<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission File No. 0-22919
PRIME COMPANIES, INC.
(Name of small business issuer in its charter)
Delaware 52-2031531
----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 Montgomery Street, Suite 406, San Francisco, CA. 94104
------------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (415) 398-4242
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS ---------------------
- -------------------
Common Stock, $.0001 NASD
OTC Bulletin Board
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 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 No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB Yes No X
State issuers revenues for the most recent fiscal year.....................$0
As of June 21, 1999 there were 6,982,742 shares of the Company's Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the registrant on March 31, 1999 was $2,049,294.
Documents incorporated by reference:
Buy-Sell Agreement executed on March 31, 1999 between Mid-Cal Express, Inc. and
Gulf Northern Transport, Inc. See "Discontinued Operations."
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS HISTORY, AND DEVELOPMENT
In 1996, the Company acquired Mid-Cal Express, Inc. ("Express") a small
trucking company that was incorporated on August 29, 1994 but inactive until
1996 when it acquired two tractors and trailers, and initiated operations on a
very small scale. In January 1997, the Company acquired the operating assets of
an established trucking company which Express operated as a long-haul
temperature-controlled truckload carrier until December 30, 1998.
On July 22, 1997 the Company formed and incorporated Mid-Cal Express
Logistics, Inc., ("Logistics"). Logistics was formed to provide logistics
operations for one of Express's largest customers and to provide a broader range
of transportation services. Additionally, the logistics and trucking operations
were to complement each other and create financial and operating synergies.
Pursuant to an Agreement and Plan of Merger (the "Agreement")
between Prime Management, Inc. ("PMI), a California Corporation, and Corcoran
Technologies Corporation ("CTC"), PMI was merged with and into CTC effective
with the State of Delaware on December 30, 1997. The Agreement was adopted by
the unanimous consent of the Board of Directors of CTC and PMI and approved
by the unanimous consent of the shareholders of CTC and PMI on December 23,
1997.
Prior to the merger, CTC had 5,000,000 shares of common stock outstanding held
by Pierce Mill Associates, Inc. Pursuant to the Agreement, CTC redeemed and
retired 4,750,000 shares of the outstanding shares of common stock and issued
3,593,124 new shares of its common stock, subject to adjustments for fractional
and dissenting shares, to the holders of all the outstanding common stock of PMI
on a pro rata basis resulting in a total of 3,843,124 shares outstanding of
CTC's common stock. As a result of the stock exchange, the former stockholders
of PMI held 93.5 percent of the outstanding shares of common stock of CTC. The
sole source of consideration used by the stockholders of PMI to acquire their
respective interest in CTC was the exchange of 100 percent of the outstanding
common stock of PMI.
The outstanding options to purchase shares of common stock of PMI were
adjusted according to the terms contained in such options for conversion to
options to purchase 2,855,208 shares of common stock of CTC.
Pursuant to the Agreement, on the effective date of the merger, the
officers and directors of PMI became the officers and directors of CTC. The
by-laws of PMI were adopted as the by-laws of CTC.
Effective as of the date of the merger, CTC changed its name to "Prime
Companies, Inc".
Effective February 18, 1999, Prime formed Zenith Technology, Inc., a
Nevada Corporation (Zenith). Zenith was formed to invest in technology-based
business activities.
<PAGE>
THE BUSINESS
Effective December 30 1998, the Company's core business is investing in
technology-based business activities that the Company's management believes to
have profit potential.
DISCONTINUED OPERATIONS
Express operated as an irregular truckload common and contract
carrier, which transported temperature-controlled commodities throughout the
United States and Canada. Express concentrated on the hauling of
temperature-sensitive products such as photographic materials, fresh produce
and food products. Having experienced significant losses in the Company's
transportation operations through the period ended June 30, 1998, management
began a review of the entire transportation group. Continued losses in the
Express subsidiary with uncertain possibility of improvement forced
management and the Board of Directors in December 1998 to decide to
discontinue the transportation group. Faced with equipment licensing costs at
the end of December 1998, the Company entered into an Asset Buy-Sell
Agreement with Gulf Northern Transport, Inc., effective December 30, 1998,
which effectively discontinued operations in the transportation segment. The
Asset Buy-Sell Agreement was structured such that Gulf Northern Transport,
Inc. acquired substantially all of the operating assets of Express for
400,000 shares of Gulf Northern Transports' parent company US Trucking, Inc.
In conjunction with the Asset Buy-Sell Agreement, on April 30, 1999 the
Company entered into an agreement with Credit Managers Association of
California for the orderly liquidation and payment of Express's outstanding
liabilities. These liabilities are to be paid by the collection of Express's
accounts receivable and by the liquidation of up to 400,000 shares of US
Trucking which will be placed in escrow for the benefit of the creditors of
Express, until the stock is sold on the open market. The market value of the
400,000 shares of US Trucking, Inc. at March 31, 1999 was approximately
$1,450,000.
The Company's logistics subsidiary, Logistics, provided services to
customers requiring truckload (TL) and Less-than-truckload (LTL) deliveries.
Logistics suffered the loss of its major customer in October 1998 and gradually
wound down its services until December 1998 when all operations were halted.
COMPETITION
Through its subsidiary, Zenith Technology, Inc., the Company is engaged
in preliminary research and development of a flat plane antenna with
applications in the telecommunications industry. The Company contemplates
obtaining an exclusive license for the technology. There is vigorous competition
in the telecommunications industry and the Company would be, at best, a minor
competitor in the near term. Rapid product and technology development,
uncertainty over adoption of industry standards and declining prices are
material considerations. Companies such as Lucent Technologies, Inc., Nortel
Networks and AT&T have greater financial and technical resources than the
Company. The Company's business may be adversely impacted by the development by
competitors of products and technologies that would render the Company's
products obsolete or noncompetitive.
MARKETING AND CUSTOMERS
Following the discontinuance of the trucking operations, the Company
had no customers in continuing operations. Marketing activities, if any,
relating to the development of products through investee subsidiaries, will
commence at such time that products and or services are deemed ready for sale.
EMPLOYEES
The Company currently has three (3) full-time employees.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases the following facilities as general office space.
<TABLE>
<CAPTION>
Location Type Size Annual Rental
<S> <C> <C> <C>
San Francisco, Office 1,200 Sq. Ft. $39,276
California
</TABLE>
The Company owns and operates the following facility as a rental property under
a lease which expires in June 1999. This property is subject to a lien under the
Company's $700,000 note payable and is currently held for sale.
<TABLE>
<CAPTION>
Location Type Size Annual Rental Income
<S> <C> <C> <C>
Fontana, CA Trucking Terminal 5.3 acres and $115,000
20,000 SQ. Ft office
space.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is exposed to routine litigation incidental to its trucking
business, primarily involving claims for personal injuries and property damage
incurred in the transportation of freight. The Company believes that all pending
litigation is adequately covered by insurance, and the adverse results in one or
more of these matters will not have a material adverse affect on its financial
position or results of operations.
During the quarter ended March 31, 1998, one of the Company's tractors
was involved in an accident, which resulted in numerous personal injuries.
Claims resulting from this incident were settled within policy limits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET
The Company's Common stock has traded in the NASDDAQ OTC Bulletin Board under
the symbol PRMC since May 17,1998. The following table presents high and low
prices for the Company's common stock published by the National Quotation
Service, Inc. The quotations represent prices in the over-the-counter-market
between dealers in securities and do not include retail markup, markdown or
commissions and do not necessarily represent actual transactions. Quarterly
market price information for the Company's shares of common stock is as follows:
<TABLE>
<CAPTION>
Quarter Ending High Low Last Trade
<S> <C> <C> <C>
June 30, 1998 3.00 3.00 3.00
September 30, 1998 3.25 0.31 3.00
December 31, 1998 3.50 1.00 2.00
</TABLE>
SHAREHOLDERS
As of December 31, 1998 the number of shareholders of record of common
stock, excluding the number of beneficial owners whose securities are held in
street name was approximately 300.
DIVIDEND POLICY
The Company plans to retain future earnings, if any, for use in its
business and, accordingly the Company does not anticipate paying dividends in
the foreseeable future. Any earnings are expected to be reserved for the
operation and expansion of the Company's business. Payment of dividends is
within the discretion of the Company's Board of Directors and will depend, among
other factors, upon the Company's earnings, financial condition and capital
requirements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements made herein or elsewhere by, or on behalf of, the Company
that are not historical facts are intended to be forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based on
assumptions about future events and are therefore inherently uncertain.
The Company cautions readers that the following important factors, among others,
could affect the Company's consolidated results:
(1) Whether acquired businesses perform at pro forma levels used by management
in the valuation process and whether, and the rate at which, management is able
to increase the profitability of acquired businesses.
(2) The ability of the Company to manage its growth in terms of implementing
internal controls and information gathering systems, and retaining or attracting
key personnel, among other things.
(3) The amount and rate of growth in the Company's corporate general and
<PAGE>
administrative expenses.
(4) Changes in interest rates, which can increase or decrease the amount the
Company pays on borrowings.
(5) Changes in government regulation, including tax rates and structures.
(6) Changes in accounting policies and practices adopted voluntarily or required
to be adopted by generally accepted accounting principles.
The Company cautions readers that it assumes no obligation to update or publicly
release any revisions to forward-looking statements made herein or any other
forward-looking statements made by, or on behalf of, the Company.
PLAN OF OPERATION
The following discussion provides information of the Company's plan of
operations for the next twelve months. The discussion should be read in
conjunction with the Company's audited financial statements included elsewhere
herein.
Effective December 30, 1998 the Company discontinued it's
transportation services segment, which operated its "Express" and "Logistics"
subsidiaries. Having experienced significant losses in the Company's
transportation operations through the period ended June 30, 1998 management
began a review of the entire transportation group. Continued losses in the
"Express" subsidiary with uncertain likelihood of improvement forced
management and the Board of Directors in December 1998 to decide to
discontinue the transportation group. Faced with equipment licensing costs at
the end of December 1998, the Company entered into an Asset Buy-Sell
Agreement with Gulf Northern Transport, Inc., effective December 30, 1998,
which effectively discontinued operations in the transportation segment.
During the year ended December 31, 1998 and 1997 the Company's
transportation segment generated revenues of $18,633,000 and $15,958,000,
respectively. The increase in revenues resulted from an increased customer
base and increases in the Company's fleet available to service customers.
Total operating costs and expenses of the discontinued segment are
$21,428,000 and $16,762,000 for 1998 and 1997, respectively. The increase was
attributed to increased costs associated with the growth in revenue and
increases in compensation rates to owner operators and company drivers.
Net other expense of the discontinued segment was $661,000 and
$364,000 for 1998 and 1997, respectively, and consisted primarily of interest
expense. The increase in interest expense resulted from increased borrowings
to finance additions to the operating fleet.
As a result, the discontinued segment generated losses of
approximately $3,456,000 and $1,168,000 in 1998 and 1997, respectively,
exclusive of a gain on the sale of the "Express" subsidiary of approximately
$1,136,000 during the year ended 1998.
The Company is currently pursuing investments in technology-based
business activities that management believes will have future profit potential.
If the Company is successful in obtaining such technology, it will require
substantial additional capital to commercialize and market the technology. There
can be no assurance that the Company will be successful in any of these efforts.
Management estimates that the Company will need at least $200,000 in
cash to cover its overhead expenses during the next twelve months. Proceeds
from the sale of its Fontana real estate is expected to yield at least
$300,000 net of commissions and after repayment of the related note payable.
Additional financing is expected to be available in the form of short-term
credit provided by insiders.
The Company's ability to sustain operations in the future is dependent
upon its ability to obtain additional financing for working capital and to
acquire new business, its ability to develop and market a product as the
technology is acquired, if any, and ultimately, the attainment of profitable
operations. There can be no assurance that the Company will be successful in any
of these efforts.
YEAR 2000
The company is dependent on computer systems and system applications for
conducting its ongoing business functions. The issue involves the ability of
computer systems that have time sensitive programs to recognize properly the
Year 2000. The inability to do so could result in major failures or
miscalculations that would disrupt the Company's ability to meet its customer
and other
<PAGE>
obligations on a timely basis. The company has achieved substantial
compliance with respect to its business critical systems.
The total pre-tax cost associated with the required modifications and
conversions was nominal. The Company also has third party customers, financial
institutions, vendors and others with which it conducts business and has
confirmed their plans to address and resolve Year 2000 issues on a timely basis.
While it is likely that these efforts by third party vendors and customers will
be successful, it is possible that a series of failures by third parties could
have an adverse effect on the Company's results of operations in future periods.
ITEM 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements are attached as pages
F-1 through F-15.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective December 16, 1998, Gilbert and Company, the Registrant's Certifying
Accountant for the past two fiscal years, were dismissed.
Gilbert and Company's reports have not contained an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. Nor has there been any disagreement with
Gilbert and Company on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
On December 16, 1998, Hein + Associates LLP, Certified Public Accountants
(Hein), were engaged to serve as the Registrant's new auditors. The election of
Hein, was approved by the Audit Committee of the Registrant's Board of
Directors.
Prior to hiring Hein, neither management or anyone acting on its behalf
consulted Hein during our two most recent fiscal years or the subsequent interim
periods.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Certain information about directors and executive officers of the Company is set
forth below:
OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions with the Company as
of the date of this Prospectus of all of the officers and directors (the "Named
Executive Officers") of the Company. Also set forth below is information as to
the principal occupation and background for each person in the table.
a) Directors and Executive Officers of the Company
<TABLE>
<CAPTION>
Name Age Director Since Position
<S> <C> <C> <C>
Irving Pfeffer 75 1970 (1) Chairman, CEO
David Lefkowitz CPA 50 1996 President, COO, Chief
Financial Officer
Marshall Raines 73 1998 Director
<PAGE>
Alon Adani 33 1998 Director
</TABLE>
(1) As director of Prime Management, Inc. since its inception.
The following is a summary of background information about the officers and
directors:
IRVING PFEFFER has practiced law at Pfeffer & Williams P.C. (formerly Law
Offices of Irving Pfeffer) since 1975. He specializes primarily in business
litigation and general corporate law and has assisted a number of "start-up"
companies with securities and other business related legal matters. Mr. Pfeffer
has written and published extensively on the topics of capital markets, business
financing and insurance. He is also a Chartered Life and Property and Casualty
Underwriter. Mr. Pfeffer holds a BA degree in Economics and Political Science
from McGill University, Canada (1949); a Ph.D. In Economics from the Wharton
School of Business, University of Pennsylvania (1954) and a law degree from
LaSalle Extension University (1974).
DAVID LEFKOWITZ is President and COO of Prime Companies. Mr. Lefkowitz has
been COO and President since January 1998. Between 1988 and December 1997, Mr.
Lefkowitz operated and worked for Lefkowitz & Company, A Certified Public
Accounting Firm. There, he specialized in management consulting of growing
companies, preparing them for eventual sale and/or mergers and acquisitions.
Mr. Lefkowitz has been a CPA since 1977. Mr. Lefkowitz earned his BS in
Business and Accounting from University of Central Florida, Orlando, Florida
in 1974.
MARSHALL L. RAINES: has been a Director of the Company since January 1998.
Mr. Raines is a Professor of Advertising, teaching a number of different
courses, at San Jose State University, since 1980. There he also coordinates
the advertising degree program, which is the largest such accredited program
in northern California. Mr. Raines has more than 22 years experience as a
senior marketing/advertising executive with major US corporations. He is on
the Marketing Advisory Board for the United States Postal Service. He earned
his BS in Marketing from New York University in 1949 and his MBA from the same
university in 1953.
ALON ADANI has been a Director of the Company since January 1998. Mr. Adani is
an investment strategist and financial analyst for Ourinvest International
Corp. in Miami, Florida, since 1996. During 1994 and 1995, Mr. Adani was
involved in the investment banking activities of Firma Praktika in Moscow,
Russia, where he handled transportation matters and contracts. Between 1992
and 1993, Mr. Adani was an exporter/importer for Sanscow Corporation in San
Francisco, California. Mr. Adani earned his B.S. in Finance and his M.B.A. at
the University of Miami.
The Company's directors will be reimbursed for any out-of-pocket expenses
incurred by them for attendance at meetings of the Board of Directors or
committees thereof. The Board of Directors also intends to compensate
non-employee directors $500 for each meeting of the Board attended by such
director.
COMPENSATION
On May 24, 1999, the Company granted its CEO and President/COO each 200,000
shares of stock as compensation for services through December 31, 2000 (in
lieu of cash payment). Prior to that date, each was compensated at $10,000 per
month.
<PAGE>
STOCK OPTION PLAN
The following table sets forth information concerning each grant of stock
options to each of the Named Executive Officers during the year ended December
31, 1998.
There were no stock options granted in 1998.
ITEM 10. EXECUTIVE COMPENSATION
This item is incorporated by reference from the Company's Notice and Proxy
Statement for its annual meeting of stockholders to be held on Tuesday, July
15,1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This item is incorporated by reference from the Company's Notice and Proxy
Statement for its annual meeting of stockholders to be held on Tuesday, July
15,1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference from the Company's Notice and Proxy
Statement for its annual meeting of stockholders to be held on Tuesday, July
15,1999.
PART IV
ITEM 13. EXHIBITS, REPORTS ON FORM 8-K AND SUPPLEMENTAL
INFORMATION
(a) INDEX TO EXHIBITS
<TABLE>
<S> <C>
4.1* 1998 Proxy
4.2* Summary of 401(K) plan
4.3* Sample Stock certificate
10 * Employment Agreements
27 Financial Data Schedule
</TABLE>
* Previously filed
In accordance with the Commission Rules, the following is a list of all
Compensatory Plans or Arrangements of the Company:
Prime Companies 401(k)
Prime Companies, Inc. Incentive Stock Option Plan
(b) No reports on Form 8-K were filed during the last quarter of the year
covered by this report.
<PAGE>
SHAREHOLDER INFORMATION
Form 10-KSB Availability. A copy of the 1998 Form 10-KSB filed with the
Securities and Exchange Commission will be forwarded, upon request, to any
shareholder. Requests should be directed to:
David Lefkowitz, President
Prime Companies, Inc.
155 Montgomery Street, Suite 406
San Francisco CA 94104-4109
Transfer Agent and Registrar
Continental Stock Transfer and Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Independent Auditors
Hein + Associates LLP
333 City Blvd. West, Suite 2130
Orange, CA 92868
Communications Directory
Corporate Offices: Prime Companies, Inc.
Mailing Address: 155 Montgomery Street, Suite 406, San Francisco CA 94104-4109
Telephone: (415) 398-4242
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. Dated
this 29th day of June, 1999.
Prime Companies, Inc.
By: /s/ Irving Pfeffer
-----------------------------------
Irving Pfeffer
Chairman, Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ David L. Lefkowitz
-----------------------------------
David L. Lefkowitz
Director, President/COO and Chief
Financial Officer
By: /s/ Marshall L. Raines
------------------------------------
Marshall L. Raines
Director
By: /s/ Alon Adani
-------------------------------
Alon Adani
Director
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT.....................................................................F-2
CONSOLIDATED BALANCE SHEET - December 31, 1998...................................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended December 31, 1998 and 1997...........F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - For the Years Ended
December 31, 1998 and 1997..................................................................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the years ended December 31, 1998, and 1997..........F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................................F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
Prime Companies, Inc.,
San Francisco, California
We have audited the accompanying consolidated balance sheet of Prime Companies,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prime Companies,
Inc. and subsidiaries at December 31, 1998, and the results of their operations
and their cash flows for the years ended December 31, 1998 and 1997 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 3 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has an accumulated deficit of
$7,948,261, that raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with regard to these matters
are also described in Note 3. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
reported asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
As described in Note 4 to the financial statements, the Company has restated its
financial statements for the year ended December 31, 1997 to record a valuation
allowance on deferred tax assets, to correct the classification of equity
between paid-in capital and retained earnings, and to correct the valuation of
investments.
/s/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
May 11, 1999, except for Note 15,
as to which the date is May 24, 1999
F-2
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 8,828
Investments held in escrow 1,800,000
Deposits and other current assets 10,618
Property held for sale 853,324
Net assets of discontinued operations 1,372,463
-------------------
TOTAL ASSETS $ 4,045,233
===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 290,269
Notes payable to related parties 731,306
Accounts payable 1,042,914
Accrued liabilities 1,026,308
-------------------
Total current liabilities 3,090,797
NOTES PAYABLE TO RELATED PARTIES 957,000
-------------------
TOTAL LIABILITIES 4,047,797
-------------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 14) -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.0001 par value, 10,000,000 shares authorized, none issued and outstanding -
Common stock, $.0001 par value, 50,000,000 shares authorized, 5,807,552 issued and
outstanding 581
Additional paid-in capital 7,945,116
Accumulated deficit (7,948,261)
-------------------
Total stockholders' equity (deficit) (2,564)
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,045,233
===================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES $ 4,693,248 $ 157,190
-------------------- --------------------
OTHER INCOME (EXPENSE):
Investment income - 109,832
Rental income 115,200 63,900
Interest income 35,058 8,926
Other income - 10,000
Interest expense (95,885) (1,547)
Other expense (11,534) -
-------------------- --------------------
Total other income (expense) 42,839 191,111
-------------------- --------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION
FOR INCOME TAX (4,650,409) 33,921
PROVISION FOR INCOME TAX 3,800 4,700
-------------------- --------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (4,654,209) 29,221
LOSS FROM DISCONTINUED OPERATIONS:
Loss from operations of transportation segment, net
of applicable income taxes of $7,000 and $4,100 in
1998 and 1997, respectively (3,455,781) (1,167,974)
Gain on sale of transportation segment net assets,
net of applicable income taxes of $0 in 1998 and
1997 1,135,536 -
-------------------- --------------------
NET LOSS $ (6,974,454) $ (1,138,753)
==================== ====================
BASIC AND DILUTED PER SHARE INFORMATION:
Loss from continuing operations $ (1.08) $ 0.01
Loss from discontinued operations (0.54) (0.36)
-------------------- --------------------
Net Loss $ (1.62) $ (0.35)
==================== ====================
WEIGHTED AVERAGE SHARES OUTSTANDING 4,315,826 3,296,461
==================== ====================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK ADDITIONAL EARNINGS STOCKHOLDERS'
------------------------------ PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997, as previously 1,255,123 $ 126 $ 1,254,998 $ (180,458) $ 1,074,666
reported
Correction of error (Note 4) (325,974) (33) (325,942) 345,404 19,429
----------- ----------- ----------- ----------- -----------
BALANCE, January 1, 1997, as restated 929,149 93 929,056 164,946 1,094,095
Sale of common shares 2,663,975 266 2,663,709 - 2,663,975
Shares issued in merger transaction 250,000 25 (25) - -
Net loss - - - (1,138,753) (1,138,753)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 3,843,124 384 3,592,740 (973,807) 2,619,317
Stock issued as compensation 154,450 16 389,748 - 389,764
Stock issued for services 1,809,978 181 3,962,628 - 3,962,809
Net loss - - - (6,974,454) (6,974,454)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 5,807,552 $ 581 $ 7,945,116 $(7,948,261) $ (2,564)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (4,654,209) $ 29,221
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities from continuing operations:
Stock issued for compensation 235,379 -
Stock issued for services 3,962,809 -
Changes in operating assets and liabilities:
Trading securities 536,974 480,141
Other current assets 7,664 (18,282)
Accounts payable 19,321 4,559
Accrued liabilities 61,864 -
-------------------- -------------------
Net cash provided by operating activities
from continuing operations 169,802 495,639
-------------------- -------------------
Loss from operations of discontinued transportation
segment (3,455,781) (1,167,974)
Adjustments to reconcile loss from operations of
discontinued transportation segment to net cash
used in operating activities of discontinued
segment:
Depreciation 851,392 667,580
Provision for bad debts 171,000 23,000
Stock issued for compensation 154,385 -
Changes in operating assets and liabilities:
Accounts receivable 139,333 (1,262,862)
Deposits 19,630 (255,887)
Prepaid expenses and other current assets 626,740 (602,668)
Other noncurrent assets 59,489 (223,238)
Accounts payable 589,527 429,507
Accrued liabilities (136,892) 1,051,336
-------------------- -------------------
Net cash used in operating activities of
discontinued segment (981,177) (1,341,206)
-------------------- -------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (126,783) (1,353,455)
Sale of property and equipment 152,941 -
-------------------- -------------------
Net cash provided by (used in) investing
activities 26,158 (1,353,455)
-------------------- -------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from the sale of stock - 2,663,975
Net proceeds from notes payable and long-term debt 1,852,409 869,655
Principal payments on notes payable and long-term debt (1,258,934) (1,398,312)
-------------------- -------------------
Net cash provided by financing activities 593,475 2,135,318
-------------------- -------------------
DECREASE IN CASH AND CASH EQUIVALENTS (191,742) (63,704)
CASH AND CASH EQUIVALENTS, beginning of year 200,570 264,274
-------------------- -------------------
CASH AND CASH EQUIVALENTS, end of year $ 8,828 $ 200,570
==================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 618,944 $ 347,903
==================== ===================
Income taxes $ 14,855 $ 4,680
==================== ===================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Notes payable issued to acquire
Property and equipment $ 740,629 $ 4,277,223
==================== ===================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
Pursuant to an Agreement and Plan of Merger (the "Agreement") between
Prime Management, Inc. ("PMI), a California Corporation, and Corcoran
Technologies Corporation ("CTC"), a nonoperating public shell, PMI was
merged into CTC through a merger effected with the State of Delaware on
December 30, 1997.
For financial statement purposes, PMI was considered the acquiring
company, and this transaction has been treated as a purchase by PMI of
CTC. For legal purposes, however, CTC remained the surviving entity.
Therefore, the combined entity retained CTC's capital structure. Prior
to the merger, CTC had 5,000,000 shares of common stock outstanding
held by Pierce Mill Associates, Inc. Pursuant to the Agreement, CTC
redeemed and retired 4,750,000 shares of the outstanding shares of
common stock and issued 3,593,124 new shares of its common stock,
subject to adjustments for fractional and dissenting shares, to the
holders of all the outstanding common stock of PMI on a pro rata basis,
resulting in a total of 3,843,124 shares outstanding of CTC's common
stock. As a result of the stock exchange, the former shareholders of
PMI hold 93.5% of the outstanding shares of common stock of CTC. The
250,000 shares effectively issued to CTC were valued at the amount of
net monetary assets acquired from CTC (which was $0). Effective as of
the date of the merger, CTC changed its name to "Prime Companies, Inc".
Up to December 30, 1998, Prime Companies, Inc., operated in one segment
which was engaged in the business of truck transportation and
transportation logistics through its two wholly-owned subsidiaries:
Mid-Cal Express, Inc. and Mid-Cal Express Logistics, Inc. As discussed
in Note 5, the Company discontinued these operations effective December
30, 1998.
Effective February 18, 1999, Prime Companies, Inc. formed Zenith
Technology, Inc., a Nevada corporation, to invest in technology-based
business activities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Prime Companies, Inc. and its two wholly owned
subsidiaries (collectively, "the Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS - For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
INCOME TAXES - The Company accounts for income taxes under the
liability method which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined, based
on the difference between the financial statements and tax basis of
assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
PROPERTY HELD FOR SALE - Property held for sale consists of land,
buildings, and improvements, which are currently being leased to a
third party. This property is recorded at cost. Depreciation on
building and improvements is calculated using the straight-line method
over the estimated useful life of 31 years.
F-7
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE - Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. At
December 31, 1998 and 1977, common stock equivalents related to options
to purchase 2,855,209 shares of common stock were anti-dilutive and
were excluded in the earnings per share computation.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. The
actual results could differ from those estimates.
The Company's financial statements are based upon a number of
significant estimates including the allowance for doubtful accounts,
realizable value of property held for sale and net assets of
discontinued operation, realizability of deferred tax assets, and cargo
claims reserves. Due to the uncertainties inherent in the estimation
process, it is at least reasonably possible that these estimates will
be further revised in the near term and such revisions could be
material.
INVESTMENTS HELD IN ESCROW - Investments held in escrow consist of
400,000 shares of U.S. Trucking, Inc. (UST) common stock. The Company
considers these securities to be available for sale. These securities
are carried at fair value with unrealized gains or losses, net of tax,
reported as a separate component of stockholders' equity. At December
31, 1998, there were no unrealized gains or losses on these securities.
The UST common stock is held in escrow. Proceeds from the sale of stock
are to be used to pay trade payables of the discontinued operations.
Remaining proceeds, if any, will be released to the Company upon final
settlement of the payables. As of May 10, 1999, the market value of
UST's common stock had decreased to $3.125 per share.
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and
circumstances indicate that the cost of long-lived assets may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash
flow value is required.
STOCK-BASED COMPENSATION - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES" (APB25) and related interpretations in accounting for its
employee stock options. In accordance with FASB Statement No. 123
"ACCOUNTING FOR STOCK-BASED COMPENSATION" (FASB123), the Company will
disclose the impact of adopting the fair value accounting of employee
stock options. Transactions in equity instruments with non-employees
for goods or services have been accounted for using the fair value
method prescribed by FASB123.
CONCENTRATIONS OF CREDIT RISK - Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed to perform as contracted. Concentrations of credit risk (whether
on or off balance sheet) that arise from financial instruments exist
for groups of customers or groups of counterparties when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly effected by changes in economic
or other
F-8
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
conditions. In accordance with FASB Statement No. 105, "DISCLOSURE OF
INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
FINANCIAL INSTRUMENTS CONCENTRATIONS OF CREDIT RISK," the credit risk
amounts shown do not take into account the value of any collateral or
security.
The customers of the Company's discontinued operations are located
throughout the United States. At December 31, 1998 approximately
$553,000 representing 60% of trade receivables was due from three
customers. No other customers accounted for more than 10% of the
Company's trade receivables at December 31, 1998
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments under FASB Statement No. 107, "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS," are determined at discrete points
in time based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision.
The following methods and assumptions were used in estimating the
indicated fair values of the Company's financial instruments:
Cash and cash equivalents: The carrying amount approximates
fair value because of the short maturity of those instruments.
Investments held in escrow: The fair value is based on quoted
market prices and is equivalent to carrying value.
Long-term and other debt: The fair value of the Company's debt
is estimated based on current rates offered to the Company for
similar debt and approximates carrying value.
IMPACT OF RECENTLY ISSUED STANDARDS - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 (SFAS No. 133), "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES". This statement is effective for
fiscal years beginning after June 15, 1999. Earlier application is
encouraged; however, the Company does not anticipate adopting SFAS No.
133 until the fiscal year beginning January 1, 2000. SFAS No. 133
requires that an entity recognize all derivatives as assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not believe the adoption of
SFAS No. 133 will have a material impact on assets, liabilities or
equity. The Company has not yet determined the impact of SFAS No. 133
on the income statement or on comprehensive income.
SFAS No. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS" and SFAS No. 134, "ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE" were
issued in 1998 and are not expected to impact the Company regarding
future financial statement disclosures, results of operations or
financial position.
3 BASIS OF PRESENTATION:
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the accompanying consolidated financial statements, the Company has
F-9
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded significant losses for the years ended December 31, 1998 and
1997, resulting in an accumulated deficit of $7,948,261 as of December
31, 1998.
In response to continued losses of the trucking and logistics
operations, management made a strategic decision to dispose of these
operations and is currently pursuing an investment in satellite
communication technology. Costs of the continuing corporate structure
have been funded through issuance of stock for services and proceeds
from notes payable from related parties. Management expects to raise
the funds necessary for additional working capital and to acquire the
satellite technology through the issuance of debt and equity securities
and through the sale of assets held for sale.
The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the
amounts and classification of liabilities should the Company be unable
to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to obtain additional financing
for working capital and to acquire new businesses, its ability to
develop and market a product as the technology is acquired, if any, and
ultimately, the attainment of profitable operations. There can be no
assurance that the Company will be successful in any of these efforts.
4. PRIOR PERIOD ADJUSTMENT:
The Company has restated its prior year financial statements to record
a valuation allowance against deferred tax assets, to correct the
classification of equity between paid-in capital and retained earnings,
and to correct the valuation of investments. The effect on results of
operations for the year ended December 31, 1997 was to decrease income
from continuing operations by $43,299 ($0.01 per share), increase the
provision for taxes applicable to loss from operations of Mid-Cal
Express by $400,390, and increase net loss by $443,689 ($0.13 per
share).
5. DISCONTINUED OPERATIONS:
Having experienced significant losses in the operations of its trucking
and logistics subsidiaries, the company's Board of Directors decided to
discontinue the operation of these subsidiaries through an orderly
liquidation. The Company ceased operations effective December 30, 1998.
In connection with the discontinuance, the Company sold the operating
assets of its trucking and logistics operations to UST in exchange for
400,000 shares of UST common stock, UST's assumption of $3,351,359 of
underlying debt, and UST's assumption of certain operating leases. All
other leases were terminated effective December 31, 1998. All assumed
debt and operating lease payments aggregating approximately $2,547,000
are guaranteed by the Company. These obligations expires in varying
amounts through June 2003. UST's stock was valued at $4.50 per share
based on the average quoted market price of the stock for a period of
three days prior and after the transaction was agreed to. Operating
assets not acquired by UST have been reduced to their estimated
realizable value. The sale resulted in a net gain of $1,135,536.
F-10
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net assets of discontinued operations consisted of the following at
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable $ 929,529
Prepaid expenses 207,046
Deposits 123,888
Equipment 112,000
------------------
Net Assets of Discontinued Operations $ 1,372,463
==================
</TABLE>
The trucking and logistics operations generated revenues of
approximately $18,633,000 and $15,958,000 in 1998 and 1997,
respectively. Loss from operations of transportation segment
included interest expense of $640,000 and $369,000 for the
years ended December 31. 1998 and 1997, respectively.
6. PROPERTY HELD FOR SALE:
Property held for sale consists of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Land $ 520,162
Building and improvements 349,985
-------------------
870,147
Less accumulated depreciation (16,823)
-------------------
$ 853,324
===================
</TABLE>
The property is currently leased to a third party under a
noncancellable operating lease which expires in June 1999. The lease
provides for monthly rentals of $9,600. Rental revenue for the years
ended December 31, 1998 and 1997 was approximately $115,000 and
$64,000, respectively. At December 31, 1998, future minimum lease
payments of $58,000 were due in 1999.
7. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Accrued compensation related liabilities $ 257,468
Accrued purchased transportation 274,083
Accrued interest 139,668
Accrued insurance 120,856
Claims loss reserves 68,402
Other accrued expenses 165,831
---------------------
Total $ 1,026,308
=====================
</TABLE>
8. NOTES PAYABLE:
At December 31, 1998, the Company had outstanding borrowings of
$181,338 from a finance company. These borrowings accrue interest at
prime plus 2% (9.75% at December 31, 1998) and are collateralized by
accounts receivable included in net assets of discontinued operations.
Also, at December 31, 1998, the Company had $108,931 outstanding on
various notes payable to leasing companies. These notes bear interest
at 0.9% to 9.1%, and are collateralized by assets held for sale.
F-11
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMON STOCK:
In May and August 1998, the Company issued 154,450 shares of common
stock to employees as compensation for services provided. The Company
recognized compensation expense of $389,764 based upon the quoted
market price of the company's stock upon issuance of the shares.
In October and November 1998, the Company issued an aggregate of
1,809,978 shares of common stock to outside consultants in exchange for
services provided. The Company recognized expense of $3,962,809 based
on the quoted market price of the company's stock upon issuance of the
shares.
10. STOCK OPTIONS:
In December 1997, the Company granted all stockholders options to
acquire one share of common stock for every three shares of stock owned
(totaling 1,197,709 options). These options are immediately exercisable
at $3.00 per share and expire on December 31, 2000. In addition the
Company granted options to acquire common stock to certain employees.
The options are exercisable at prices ranging from $3.00 to $6.00 per
share.
A summary of option transactions during 1998 and 1997 follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES WEIGHTED AVERAGE
EXERCISE PRICE
--------------------- ---------------------
<S> <C> <C>
Outstanding at January 1, 1997 - -
Granted 2,855,209 3.13
Expired/Canceled - -
-------------------- ---------------------
Outstanding at December 31, 1997 2,855,209 3.13
Granted - -
Expired/Canceled - -
-------------------- ---------------------
Outstanding at January 1, 1997 2,855,209 3.13
==================== =====================
</TABLE>
At December 31, 1998, options to purchase 2,735,209 and 120,000 shares
were exercisable at prices of $3.00 and $6.00 per share, respectively,
and all were exercisable through December 31, 2000.
As stated in Note 2, the Company has not adopted the fair value
accounting prescribed by FASB123 for employees. On the date of grant
for awards in 1997, the Company had no active market for its common
stock. Accordingly, the minimum value method was used to value the
options using the following assumptions: risk-free interest rate equal
to the yield on government bonds and notes with a maturity equal to the
expected life for the month the options were granted; expected lives of
three years; and dividend yield of 0%. The resulting estimated fair
value of the options granted during 1997 was $0. Had compensation cost
for stock options issued to employees been determined based on the fair
value at grant date for awards in 1997, consistent with the provisions
of FASB123, the Company's net loss and net loss per share for the year
ended December 31, 1997 would have been unchanged.
F-12
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES:
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997
--------------------- -----------------------
<S> <C> <C>
Current:
Federal $ - $ -
State 10,800 8,800
--------------------- -----------------------
10,800 8,800
Deferred:
Federal - -
State - -
--------------------- -----------------------
Total $ 10,800 $ 8,800
===================== =======================
</TABLE>
The actual income tax expense (benefit) differs from the "expected" tax
expense (benefit) computed by applying the U.S. federal corporate
income tax rate of 34% for each period as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997
--------------------- -----------------------
<S> <C> <C>
Computed "expected" tax expense
(benefit) (34.0%) (34.0%)
Nondeductible expenses .2% 2.6%
State income taxes .2% .6
Change in valuation allowance 33.8% 31.4%
--------------------- -----------------------
.2% .6%
===================== =======================
</TABLE>
The components of the net deferred tax assets are as follows at
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Current deferred tax assets:
Vacation accrual $ 16,030
Allowance for bad debts 94,180
Accrued expenses 90,610
-------------------------
$ 200,820
Valuation allowance (200,820)
-------------------------
Net current deferred tax assets $ -
=========================
Noncurrent deferred tax assets:
Depreciation $ 37,260
Net operating loss carryforward 3,075,280
-------------------------
3,112,540
Valuation allowance (3,112,540)
-------------------------
Net noncurrent deferred tax assets $ -
=========================
</TABLE>
As of December 31, 1998, the Company has available net operating loss
carryforwards for income tax purposes of $8,035,000 which expire in the
years 1999-2018. The Company has state net operating loss carryforwards
of $3,884,000 which expire in the years 2000-2003. The benefit of the
F-13
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operating loss available to offset future taxable income may be subject
to reduction or limitation of use as a result of certain consolidated
return filing regulations and limitations relating to a 50% change in
ownership.
12. RELATED PARTY TRANSACTIONS:
During 1998, the Company received cash pursuant to notes payable issued
to related parties. At December 31, 1998, the Company had the following
notes payable to related parties:
<TABLE>
<CAPTION>
<S> <C>
Note payable to shareholder and relative of the Chief Executive Officer;
interest only payable monthly at 8.5%; principal due August 2000; secured by
land and building. $ 700,000
Note payable to Chief Executive Officer; interest only payable monthly at
10%; principal due December 2020; unsecured. 257,000
Various notes payable to shareholders; interest at 10%; principal and
interest due at various dates throughout 1999; unsecured. 731,306
-----------------------
1,688,306
Current Portion 731,306
-----------------------
$ 957,000
=======================
</TABLE>
Accrued interest on notes payable to related parties was $51,814 at
December 31, 1998. Interest expense on these notes was $95,885 in 1998.
No interest on notes payable to related parties was incurred in 1997.
The Company currently provides office space without charge to a law
practice operated by the Company's CEO.
13. EMPLOYEE DEFINED CONTRIBUTION PLAN:
Effective February 1, 1997, the Company adopted a Deferred Compensation
Simple IRA Plan (the "Plan") covering all full-time employees. To be
eligible to participate in the Plan, employees must be expected to earn
at least $5,000 annually. Employees involved in the Plan may contribute
up to $6,000 of their compensation, on a pre-tax basis, subject to
statutory and Internal Revenue Service guidelines. Contributions to the
Plan are invested at the direction of the participant. The Company made
matching contributions of $12,000 and $11,000 to the Plan during the
years ended December 31, 1998 and 1997, respectively.
14. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has operating lease commitments for its office space, which
expire over the next two years. The following is a schedule of future
minimum lease payments for operating leases (with initial or remaining
terms in excess of one year) as of December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C>
1999 $ 39,000
2000 36,000
</TABLE>
F-14
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental expense for all operating leases was $1,800,000 and $1,052,000
for 1998 and 1997, respectively.
LITIGATION AND OTHER CLAIMS
The Company is a defendant in a wrongful death suit relating to an
accident involving one of its drivers. The claim was turned over to the
Company's insurance carriers and was settled within coverage limits.
The Company is obligated under its liability and property damage
insurance policies for losses up to the specific policy deductibles as
a result of accidents and claims incurred. Accrued loss reserves of
$68,402 as of December 31, 1998 were recorded to cover these potential
claims.
15. SUBSEQUENT EVENTS
In January 1999, the Company issued an aggregate of 750,100 shares of
common stock to outside consultants in exchange for services to be
provided.
On May 24, 1999, the Company issued to its CEO and President/COO
200,000 shares of common stock each for services to be provided through
December 31, 2000.
In the first quarter of 1999, Mid-Cal Express, Inc. granted Credit
Managers Association of California (CMA), trustee for all creditors of
Mid-Cal Express, Inc., a security interest in all assets of
discontinued operations and the investments held in escrow. CMA will
represent the creditors in a voluntary work-out plan for the
satisfaction of the debts of Mid-Cal Express, Inc.
F-15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,828
<SECURITIES> 1,800,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,045,233
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,045,233
<CURRENT-LIABILITIES> 3,090,797
<BONDS> 957,000
0
0
<COMMON> 581
<OTHER-SE> (3,145)
<TOTAL-LIABILITY-AND-EQUITY> 4,045,233
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,693,248
<OTHER-EXPENSES> 11,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,885
<INCOME-PRETAX> (4,650,403)
<INCOME-TAX> 3,806
<INCOME-CONTINUING> (4,654,209)
<DISCONTINUED> (2,320,245)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,974,454)
<EPS-BASIC> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
