilities 55,995,185 71,954,658
Stockholders' equity
Preferred stock, $100 par value:
authorized 250,000 shares,
issued 25,000 shares in 1996 2,500,000 2,500,000
Common stock, $0.05 par value:
authorized 10,000,000 shares;
issued 4,386,365 and 4,384,365
shares at June 30, 1997 and
December 31, 1996 219,318 219,218
Additional paid-in capital 9,481,010 9,480,675
Accumulated deficit (2,462,882) (2,842,802)
Treasury stock, at cost; 94,200
shares at June 30, 1997 and
December 31, 1996 (299,800) (299,800)
Total stockholders' equity 9,437,646 9,057,291
Total liabilities and
stockholders' equity $65,432,831 $81,011,949
See accompanying notes to consolidated financial statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before dividends $ 492,420 $ 3,388,053
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and other amortization 362,623 215,129
Customer deposits and payments
on direct finance leases and
loans net of amortization 3,732,089 3,766,151
Amortization of debt financing fees 60,781 -
Non-cash gain on securitization (1,913,695) (2,244,719)
Provision for credit losses 4,000,000 -
Capitalized initial direct costs (289,898) (199,666)
Changes in assets and liabilities:
Rentals on leased equipment and
other receivables (1,365,791) (981,866)
Other assets (491,084) (663,329)
Accrued expenses and other
liabilities 955,454 (411,746)
Due from equipment trusts 46,948 26,025
Net cash provided by operating
activities 5,589,847 2,894,032
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of equipment acquired for
lease and principal amounts
disbursed for loans (66,040,538) (53,532,367)
Purchase of fixed assets (306,835) (91,829)
Net cash used in investing activities (66,347,373) (53,624,196)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable, net
of borrowing (16,998,685) (31,486,493)
Proceeds from securitization reducing
book value of leases and loans 66,281,820 57,125,671
Discounted lease rentals reducing
investment in direct finance
leases and loans 7,072,823 24,116,387
Preferred stock dividends (112,500) -
Other 435 625
Net cash provided by financing
activities 56,243,893 49,756,190
Decrease in cash and cash equivalents (4,513,633) (973,974)
Cash and cash equivalents:
Beginning of period 7,063,398 2,001,949
End of period $ 2,549,765 $ 1,027,975
Interest paid during the period $ 2,040,404 $ 993,247
See accompanying notes to consolidated financial statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Basis of Presentation
The interim financial statements have been prepared by Prime
Capital Corporation ("the Company" or "Prime Capital"), without
audit, pursuant to the rules and regulations of the Securities
and Exchange Commission applicable to quarterly reports on Form
10-QSB. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion
of management, all adjustments which are of a normal recurring
nature and are necessary for a fair presentation have been
included. However, results for interim periods are not
necessarily indicative of the results that may be expected for a
full year. It is suggested that these financial statements be
read in conjunction with the consolidated financial statements
and related notes and schedules included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
Certain reclassifications have been made to the 1996 financial
statements to conform to the classifications used in the June 30,
1997 financial statements. These reclassifications had no effect
on net income or stockholders' equity as previously reported.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The operating results of Prime Capital are primarily affected by
the following factors: (1) the volume of financial contract
activations, (2) the amount and timing of financial contract
sales, (3) the level of operating expenditures required to
originate and service the volume of financial contract
activations and sales, and (4) credit losses.
Once a financial contract is activated, it is sold to a third
party or, in most cases, funded through a warehouse finance
facility until it is sold through securitization. Sale of a
contract to a third party results in immediate fee income.
Warehousing a contract for a period of time results in increased
rentals on leased equipment or direct finance lease income and
correspondingly increased interest expense and, if the contract
is an operating lease, depreciation on leased equipment. When
contracts are accumulated to a certain level and sold into
securitization, the Company recognizes fee income from the gain
on securitization and ceases to recognize rental or direct
finance lease income and interest and depreciation expense
associated with the sold contracts. Future revenues from the
securitizations include fee income derived from servicing the
securitization pool and interest income earned on cash reserve
balances until all the contracts in the pool have expired.
Securitizations During the Six Months Ended June 30, 1997 and
1996
On January 22, 1996, the Company issued and sold equipment lease-
backed pay-through notes with an initial aggregate contract value
of $85.3 million. Through this issuance, the Company permanently
financed certain assets and liabilities carried on the Company's
balance sheet as of December 31, 1995. These assets and
liabilities were removed from the balance sheet and the resulting
gain of $4.1 million was recognized on the Company's statement of
operations in the first quarter of 1996.
On March 20, 1997, the Company issued and sold equipment lease-
backed pay-through notes with an initial aggregate contract value
of $77.5 million. Through this issuance, the Company permanently
financed certain assets and liabilities carried on the Company's
balance sheet as of December 31, 1996. These assets and
liabilities were removed from the balance sheet and the resulting
gain of $6.6 million was recognized on the Company's statement of
operations in the first quarter of 1997.
Results of Operations-Six Months Ended June 30, 1997
The Company activated financial contracts totaling $75.3 million
in 1997, a decrease of 7.4% from the $81.3 million activated in
1996.
Fee income increased $0.6 million, or 10.4% to $6.7 million in
1997 from $6.1 million in 1996. Fee income primarily relates to
gains from the sale or securitization of financial contracts.
The initial value of the contracts sold or securitized was $91.9
million and $90.2 million in 1997 and 1996, respectively. The
Company also earned commitment fees associated with the financing
of a major hospital network of $.01 million and $1.7 million in
1997 and 1996, respectively.
Direct financing lease income increased $1.9 million to $2.5
million in 1997 from $0.6 million in 1996. The longer holding
period of financial contracts and higher average contract
balances held in the warehouse accounted for this increase.
Rentals on leased equipment increased $182,000, or 61.0%, to
$481,000 in 1997 from $299,000 in 1996 due to the longer holding
period of financial contracts and higher average contract
balances held in the warehouse. There was a corresponding
increase in depreciation of leased equipment of $121,000, or
87.2%, to $260,000 in 1997 from $139,000 in 1996.
Interest income decreased $9,000, or 1.7%, to $574,000 in 1997
from $583,000 in 1996.
Other income increased $11,000, or 9.2%, to $131,000 in 1997 from
$120,000 in 1996.
Interest expense increased $0.8 million, or $73.2%, to $2.0
million in 1997 from $1.2 million in 1996. Interest related to
subordinated debt totaled $313,000 in 1997. Also contributing to
increased interest expense was the amortization of debt issuance
costs and the longer holding period as well has higher average
balances of financial contracts funded on the warehouse line of
credit. (See "Liquidity and Capital Resources.")
The Company recorded a provision for credit losses of $4.0
million in 1997. No provision was recorded in 1996. (See
"Credit Losses.")
Selling, general and administrative expenses increased $0.7
million, or 22.7%, to $3.9 million in 1997 from $3.2 million in
1996. Employee compensation and related costs, including
commissions, accounted for 60.7% and 64.0% of total selling,
general and administrative expenses in 1997 and 1996,
respectively. The Company had 57 and 51 employees at June 30,
1997 and 1996 respectively. Selling, general and administrative
expenses have increased primarily due to the hiring of additional
employees and the increase in the serviced financial contract
portfolio.
Net capitalized initial direct costs increased $74,000, or 39.0%,
to $264,000 in 1997 from $190,000 in 1996.
In 1997, earnings available for common shareholders was reduced
by $113,000 for dividends payable to holders of preferred stock.
There were no preferred stock dividends payable for 1996. (See
"Liquidity and Capital Resources.")
Results of Operations-Three Months Ended June 30, 1997
The Company activated financial contracts totaling $41.6 million
in 1997, an increase of 31.2% from the $31.7 million activated in
1996.
Fee income decreased $1.6 million, or 91.4%, to $0.1 million in
1997 from $1.7 million in 1996. Fee income includes gains from
the sale or securitization of financial contracts. The initial
value of the contracts sold or securitized was $1.2 million and
$4.6 million in 1997 and 1996, respectively. The Company also
earned commitment fees associated with the financing of a major
hospital network of $0.1 million and $1.7 million in 1997 and
1996, respectively.
Direct financing lease income increased $474,000, or 99.2%, to
$952,000 in 1997 from $478,000 in 1996. The longer holding
period of financial contracts and higher average contract
balances held in the warehouse accounted for this increase.
Rentals on leased equipment increased $26,000, or 10.4%, to
$275,000 in 1997 from $249,000 in 1996 due to the longer holding
period of financial contracts and higher average contract
balances held in the warehouse. There was a corresponding
increase in depreciation of leased equipment of $40,000, or
33.5%, to $160,000 in 1997 from $120,000 in 1996.
Interest expense increased $349,000, or 75.0%, to $815,000 in
1997 from $466,000 in 1996. Interest related to subordinated debt
totaled $137,000 in 1997. Also contributing to increased
interest expense was amortization of debt issuance costs and
interest associated with carrying higher contract balances funded
on the warehouse line of credit. (See "Liquidity and Capital
Resources.")
The Company recorded a provision for credit losses of $1.5
million in 1997. No provision was recorded in 1996. (See
"Credit Losses.")
Selling, general and administrative expenses increased $0.4
million, or 21.5%, to $2.1 million in 1997 from $1.7 million in
1996. Employee compensation and related costs, including
commissions, accounted for 68.7% and 61.7% of total selling,
general and administrative expenses in 1997 and 1996,
respectively. Selling, general and administrative expenses have
increased primarily due to the hiring of additional employees and
the increase in the serviced financial contract portfolio.
In 1997, earnings available for common shareholders was reduced
by $56,000 for dividends payable to the holder of preferred
stock. There were no preferred dividends payable for 1996. (See
"Liquidity and Capital Resources.")
Credit Losses
Prime Capital has identified four customers who have experienced
significant deterioration in their financial condition, which has
adversely impacted their ability to repay the financial
obligations to the Company. In the case of three customers, the
Company has alleged fraud and material misrepresentation of the
customer's financial condition or the contract's underlying
collateral.
In each case the Company has and will continue to aggressively
pursue various loss mitigation strategies; including repossession
and sale of collateral, litigation, and other actions against the
lessee-obligors, guarantors of the financial contracts, or other
individuals whose actions may have been detrimental to Prime
Capital.
On June 16, 1997, the Company had previously disclosed its loss
exposure of $6.6 for the largest of the four customers. At June
30, 1997, Prime Capital's aggregate exposure to credit loss from
these four customers totaled $10.5 million. However, the Company
expects to be successful in several of its loss mitigation
strategies and has established loss reserves accordingly.
During the first six months of 1997, the Company has recorded
provisions for credit losses totaling $4.0 million, increasing
its balance sheet loss reserves to $7.0 million at June 30, 1997.
The Company has allocated $4.6 million of its loss reserves to
absorb the estimated shortfall of net recovery proceeds from
these four situations. The Company will continue to closely
monitor each situation to ensure the adequacy of its total loss
reserves.
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 non-recourse financing to fund future
acquisitions and originations of financial contracts. Second,
the Company must originate a sufficient volume of new business
which is structured and priced in such a way so as to permit the
Company to finance or sell those financial contracts for an
amount which, in the aggregate, covers the Company's cost of
operations, plus provides a return on stockholders' equity. The
Company intends to utilize a combination of interim warehouse
borrowing and long-term funding methodologies to provide it with
borrowing and funding availability at competitive rates of
interest. The long-term funding methodologies will include: (1)
the continued issuance of asset backed securities, (2) portfolio
sales, (3) program financings, and (4) the discounting of
individual financial contracts.
The Company conducts its business in a manner designed to
conserve its working capital and minimize its credit exposure.
The Company does not purchase equipment or disburse funds until:
(1) it has received a noncancelable lease or loan from its
customer, and (2) it has determined that the lease or loan (a)
can be discounted with a bank or financial institution on a non-
recourse basis, or (b) meets the origination standards
established for a securitized pool.
Liquidity and Capital Resources
On October 4, 1996, Prime Capital Corporation raised additional
capital by completing a private sale of $5.0 million principal
amount of five year, 12.5% subordinated debentures and $2.5
million of 9% preferred stock to Banc Once Capital Corporation
(BOCC), a subsidiary of Bank One Corporation, Columbus, Ohio. As
part of the transaction, BOCC also received warrants to purchase
499,606 shares of Prime Capital's common stock at $1.00 per
share.
Management believes that in order to meet its ongoing funding
needs, the Company will require additional capital resources to
supplement the expected cash flows of its operating activities
and anticipated borrowings under its warehouse financing
facility. The Company is expecting to complete one or more sales
or securitizations of financial contracts before the end of the
year. The Company is also exploring other sources of liquidity
to satisfy its needs for additional capital resources.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Prime Capital's shareholders was held on
July 2, 1997. The following items were voted upon and ratified:
The following members of the board of directors were elected to
hold office until the next Annual Meeting: James A. Friedman,
Leander W. Jennings, William D. Smithburg, Robert R. Youngquist
and Mark P. Bischoff. Three million eight hundred fifty thousand
thirty-one (3,850,031) shares were cast in favor of the motion,
no shares were cast against the motion and six thousand three
hundred (6,300) shares abstained.
The election of the accounting firm of KPMG Peat Marwick LLP as
auditors of the Company for the current fiscal year was voted
upon and ratified. Three million eight hundred fifty-one thousand
three hundred eleven (3,851,311) shares were cast in favor of the
motion, two thousand five hundred (2,500) shares were cast
against the motion and two thousand five hundred twenty (2,520)
shares abstained.
The approval of the Company's 1997 Stock Option Plan was voted
upon and ratified. Three million two hundred two thousand three
hundred thirty-six (3,202,336) shares were cast in favor of the
motion, one hundred thirty-six thousand four hundred fifty
(136,450) shares were cast against the motion and one thousand
eight hundred twenty (1,820) shares abstained.
An Amendment to the Company's 1987 Stock Option Plan was voted
upon and ratified. Three million one hundred twenty-five
thousand eight hundred fifty-five (3,125,855) shares were cast in
favor, one hundred six thousand four hundred fifty (136,450)
shares were cast against and five thousand seven hundred one
(5,701) shares abstained.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit Index
Exhibit No. Description
11 Statement Regarding Computation of Per Share
Earnings
27 Financial Data Schedule
b) Reports on Form 8-K
On June 16, 1997, Prime Capital Corporation filed Form 8K
disclosing the nature of a suit filed by it's subsidiary, Prime
Leasing, Inc.
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 15, 1997 /s/ Vern Landeck
Vern Landeck, Chief Financial Officer
Vern Landeck is the Principal Financial
and Accounting Officer and has been
duly authorized to sign on behalf of
the Registrant
August 15, 1997 /s/ James A. Friedman
James A. Friedman, Chief Executive Officer