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 September 30, 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 September 30, 1998, there were 4,447,098 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 and Nine Months Ended
September 30, 1998 and 1997 3
Consolidated Balance Sheets --
September 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 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
Item 4. Submission of Matters to a Vote of Security
Holders 11
Item 6. Exhibits & Reports on 8-K 11
Exhibit Index 11
Reports on Form 8-K 11
SIGNATURE 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues:
Fee income 1,558,960 2,488,126 5,898,414 9,130,228
Direct financing
leases and loans 487,457 1,347,003 1,760,411 3,882,620
Rentals on
operating leases 1,067,993 314,766 2,372,117 796,059
Interest income 226,111 173,412 707,648 747,028
Other income 104,684 81,649 282,961 212,455
--------- --------- ---------- ----------
Total revenues 3,445,205 4,404,956 11,021,551 14,768,390
Expenses:
Depreciation on leased
equipment 864,720 172,841 1,915,389 432,514
Interest 771,730 1,021,612 2,278,680 2,924,523
Provision for credit losses - - 150,000 4,000,000
Selling, general and
administrative 2,221,497 2,546,793 6,807,347 6,255,224
--------- --------- ---------- ----------
Total expenses 3,857,947 3,741,246 11,151,416 13,612,261
Income (loss) before income
taxes (412,742) 663,710 (129,865) 1,156,129
Income taxes - - - -
--------- --------- ---------- ----------
Net Income (loss) (412,742) 663,710 (129,865) 1,156,129
========= ========= ========== ==========
Basic earnings per share: $ (0.11) 0.14 (0.07) 0.23
========= ========= ========== ==========
Dilutive earnings per share:$ (0.11) 0.12 (0.07) 0.20
========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
ASSETS 1998 1997
(Unaudited) (Audited)
Cash and cash equivalents $ 1,900,287 3,572,553
Receivables:
Operating lease rentals 338,058 115,930
Floor plan receivables 3,950,243 1,450,840
Other 7,634,184 6,598,431
Net investment in direct financing
leases and loans 35,029,389 17,881,502
Investment in securitized receivables,
including restricted cash 11,234,104 7,799,195
Leased equipment, net of accumulated
depreciation 10,169,046 4,188,097
Deposits on equipment 209,844 1,370,326
Equipment and furniture, net of accumulated
depreciation 677,874 720,725
Other assets 881,283 2,133,957
---------- ----------
Total assets $72,024,312 45,831,556
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $33,533,340 16,357,347
Accounts payable for equipment 14,566,716 6,565,270
Accrued expenses and other liabilities 9,734,007 8,244,271
Deposits and advances 3,235,422 2,415,476
Subordinated debt 5,000,000 5,000,000
---------- ----------
Total liabilities 66,069,485 38,582,364
---------- ----------
Stockholders' equity
Preferred stock, $100 par value:
authorized 250,000 shares, issued 25,000 2,500,000 2,500,000
Common stock, $0.05 par value:
authorized 10,000,000 shares; issued
4,447,098 and 4,396,265 shares in
1998 and 1997, respectively 221,976 219,813
Additional paid-in capital 9,490,941 9,483,852
Accumulated deficit (5,958,289) (5,659,673)
Unrealized gains on securities - 1,005,000
Treasury stock, at cost, 94,200 shares
in 1998 and 1997 (299,801) (299,800)
---------- ----------
Total stockholders' equity 5,954,827 7,249,192
---------- ----------
Total liabilities and stockholders' equity $72,024,312 45,831,556
========== ==========
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (129,865) 1,156,129
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation of leased equipment 1,915,389 432,514
Other depreciation and amortization 281,254 207,971
Non-cash gain on securitization (1,165,196) (1,372,348)
Provision for credit loss 150,000 4,000,000
Changes in assets and liabilities:
Rentals on leased equipment and other
receivables (3,624,747) 1,186,437
Other assets 156,502 1,069,471
Accrued expenses and other liabilities 1,489,736 (4,129,542)
---------- ---------
Net cash provided by (used in) operating activities (926,927) 2,550,632
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired for lease (115,125,964) (111,535,545)
Customer deposits and payments on direct
finance leases and loans 8,131,210 7,058,977
Purchase of equipment and furniture (147,231) (381,086)
Investment in inventory finance receivables (2,499,403) -
Proceeds from sales of finance receivables 91,879,557 142,183,656
---------- ----------
Net cash provided by (used in)
investing activities (17,761,831) 37,326,002
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options 9,249 563
Preferred stock dividends (168,750) (171,250)
Net increase (decrease) in notes payable 17,175,993 (41,036,234)
---------- ----------
Net cash provided by (used in) financing activities 17,016,492 (41,206,921)
Increase (decrease) in cash and cash equivalents (1,672,266) (1,330,287)
Cash and cash equivalents:
Beginning of period 3,572,553 7,063,398
---------- ----------
End of period $ 1,900,287 5,733,111
========== ==========
Cash paid during the year for interest $ 2,208,327 3,144,198
========== ==========
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 September 30, 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 software/
information technology, medical, communications, specialty vehicle, and
hospitality/gaming industries. Prime develops new business primarily
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.
Currently, the Company has four warehouse credit facilities, including one
true sale facility. The Company generally sells or assigns the Financial
Contracts it acquires or originates through securitization and other
structured finance transactions. Gains on the sale or securitization of
Financial Contracts are included in fee income in the consolidated statement
of operations. In the securitization transaction, the Company sells and
transfers a pool of Financial Contracts to a wholly-owned, bankruptcy remote,
special purpose subsidiary. This subsidiary in turn simultaneously sells and
transfers its interest in the Financial Contracts to a trust which issues
beneficial interests in the Financial Contracts in the form of senior and
subordinated securities. The Company generally retains a residual interest
in the Financial 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 Nine Months
Ended September 30, 1998 and 1997
The following table summarizes the sale and securitization of Financial
Contracts completed during the nine months ended September 30, 1998 and 1997.
Nine Months Ended September 30,
(Amounts in thousands)
Description Date 1998 1997
- --------------------- --------------- --------- ---------
Prime Finance
Corporation 1997-A March, 1997 $ - 77,428
Private Whole-loan Sale September, 1997 44,017
Prime Finance
Corporations 1998-A-1 March, 1998
and 1998-A-2 38,937 -
True Sale Facility 42,053 -
-------- --------
Subtotal 80,990 121,445
Other sale transactions 15,865 42,597
-------- --------
Total $ 96,855 164,042
======== ========
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 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 Nine Months Ended September 30, 1998 and 1997
===========================================================================
The Company activated financial contracts totaling $116.3 million in 1998,
a decrease from the $117.7 million activated in 1997.
Fee income decreased $3.2 million, or 35.4%, to $5.9 million in 1998 from
$9.1 million in 1997. This decrease is attributable to the higher than
expected amount of financial contracts held on the balance sheet at September
30, 1998. These financial contracts will be available for sale in the fourth
quarter. Fee income includes gain from the sale and securitization of financial
contracts of $96.9 million in 1998 and $164.0 million in 1997. The 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.
Fee income for 1998 also includes $1.9 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 $2.1 million, or 54.7%, to $1.8 million
in 1998 from $3.9 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 $1.6 million, or 198%, to $2.4
million in 1998 from $0.8 million in 1997. Depreciation of leased equipment
increased $1.5 million, to $1.9 million in 1998 from $0.4 million in 1997.
Interest income decreased $39,000, or 5.3%, to $708,000 in 1998 from $747,000
in 1997.
Other income increased $71,000, or 33.2%, to $283,000 in 1998 from $212,000
in 1997.
Interest expense decreased $0.6 million, or 22.1%, to $2.3 million in 1998 from
$2.9 million in 1997, primarily due to lower average borrowings under the
Company's warehouse credit facilities.
Provision for credit losses was $150,000 and $4.0 million in 1998 and 1997,
respectively. (See "Credit Losses").
Selling, general and administrative expenses increased $0.6 million, or 8.8%,
to $6.8 million in 1998 from $6.2 million in 1997. Employee compensation and
related costs, including commissions, accounted for 62.2% and 61.5% of total
selling, general and administrative expenses in 1998 and 1997, respectively.
The Company had 75 and 68 employees at September 30, 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.
Results of Operations For The Three Months Ended September 30, 1998 and 1997
============================================================================
The Company activated financial contracts totaling $38.6 million in 1998,
a decrease of 9.4% from the $42.6 million activated in 1997. Financial
contracts originated through formal vendor programs, however, grew 294% to
$34.4 million from $11.7 million in the same quarter in 1997.
Fee income decreased $0.9 million, to $1.6 million in 1998 from $2.5 million
in 1997. This decrease is attributable to the higher than expected amount of
financial contracts held on the balance sheet at September 30, 1998. These
financial contracts will be available for sale in the fourth quarter. Fee
income includes gain from the sale and securitization of financial contracts
of $22.9 million in 1998 and $81.3 million in 1997.
Direct financing lease income decreased $0.8 million, or 63.8%, to $0.5
million in 1998 from $1.3 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 $0.8 million, to $1.1 million in 1998
from $0.3 million in 1997. Depreciation of leased equipment increased
$692,000, to $865,000 in 1998 from $173,000 in 1997.
Interest income increased $53,000, or 30.4%, to $226,000 in 1998 from
$173,000 in 1997.
Other income increased $23,000, or 28.2%, to $105,000 in 1998 from $82,000 in
1997.
Interest expense decreased $250,000, or 24.5%, to $772,000 in 1998 from
$1,022,000 in 1997, primarily due to lower average borrowings under the
Company's warehouse credit facilities.
Selling, general and administrative expenses decreased $0.3 million, or
12.8%, to $2.2 million in 1998 from $2.5 million in 1997. Employee
compensation and related costs, including commissions, accounted for 63.6% and
64.6% of total selling, general and administrative expenses in 1998 and 1997,
respectively. The Company had 75 and 68 employees at September 30, 1998 and
1997, respectively.
Credit Losses
=============
Generally, an allowance for credit losses is 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 of sale. This allowance for credit
losses is included as a reduction of the Company's investment in securitized
receivables. 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.
An account is reported as charged-off at the time the account is to be
repurchased under the Company's recourse obligations of a securitization or
other structured financing transaction. The Company's recourse obligations
generally require an account to be repurchased if the lessee or borrower
declare bankruptcy, the collateral is repossessed, or the account becomes more
than 120 days past due.
At the time an account is charged-off, the initial charge-off is recorded net
of an estimated recovery that is expected to be realized in the future.
Examples of such recoveries include continuing payments from the lessee or
borrower, payments from guarantors, proceeds from the sale of equipment or other
collateral, and proceeds from insurance contracts. Estimated recoveries are
included in other receivables and totaled $6.4 million at September 30, 1998
and $5.0 million at December 31, 1997.
During 1997, Prime identified certain customers who had experienced significant
deterioration in their financial condition, which had 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, during the year ended December 31, 1997, the Company recorded
provisions for credit losses totaling $7.0 million.
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 the continued
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)
November 23, 1998 /s/ Vern E. Landeck__________________
Vern E. Landeck, Chief Financial Officer
Vern E. Landeck is
the Principal Financial and Accounting
Officer and has been duly authorized to
sign on behalf of the Registrant
November 23, 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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------------ ---------------------
Numerator:
Net income (loss) $ (412,742) 663,710 (129,865 1,156,129
Preferred dividends (55,625) (56,250) (168,750) (168,750)
--------- --------- -------- --------
Numerator for basic
and diluted earnings
per share-income
(loss) available to
common shareholders $ (468,367) 607,460 (298,615) 987,379
========= ========= ========= ========
Denominator:
Denominator for basic
earnings per share-
weighted average shares 4,351,016 4,292,165 4,343,869 4,291,850
Effect of dilutive securities:
Options and warrants 527,991 580,299 570,330 568,730
--------- --------- --------- ---------
Dilutive potential
common shares 527,991 580,299 570,330 568,730
--------- --------- --------- ---------
Denominator for diluted
earnings per share-
adjusted weighted
average shares and
assumed conversions 4,879,007 4,872,650 4,914,199 4,860,580
========= ========= ========= =========
Basic earnings per share $ (0.11) 0.14 (0.07) 0.23
========= ========= ========= =========
Diluted earnings per share $ (0.11) 0.12 (0.07) 0.20
========= ========= ========= =========
Options to purchase an average of 190,000 shares of common stock at prices
between $4.25 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 3,400 shares of common stock at $6.00 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.
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.
[ARTICLE]5
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEPT-30-1998
[CASH] 1,900,287
[SECURITIES] 0
[RECEIVABLES] 11,922,485
[ALLOWANCES] (3,014,188)
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2,183,125
[DEPRECIATION] (1,505,252)
[TOTAL-ASSETS] 72,024,312
[CURRENT-LIABILITIES] 0
[BONDS] 5,000,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 2,500,000
[COMMON] 221,976
[OTHER-SE] 3,232,851
[TOTAL-LIABILITY-AND-EQUITY] 72,024,312
[SALES] 0
[TOTAL-REVENUES] 11,021,551
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 8,722,736
[LOSS-PROVISION] 150,000
[INTEREST-EXPENSE] 2,278,680
[INCOME-PRETAX] (129,865)
[INCOME-TAX] 0
[INCOME-CONTINUING] (129,865)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (129,865)
[EPS-PRIMARY] (0.07)
[EPS-DILUTED] (0.07)