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 March 31, 1998
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 March 31, 1998, there were 4,335,398 shares of common stock
outstanding.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations --
Three Months Ended
March 31, 1998 and 1997 3
Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
PART II. OTHER INFORMATION 10
SIGNATURES 11
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
1998 1997
Revenues:
Fee income $ 2,380,662 6,528,856
Direct financing leases and loans 786,026 1,583,921
Rentals on operating leases 300,436 206,311
Interest income 178,264 270,818
Other income 93,875 67,855
--------- ---------
Total revenues 3,739,263 8,657,761
--------- ---------
Expenses:
Depreciation on leased equipment 192,315 100,077
Interest 594,576 1,122,568
Provision for credit losses - 2,500,000
Selling, general and administrative 2,212,468 1,752,550
--------- ---------
Total expenses 2,999,359 5,475,195
--------- ---------
Income before income taxes 739,904 3,182,566
Income taxes - -
Net income $ 739,904 3,182,566
========= =========
Basic earnings per share $ 0.16 0.68
========= =========
Dilutive earnings per share $ 0.14 0.65
========= =========
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
ASSETS 1998 1997
(Unaudited) (Audited)
Cash and cash equivalents $ 1,003,090 3,572,553
Receivables:
Operating lease rentals 99,053 115,930
Other 9,910,422 8,049,271
Net investment in direct financing leases
and loans 16,508,517 17,881,502
Investment in securitized receivables,
including restricted cash 9,848,312 7,799,195
Leased equipment, net of accumulated
depreciation 8,435,557 4,188,097
Deposits on equipment 898,498 1,370,326
Equipment and furniture, net of accumulated
depreciation 700,926 720,725
Other assets 2,175,027 2,133,957
--------- ---------
Total assets $ 49,579,402 45,831,556
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 19,961,307 16,357,347
Accounts payable for equipment 4,118,333 6,565,270
Accrued expenses and other liabilities 10,011,879 8,244,271
Deposits and advances 2,682,899 2,415,476
---------- ----------
36,774,418 33,582,364
Subordinated debt 5,000,000 5,000,000
---------- ----------
Total liabilities 41,774,418 38,582,364
---------- ----------
Stockholders' equity
Preferred stock, $100 par value:
authorized 250,000 shares,
issued 25,000 shares 2,500,000 2,500,000
Common stock, $0.05 par value:
authorized 10,000,000 shares; issued
4,429,598 and 4,396,265 shares at
March 31, 1998 and December 31, 1997,
respectively 221,101 219,813
Additional paid-in capital 9,489,005 9,483,855
Accumulated deficit (4,971,522) (5,659,676)
Unrealized gain on securities 866,200 1,005,000
Treasury stock, at cost, 94,200 shares (299,800) (299,800)
---------- ----------
Total stockholders' equity 7,804,984 7,249,192
---------- ----------
Total liabilities and stockholders' equity $ 49,579,402 45,831,556
========== ==========
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 739,904 3,182,566
Adjustments to reconcile net income
to net cash provided by or used in
operating activities:
Depreciation of leased equipment 192,315 100,076
Other depreciation and amortization 88,717 63,589
Non-cash gain on securitization of
receivables (1,165,196) (1,913,695)
Provision for credit losses - 2,500,000
Changes in assets and liabilities:
Rentals on leased equipment and other
receivables (1,516,453) (2,651,587)
Other assets (210,261) 12,945
Accrued expenses and other liabilities 1,772,108 (530,165)
---------- ----------
Net cash provided by (used in) operating
activities (98,866) 763,729
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired for lease (41,902,425) (38,042,239)
Customer deposits and payments on direct
finance leases and loans 1,828,154 572,330
Purchase of equipment and furniture (38,527) (186,205)
Investment in inventory finance receivables (1,158,598) -
Proceeds from sales of finance receivables 35,246,651 71,781,603
---------- ----------
Net cash provided by (used in) investing
activities (6,024,745) 34,125,489
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options 6,438 437
Preferred stock dividends (56,250) (56,250)
Net increase (decrease) in notes payable 3,603,960 (34,406,487)
---------- ----------
Net cash provided by (used in) financing
activities 3,554,148 (34,462,300)
Increase (decrease) in cash and cash equivalents (2,569,463) 426,918
Cash and cash equivalents:
Beginning of period 3,572,553 7,063,398
---------- ----------
End of period $ 1,003,090 7,490,316
========== ==========
Cash paid during the year for interest $ 527,786 1,146,892
========== ==========
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,
1997.
Certain reclassifications have been made to the 1997 financial
statements to conform to the classifications used in the March 31, 1998
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
-------------------------
Prime Capital Corporation, including its wholly owned subsidiaries,
("Prime" or the "Company") operates as a diversified specialty finance
company that originates, acquires, aggregates and services loans, installment
purchase agreements and leases ("financial contracts") primarily in the
medical, communications, specialty vehicle, hospitality/gaming and software
industries. Prime develops new business directly with end users and through
private label vendor finance programs with equipment manufacturers, dealers
and distributors. The Company seeks to become an effective business partner
with its clients by structuring and servicing comprehensive finance programs
which contribute to the clients growth and success. Prime funds its loan and
lease receivables primarily by issuing asset-backed securities to
institutional investors.
The operating results of Prime are primarily affected by the following
factors: (1) the volume and pricing 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
direct finance lease income and interest 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.
Sales and Securitizations of Finance Receivables
- ------------------------------------------------
During the Three Months Ended March 31, 1998 and 1997
- -----------------------------------------------------
The following table summarizes the sale and securitization of Financial
Contracts completed during the three months ended March 31, 1998 and
1997.
Three Months Ended March 31,
(Amounts in thousands)
Description Date 1998 1997
- --------------------- --------------- --------- --------
Prime Finance
Corporation 1997-A March, 1997 $ - 77,476
Prime Finance
Corporations 1998-A-1 March, 1998
and 1998-A-2 38,937 -
------- -------
Subtotal 38,937 77,476
Other sale transactions - 5,559
------- -------
Total $ 38,937 83,035
======= =======
In March 1998, equipment lease-receivables backed pay through notes were
jointly issued by Prime Finance Corporation 1998-A-1 and Prime Finance
Corporation 1998-A-2 (collectively referred as "PFC-1998A"), both wholly
owned subsidiaries of the Company.
The initial principal amount of the notes issued by PFC 1998A totaled
$106.1 million, which included $62.2 million of receivables related to
the consolidation of certain securitizations completed in prior years,
$5.0 million that represents the pre-funding of finance receivables that
will be sold after March 31, 1998, and $1.8 million of proceeds from the
assignment of rentals and residual values of operating leases. Proceeds
attributable to operating lease contracts are reported as debt in the
Company's financial statements.
Results of Operations For The Three Months Ended March 31, 1998 and 1997
- ------------------------------------------------------------------------
The Company activated financial contracts totaling $33.6 million in 1998,
unchanged from the $33.6 million activated in 1997.
Fee income decreased $4.1 million, or 63.5%, to $2.4 million in 1998
from $6.5 million in 1997. Fee income includes gain from the securitization
of financial contracts of $0.5 million in 1998 and $6.1 million in 1997.
The March 1998 gain from sale of contracts has been reduced by a $745,000
loss attributable to the $62.2 million of receivables related to the
consolidation of certain securitizations completed in prior years, and
excludes any gain or loss attributable to the $5.0 million of prefunded
receivables. Fee income for March 1998 also includes a $1.4 million gain
from the sale of warrants that were received by the Company in connection
with originating a lease transaction.
Direct financing lease income decreased $0.8 million, or 50.4%, to $0.8
million in 1998 from $1.6 million in 1997. The decrease is due to shorter
holding period of financial contracts and lower average contract balances
held in the warehouse.
Rentals on leased equipment increased $94,000, or 45.6%, to $300,000 in
1998 from $206,000 in 1997. Depreciation of leased equipment increased
$92,000, or 92.2%, to $192,000 in 1998 from $100,000 in 1997.
Interest income decreased $93,000, or 34.2%, to $178,000 in 1998 from
$271,000 in 1997.
Other income increased $26,000, or 38.3%, to $94,000 in 1998 from $68,000
in 1997.
Interest expense decreased $0.5 million, or 47.0%, to $0.6 million in 1998
from $1.1 million in 1997, primarily due to lower average borrowings under
the Company's warehouse credit facilities.
Provision for credit losses was $2.5 million in 1997. There was no provision
for credit losses in 1998.
Selling, general and administrative expenses increased $0.4 million, or
26.2%, to $2.2 million in 1998 from $1.8 million in 1997. Employee
compensation and related costs, including commissions, accounted for 58.8%
and 56.2% of total selling, general and administrative expenses in 1998 and
1997, respectively. The Company had 68 and 55 employees at March 31,1998
and 1997, 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.
Credit Losses
- -------------
An allowance for credit losses is initially established when financial
contracts are sold or securitized in transactions where the Company retains
recourse for losses, partial or otherwise. This initial estimate of future
losses reduces the gain recorded at the time sale. If necessary, a provision
for credit losses is charged against earnings to maintain the allowance for
credit losses at an amount management believes necessary to absorb potential
losses in the finance contract portfolio.
Management evaluates the adequacy of the allowance for credit losses by
reviewing credit loss experience, delinquencies, the value of the underlying
collateral, including third party guarantees or insurance recoveries, the
level of finance contract portfolio, as well as, general economic conditions.
During 1997, Prime identified certain customers who had experienced
significant deterioration in their financial condition, which has adversely
impacted their ability to repay the financial obligations to the Company.
The estimated losses from these situations exceeded the balance of the
allowance for credit losses. Consequently, the Company recorded an
additional $7.0 million provision for credit losses during the year ended
December 31, 1997.
For three of the more significant 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.
Financial Condition
- -------------------
The Company's financial condition will remain dependent upon certain critical
elements. First, the Company must continue to be able to access the capital
markets for recourse and non-recourse financing to fund future originations
and acquisitions 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. Prime 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, and (3) the discounting of individual financial contracts.
Prime 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 noncancellable
lease or loan agreement from its customer, and (2) it has determined
that the lease or loan agreement (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
- -------------------------------
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
None.
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
None.
SIGNATURES
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)
May 15, 1998 /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
May 15, 1998 /s/ James A. Friedman
James A. Friedman, Chief Executive Officer
EXHIBIT 11
PRIME CAPITAL CORPORATION
Computation of Earnings Per Share
(Unaudited)
Three Months Ended March 31,
1998 1997
---------- ----------
Numerator:
Net income $ 739,904 3,182,566
Preferred dividends (56,250) (56,250)
--------- ---------
Numerator for basic
and diluted earnings
per share-income
(loss) available to
common shareholders $ 683,654 3,126,316
========= =========
Denominator:
Denominator for basic
earnings per share-
weighted average shares 4,333,158 4,282,610
Effect of dilutive securities:
Options and warrants 621,165 386,352
--------- ---------
Dilutive potential
common shares 621,165 386,352
--------- ---------
Denominator for diluted
earnings per share-
adjusted weighted
average shares and
assumed conversions 4,954,323 4,668,962
========= =========
Basic earnings per share $ 0.16 0.76
========= =========
Diluted earnings per share $ 0.14 0.85
========= =========
Options to purchase an average of 100,000 shares of common stock at prices
between $5.25 and $6.00 per share in 1998 were outstanding but were not
included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive. Options to
purchase an average of 80,000 shares of common stock at prices between
$5.25 and $5.88 per share in 1997 were outstanding but were not included in
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
[ARTICLE] 5
[LEGEND]
This schedule contains summary financial information extracted from SEC
Form 10QSB and is qualified in its entirety by reference to such
financial statements. Individual data items on this schedule may not
add up due to rounding.
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] MAR-31-1998
[CASH] 1,003,090
[SECURITIES] 0
[RECEIVABLES] 15,742,703
[ALLOWANCES] (3,107,028)
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2,074,422
[DEPRECIATION] (1,373,496)
[TOTAL-ASSETS] 49,579,402
[CURRENT-LIABILITIES] 0
[BONDS] 5,000,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 2,500,000
[COMMON] 221,101
[OTHER-SE] 5,083,883
[TOTAL-LIABILITY-AND-EQUITY] 49,579,402
[SALES] 0
[TOTAL-REVENUES] 3,739,263
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 2,404,783
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 594,576
[INCOME-PRETAX] 683,654
[INCOME-TAX] 0
[INCOME-CONTINUING] 683,654
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 683,654
[EPS-PRIMARY] 0.16
[EPS-DILUTED] 0.14