FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
(x) Annual report under section 13 or 15(d) of the Securities
Exchange Act of 1934
( ) Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-14888
PRIME CAPITAL CORPORATION
(Name of small business issuer in its charter)
Delaware 36-3347311
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
O'Hare International Center,
10275 W. Higgins Rd., Rosemont, IL 60018-3890
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(847) 294-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.05 par value
Check whether the issuer (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 ( ).
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no
disclosure will 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. ( )
Issuer's revenues for year ending December 31, 1996: $17,481,773.
The approximate market value of stock held by non-affiliates was
$11,663,299 based upon 2,050,690 shares held by such persons and
a closing price of the Common Stock on February 28, 1997 of $5
11/16. The number of shares outstanding of the Registrant's $0.05
par value common stock at February 28, 1997 was 4,290,165.
Exhibit Index is located on page 37. The total number of pages
is 41.
<PAGE>
PRIME CAPITAL CORPORATION
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1996
INDEX
PART I
Item
Number Page
1. BUSINESS 2
2. PROPERTIES 7
3. LEGAL PROCEEDINGS 7
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 7
PART II
5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 7
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES 15
PART III
9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 16
10. EXECUTIVE COMPENSATION AND OTHER INFORMATION 18
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 22
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
13. EXHIBITS AND REPORTS ON FORM 8-K 23
Item 1. BUSINESS
General
The Company is a specialty finance organization providing
financial services to clients and customers throughout the United
States. The Company's primary focus is on providing specialty
and high value-added financial products that are targeted to
specific markets through its three Business Units. The target
markets of the Company are those that are underserved,
inefficient and/or fragmented, with the intention of being a
market-developer and capital provider to emerging and established
customers and clients that offer the highest growth potential.
The Company utilizes its financial engineering capabilities to
structure transactions which attempt to mitigate risk while
achieving relatively attractive spreads. The Company attempts to
employ a fairly disciplined approach that allows for growth and
avoids, to the extent possible, having to compete as either a
risk absorber or a pure low-cost provider of funds.
The Company is primarily engaged in the business of originating
(or, in some cases, purchasing) leases, secured loans or
installment purchase agreements (collectively, "Financial
Contracts"), warehousing such Financial Contracts, and ultimately
securitizing (or, in some cases, selling outright) such Financial
Contracts. In most cases, the Company does not, for accounting
purposes, realize the ultimate income associated with such
Financial Contracts until the time of sale or securitization;
and, accordingly, some of the variances in the year-to-year
revenue and net income figures in the statement of operations of
the Company are reflective of that fact.
The ability of the Company to generate net income is dependent on
a number of factors, including the following; (a) the volume of
originations of Financial Contracts ("Financial Contract
Volume"), (b) on a short-term basis, the net interest spread
between the cost of the warehouse facilities available to the
Company and the all-inclusive interest rate on the Financial
Contracts (the "Short-Term Interest Spread"); and on a long-term
basis, the difference between the implied rate or yield (after
factoring in various components such as expenses, required
reserves, subordination levels and the like) on the
securitizations sponsored by the Company and the weighted average
interest rate on the Financial Contracts sold into such
securitizations (the "Securitization Profit"), (c) the level of
delinquencies and defaults on the Financial Contracts originated
or purchased by the Company, and (d) the expenses incurred by the
Company in the operation of its business, including salaries,
commissions and other selling, general and administrative
expenses (collectively, "SG&A").
The ability of the Company to generate acceptable Financial
Contract Volume is, itself, dependent upon a number of factors,
including (i) the size, experience and expertise of its sales
staff, (ii) the availability of sufficient drawable amounts under
the Company's warehouse facilities to finance such Financial
Contract Volume, (iii) the reluctance of the Company to accept
unattractive credit risk in respect of a particular borrower or
borrowers, (iv) the necessity of such Financial Contracts to meet
the requirements and criteria of a securitization or other
funding source and (v) the competition in the financial market-
place to provide financing to customers (including competition
from commercial banks, finance companies and other suppliers of
capital).
The ability of the Company to maintain an acceptable level of
Short-Term Interest Spread and to generate an acceptable level of
Securitization Profit is, itself, dependent upon a variety of
factors and considerations, including (i) competition in the
financial market-place, (ii) the borrowing cost to the Company
under its warehouse facilities, and (iii) the all-in cost
associated with the securitization of the Financial Contracts
originated and sold into such securitization.
The ability of the Company to decrease or eliminate credit risk
(and, thus, write-offs and write-downs of the assets) is highly
dependent on an effective system (and the employment and
retention of adequate personnel to implement and monitor such
system) to review, analyze and assess both the credit quality of
the borrowers and the continuing residual value of the equipment
or other items which form the security for the Financial
Contract. Although the securitization of a particular portfolio
of Financial Contracts generally relieves the Company from any on-
going liability (and, thus, the credit risk with respect to such
portfolio is assumed by the purchasers of the securities issued
in the securitization), any substantial decrease in the credit
quality of a previously-securitized portfolio will impact on the
ability of the Company to realize reserve fund amounts and would
probably impact on the ability of the Company to sell all of the
securities in future securitizations.
The ability of the Company to manage its expenses (including its
SG&A) is a major factor in determining profitability. Any
decrease in such expenses must be balanced against the risk
associated with possible defections of key personnel and
inadequate staffing levels, particularly with respect to the
sales personnel. The Company believes that some portion of the
relatively high level of SG&A is attributable to (i) the re-
focusing of its products lines, and (ii) the functional
equivalent of research-and-development with respect to new
products and services offered by the Company.
The Company's credit underwriting and risk management strategies
have historically proven to be effective, and the management of
the Company places a high emphasis on evaluating portfolio and
vendor risk and structuring programs that attempt to mitigate
risk. Over the last six years, credit losses on the Financial
Contracts (as defined below) have consistently been nominal
relative to the portfolio average outstanding balances. In
addition, the Company's residual realization experience has been
above-average by industry standards, which is largely
attributable to a focus on equipment that is modular, upgradeable
and manufactured by leading companies. Operational and
administrative functions are centralized through a common
corporate support group.
Marketing and Sales Activities
Substantially all of the Financial Contracts are originated by
the Company through its own sales force of 14 persons. The sales
force is divided into three groups: (a) Healthcare Finance Group
("HFG"), (b) Vendor Finance Group ("VFG"), and (c) Structured
Finance Group ("SFG").
HFG provides specialized retail financial services directly to
health providers and other end-users of medical equipment
(including hospitals, doctor groups and outpatient centers) and
is responsible for creating business opportunities within the
medical marketplace.
VFG provides private label vendor programs, specialized joint
ventures and captive financing company financial services to
national manufacturers, distributors, and niche originators, each
of whom directly or indirectly control the distribution of
equipment. While it operates within the multi-billion dollar
equipment financing marketplace, VFG focuses on underserved and
inefficient niches within that market. Such targeted niches
include (i) medical equipment manufacturers and distributors,
(ii) telecommunications equipment manufacturers, and (iii)
software manufacturers and system integrators.
SFG pursues credit-driven project financings and portfolio
acquisitions, and works with other equipment leasing companies,
selected equipment manufacturers, banks and finance companies.
SFG focuses on the following markets: (i) gaming equipment lease
programs, (ii) lease funding and portfolio acquisition programs,
and (iii) energy market financings.
Lease Terms and Conditions
The Financial Contracts generally take the form of finance
leases, true or tax leases, and note and security agreements.
Substantially all of the Financial Contracts are non-cancelable,
"hell or high water", triple-net obligations of the lessee or
borrower. Initial terms generally range from 12 to 120 months
from the date of commencement, with the majority of the Financial
Contracts historically having had an initial term of 48 months.
The Financial Contracts are generally secured by equipment and
other tangible assets.
The Company uses a master lease or loan agreement form, the terms
and conditions of which are sometimes modified to accommodate a
particular lease or loan transaction. In substantially all
cases, the obligations are "triple net" leases or loans under
which the lessee or borrower is obligated to: (i) remit all rents
or loan payments regardless of the performance of the equipment,
(ii) operate the equipment in compliance with the manufacturer's
instruction manuals and governmental rules and regulations, (iii)
properly maintain and service the equipment, (iv) insure the
equipment against casualty loss and provide public liability
coverage for bodily injury and property damage, and (v) pay
directly (or reimburse the Company for) any property, use or
similar taxes associated with the equipment.
Under its master lease and loan agreements, in the event of a
default by a lessee or borrower, the Company can declare the
lease or loan in default and pursue its contractual remedies,
including repossession (or foreclosure of the security interest,
in the case of a loan) of the equipment. The master lease and
loan agreements give the lessee or borrower the right to enforce
the warranties made by the equipment manufacturers and vendors.
The Company makes no representation or warranty to the lessee or
borrower regarding marketability, fitness for any purpose,
condition, quality, delivery or installation of the equipment.
The equipment is delivered from the supplier directly to the
lessee or borrower and, following the lessee or borrower's
acceptance of the equipment, the Company pays the purchase price
to the supplier. In the case of leases, the Company maintains
title to the equipment throughout the lease term, while the case
of a loan, the Company maintains a lien and perfected security
interest in the equipment throughout the term of the loan. A
lease may or may not provide for the renewal of the lease and/or
the purchase of the equipment at the end of the initial lease
term.
Types of Financial Contracts
1) Finance Leases: This classification of a lease is actually
used to refer to three different types of lease structures. They
generally share the essential characteristics whereby the lease
payments are structured to fully amortize the equipment cost over
the term of the lease; and the lessee effectively obtains
ownership of the equipment at lease maturity.
a) "Dollar Buy-Out Lease" - The most prevalent finance
lease is commonly referred to as a dollar buy-out lease, for it
requires the lessee to purchase the equipment for $1.00 (or some
other nominal amount) at the end of the original lease term.
Title to the equipment generally resides with a lessor during the
lease term, with the lessee obtaining ownership at lease
maturity.
b) "Put" or "Balloon" Lease - This is a common type of
finance lease under which the lessee agrees to purchase the
equipment covered by the lease, at the end of a lease term, for a
predetermined price. The "put" or "balloon" may be in an amount
ranging from 5% of the original equipment cost to 40% or more of
the original equipment cost. The "put" or "balloon" payment is
made as the last payment due under the lease term. Title to the
equipment resides with the lessor during the lease term, with the
lessee obtaining ownership at lease maturity.
c) A lease may call for the lessee to have the option to
purchase the equipment at the then fair market value from (or
return the equipment to) the lessor at the end of the initial
lease term. This type of lease may at times be categorized, for
accounting purposes, as either a finance lease or an operating
lease, as described below. The categorization is dependent upon
current accounting regulations outlined in FASB #13 relative to
whether or not the mandatory lease payments amortize more or less
than 90% of the original equipment cost. If 90% or more of the
original equipment cost is amortized by the mandatory lease
payments, then the lease will be categorized as a finance lease
for accounting purposes. Title to the equipment will rest with
the lessor who will have the first lien and perfected security
interest in the equipment. Title will be conveyed to the lessee
only upon negotiation of a final payment which will be determined
by then fair market value of the equipment.
2) Operating Leases - This is the common version of the lease
which provides the lessee with the option, but not the
obligation, to purchase the equipment at the end of the initial
lease term at its fair market value. As stated above, the
determination of whether a lease is an operating lease or a
finance lease is based upon current accounting conventions. An
operating lease is one where the mandatory lease payments
amortize less than 90% of the original equipment cost. Title to
the equipment will rest with the lessor who will have the first
lien and perfected security interest in the equipment. Title
will be conveyed to the lessee only upon negotiation of a final
payment which will be determined by the then fair market value of
the equipment.
3) Loan or Note and Security Agreement - The Company documents
certain transactions as loans with a note and security agreement
as the underlying documentation. Loan agreements require the
full amortization of the equipment cost (generally the loan
principal balance) during the term of the agreement. Loan
documentation requires that the rate of interest be disclosed to
the borrower. Title to the equipment is held by the borrower,
with the lender having a perfected security interest in and lien
upon the equipment.
Type of Equipment Leased
The assets that Prime finances for its clients varies within the
following market niches. Healthcare Finance Group primarily
finances medical devices used in the treatment of patients and
computer systems for the general operation of hospitals. The
Structured Finance Group provides financing primarily for casino
and rout operators in the gaming industry as well as heating and
cooling equipment for energy management applications. Slot
machines and other furniture & fixtures are the most common
assets included in the gaming contracts. The heating and cooling
equipment is composed of boilers, chillers, and the specialized
computers needed for climate control and monitoring. The Vendor
Services Group finances the assets manufactured or distributed by
its clients, including, without limitation, bone densitometers,
software for corporate applications, voice mail systems,
telephone systems and telephone switches. The following table
summarizes the distribution of equipment type as a percentage of
the Aggregate Contract Value for the December 1996 and January
1996 securitizations:
December January
Equipment Type 1996 1996
Medical 28% 34%
Computer 21 19
Gaming 14 19
Energy Management 7 10
Software 2 < 1
Furniture, Fixtures &
Physician Practices 12 8
Telecommunications 4 6
Other 12 3
The Company typically originates Financial Contracts that have an
original contract balance ranging from approximately $50,000 to
$5,000,000 or greater.
Customers
Since its inception, the Company has entered into financing
transactions with over 3,500 customers. There is no significant
credit exposure with any one customer. The Company conducts a
credit review of prospective customers through an examination of
their financial statements and credit history, and requests
audited financial statements annually in an effort to keep
current on each customer's financial status. The Company does
not believe that the loss of any one customer would have a
material adverse impact on its operations.
Under vendor programs, the Company provides financing programs
with vendors, some exclusive some not, where the Company reviews
the strength of the vendor as well as the end user in relation to
making the credit decision. Vendor programs generate repeat
business as the vendor provides financing for their customers.
Most of the vendor agreements (programs) include some form of
recourse to the vendor and/or remarketing agreements.
Employees
As of December 31, 1996, the Company had 52 employees, none of
whom were represented by a labor union.
Competition
The equipment leasing and related businesses of the Company are
highly competitive. Many firms are engaged in the same types of
businesses as the Company, including (i) finance divisions,
affiliates and subsidiaries of equipment manufacturers, (ii)
banks, their affiliates or subsidiaries, several of which lend
funds to the Company, (iii) other leasing and finance companies,
(iv) companies and state agencies which sponsor tax-exempt
financing or other investor programs for the acquisition and
lease of equipment, and (v) independently formed partnerships of
individuals or corporations operated for the specific purpose of
leasing equipment. Many of these organizations have greater
financial or other resources than the Company and, therefore, may
be able to obtain funds on terms more favorable than those
available to the Company.
The Company believes that its ability to compete effectively
depends to a great extent upon: a) its knowledge of the
marketplace, b) the education, training and experience of its
personnel, c) the relationship and reputation it has established
for service and keeping its commitments with customers and
vendors, and d) its flexibility and adaptability to the special
needs of its institutional and technologically-oriented
customers.
Item 2. PROPERTIES
The Company's leased corporate headquarters occupy approximately
14,500 square feet of space in an office building located in
Rosemont, Illinois (a suburb of Chicago) near O'Hare Airport. The
lease, which expired on December 31, 1996, has been extended
pursuant to a seven-year renewal. Also, the Company exercised
its option to lease 4,900 square feet of additional space
contiguous with the existing space. The Company also leases
sales offices in Duluth, Georgia, Albany, New York and Charlotte,
North Carolina. Aggregate annual rent for these sales offices
is approximately $31,000.
Item 3. LEGAL PROCEEDINGS
While the Company is subject, from time to time in the ordinary
course of its business, to legal actions and claims, it is not
now a party to any legal proceeding that could have material
adverse effect on the Company's financial position or results of
operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
The Common Stock was traded on the NASDAQ National Market System
until July 23, 1992 at which time the Common Stock was removed
from the National Market System and began being traded in the
over-the-counter market primarily because it did not meet the
minimum bid price requirement of one dollar to continue to be
traded on the NASDAQ Bulletin Board. On June 5, 1996, the Common
Stock once again began trading on the Nasdaq SmallCap Market tier
of the Nasdaq Stock Market under the symbol: PMCP. The following
table summarizes the quarterly price range of the Common Stock
for 1996 and 1995.
1996 1995
High Low High Low
First $4 $1 5/8 $1 3/8 $ 5/8
Second 6 3 1/2 1 3/4 5/8
Third 6 4 3/4 2 5/8
Fourth 6 1/4 4 3/4 2 1/4 1 1/4
(b) Holders
As of December 31, 1996, there were approximately 413
holders of record of common stock.
c) Dividends
The Company has never paid a dividend on its Common
Stock, and no dividends are contemplated in the
foreseeable future. Payment of dividends is within the
discretion of the Company's Board of Directors.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS6.
General
The financial results of 1996 compared to 1995 were influenced by
a number of economic and strategic issues including: (i) over the
past several years the Company's healthcare market has changed
both in size and the type of financing required by the
marketplace, (ii) a securitization totaling $56,725,781 was
completed in March 1995, (iii) a securitization totaling
$85,273,476 was completed in January 1996, (iv) a securitization
totaling $66,322,341 was completed in December 1996, (v) in
October 1996, the company issued 25,000 shares of $100 par value
preferred stock with warrants to purchase 499,606 shares of
common stock and (vi) in October 1996 the company was issued $5
million of subordinated debenture notes.
On March 16, 1995, the Company issued and sold equipment lease-
backed pay-through notes with an initial aggregate contract value
of $56,725,781. Through this issuance, the Company permanently
financed certain assets and liabilities carried on the Company's
balance sheet as of December 31, 1994. These assets and
liabilities were removed from the consolidated balance sheets and
the resulting gain of approximately $2.1 million was recognized
on the Company's statement of operations in the first quarter of
1995.
On January 22, 1996, the Company issued and sold equipment lease-
backed pay-through notes with an initial aggregate contract value
of $85,273,476. Through this issuance, the Company permanently
financed certain assets and liabilities carried on the Company's
balance sheet as of December 31, 1995. These assets and
liabilities were removed from the balance sheet and the resulting
gain of approximately $4.2 million was recognized on the
Company's statement of operations in the first quarter of 1996.
On December 13, 1996, the Company issued and sold equipment lease-
backed pay-through notes with an initial aggregate contract value
of $66,322,341. The resulting gain of approximately $4.1 million
was recognized on the Company's statement of operations in the
last quarter of 1996.
On March 20, 1997, the Company issued and sold equipment lease-
backed pay-through notes with an initial aggregate contract value
of $77,476,378. While most of the securitized pool consists of
contracts originated during 1996, accounting rules require that
the gain realized by the Company from accounting for the
securitization as a sale be recognized in the first quarter of
1997.
The Company has historically profited from the value of the
equipment subject to leases upon termination of such leases at
initial maturity (the amount so realized is referred to herein as
"Residual Amounts"). The Residual Amounts are typically realized
from the sale or "re-lease" of the equipment to the original
lessee or, in some cases, from the sale of the equipment in the
open market or to the supplier or manufacturer. In respect of a
sale of a Financial Contract to a third party, the Company
typically either sells or retains the Residual Amounts, depending
on the particular sale. If the Residual Amounts are sold with
the Financial Contract, the Company and the purchaser negotiate
the price paid for the assumed Residual Amounts. In the case of
a securitization, the Company in effect sells the Residual
Amounts for a pre-determined price and, to the extent that the
actual Residual Amounts realized from the sale or re-lease of the
equipment exceeds that which was assumed, the excess is deposited
in the reserve fund established in connection with the
securitization; and, subject to the rights of the holders of the
Securitization Notes to be paid from such funds, remitted to the
Company when all of the Securitization Notes have been paid in
full.
The Company attempts to conduct its business in a manner designed
to conserve its working capital and minimize its credit exposure.
The Company does not purchase equipment until: (i) it has
received a noncancelable lease from its customer, and (ii) it has
determined that the lease (a) can be discounted with a bank or
financial institution on a non-recourse basis, or (b) meets the
lease origination standards established for a securitized pool.
Financial Condition
The Company's financial condition continues to be dependent upon
certain critical elements. First, the Company must be able to
obtain recourse and non-recourse financing to fund future
acquisitions and originations of Financial Contracts. Second,
the Company must originate a sufficient volume of new business
which is structured and priced in such a way so as to permit the
Company to finance or sell those Financial Contracts for an
amount which, in the aggregate, covers the Company's cost of
operations, plus provides a return on stockholders' equity. The
Company intends to utilize a combination of interim warehouse
borrowing and long-term funding methodologies to provide it with
borrowing and funding availability at market competitive rates of
interest. The long-term funding methodologies will include: (i)
the continued issuance of asset-backed securities, (ii) portfolio
sales, (iii) program financings, and (iv) the discounting of
individual Financial Contracts.
Liquidity and Capital Resources
The Company utilizes amounts available under its warehouse
facilities to fund the origination of its Financial Contracts and
to carry such Financial Contracts until the date that they are
sold to a third party or securitized. The Company has a number
of credit facilities at its disposal including warehouse
facilities that totaled approximately $66.4 million as of
December 31, 1996. Amounts drawn and outstanding under these
facilities are primarily a function of the Financial Contract
volume generated prior to sale or securitization of such
Financial Contracts. As of December 31, 1996, approximately
$46.3 million was outstanding under the warehouse facilities.
Permanent, long-term financing for the Company's originated
assets is provided through either non-recourse debt or
securitized asset sales. The Company currently utilizes
approximately twenty institutional lenders to permanently finance
lease rentals on a non-recourse basis. These financings are
collateralized solely by the leased equipment and related
rentals, and the Company has no recourse liability to these
lenders for repayment of debt in the event of a lessee default.
Typically, the proceeds of these borrowings exceed the Company's
investment in the leased equipment. In the past, the Company has
been able to obtain adequate non-recourse funding commitments,
and the Company believes it will be able to do so in the future.
On October 4, 1996, Prime Capital Corporation raised additional
capital by completing a private sale of $5 million principal
amount of five year, 12.5% subordinated debentures and $2.5
million of 9% preferred stock to Banc One Capital Corporation
(BOCC), a subsidiary of Bank One Corporation, Columbus, Ohio. In
addition, BOCC has agreed to purchase up to an additional $2.5
million of Prime Capital's five year, 12.5% subordinated
debentures during the next two years. As part of the transaction,
BOCC also received warrants to purchase up to 12% of Prime
Capital's common stock, depending on the total amount of
subordinated debentures purchased by BOCC.
The Company intends to continue to pursue a diversified strategy
of funding which will include: (i) periodic securitization of
aggregated pools of transactions; (ii) specific program financing
agreements; (iii) portfolio sales, and (iv) "one-off" sales of
selected transactions. This strategy is focused upon maintaining
funding access, optimizing the cost of funds and enhancing the
Company's ability to be market/client responsive in specialized
transactions.
The Company believes that existing cash balances, cash flows from
its activities, available warehouse and permanent non-recourse
borrowings, and securitized asset sales will be sufficient to
meet its foreseeable financing needs, provided the Company is
able to originate a sufficient volume of transactions which meet
its credit quality and profitability standards.
The Securitization Process
Although the Company has historically sold some its Financial
Contracts outright to a third party, it believes that the "best
execution" for the ultimate disposition of the Financial
Contracts which it originates is the securitization process.
Since December, 1993, the Company has engaged in, and sponsored,
five separate securitizations (one in December, 1993, the second
in September, 1994, the third in March, 1995, the fourth in
January 1996, and the last in December 1996.) The total initial
aggregate contract value of the Financial Contracts sold by the
Company into the last five securitizations has been $56,762,677,
$39,424,940, $56,725,781, $85,273,476, and 66,322,341
respectively. Each of these securitizations has received "true
sale" treatment, and is treated as a sale for accounting
purposes. Each securitization has resulted in the issuance by a
special-purpose, wholly-owned subsidiary of the Company of
equipment lease-backed pay-through notes (the "Securitization
Notes"). Securitization Notes have been non-recourse to the
Company. Such Securitization Notes have generally been issued in
various classes, with various subordination levels, but in each
case, all of the Securitization Notes (including the class which
is the most subordinated) have been sold, and the Company has not
been required to purchase or take back any part of the
Securitization Notes. While this fact is not necessarily unique
to the Company, it is frequently the case that companies in the
same business as, or similar businesses to, that of the Company
have been required, in connection with securitizations of their
lease or loan portfolios, to purchase or take back the most
subordinated class of securitization securities issued in
connection with such securitizations, as a result of the
perceived risk of such subordinated class. The Company's ability
to avoid this risk is primarily the result of the credit quality
history of their Financial Contract portfolios. Each issue of
Securitization Notes has been privately placed, rather than sold
publicly.
The price at which the Company has historically sold Financial
Contracts into each securitization is a function of a number of
factors and considerations, but - as a general matter - the
profit realized from such sale is the present value of the future
revenue stream on the Financial Contracts, at the weighted
average interest rate applicable to such Financial Contracts
(together with an assumed residual value of the equipment of
other items forming the security for the Financial Contracts),
less (i) the weighted average yield applicable to the
Securitization Notes, (ii) the expenses (including the private
placement fee) of issuance of the Securitization Notes, (iii) the
accrual of the servicing fees, and (iv) the establishment of
certain reserves. Cash reserves of approximately 1% to 3% are
established at closing for the purpose of providing credit
support for the Securitization Notes, while GAAP accounting
reserves are established at .5%. The approximate .5% to 2.5%
difference flows through the income statement and is recognized
as current earnings. Each reserve fund, represented by
"Restricted cash" on the Company's balance sheet, is increased
over the life of the Securitization Notes by excess interest
income on the Financial Contracts over the debt service
applicable to the Securitization Notes, by residual realizations
over those which were assumed at the time of the issuance of the
Securitization Notes, and by interest income on the reserve fund
itself. The indentures of the various securitization pools have
unique stipulations regarding release of cash reserve funds,
however, in any event, cash reserves relating to all of the
securitization pools are released as such time as no notes remain
outstanding.
Other Contracts
While securitizations have been, since 1993, the prime exit
strategy for Financial Contracts originated by the Company, the
Company has in the past sold certain Financial Contracts (or
portfolios of Financial Contracts) directly to third parties, and
will continue to assess the viability of selling to third parties
in the future. A direct sale of Financial Contracts to third
parties generally reduces or eliminates the need for any
substantial representations or warranties from the Company, and
generally may be accomplished without the need to establish any
reserve or similar funds. In addition, such sales may frequently
be effected quickly and may provide a source of interim working
capital funds to the Company. The market for such outright sales
to third parties is relatively deep and there are a number of
financial institutions (including banks and insurance companies)
which are currently involved in purchasing financial assets
similar to the Financial Contracts.
During the three-year period from January 1, 1994 through
December 31, 1996, the Company sold Financial Contracts to third
parties with an aggregate contract balance of $95,017,132 broken
down as follows: $31,701,262 in 1996; $36,790,616 in 1995; and
$26,525,254 in 1994. Total financings by the Company were
$183,297,079 in 1996, $93,516,397 in 1995, and $65,950,194 in
1994.
Results of Operations
The operating results of Prime Capital are affected by three
main, yet interrelated factors: 1. The volume of Finance
Contract activations, 2. the amount and frequency of Financial
Contract financings and 3. the level of operating expenditures
required to support the volume of Finance Contract activations
and financings.
Once a Financial Contract is activated, it is sold to a third
party or, in most cases, funded through a warehouse facility
until it is sold through securitization. Sale of a contract to a
third party results in immediate fee income on that contract.
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 recognizes Rental or Direct
Finance Lease Income, Interest Expense and Depreciation
associated with the sold contracts. As with most of Prime's
securitizations to date, a securitization also triggers the
recognition of servicing fee income on the securitization pool
and interest income on cash reserve balances until all the
contracts in the pool have expired.
Prime's revenue results have consistently followed the above
trends. The volume of Financial Contract activations has
increased consistently over the past three years, an increase of
97% from 1994 to 1995 and an increase of 21% from 1995 to 1996.
As Financial Contract activation volume increased, so did
revenues from Rentals on leased equipment and Direct Financing
Leases. The increased initial contract value of each of the four
securitization pools over the last three years resulted in
increased fee income from gains on securitization. The
accumulation of five securitization pools has contributed, and
will continue to contribute, to an increase in interest income
realized on cash reserve balances and an increase in servicing
fee income on the securitization pools over the life of the
contracts securitized.
The above factors also contribute to the expenses of the Company.
Increased activations and increased warehouse balances over the
past three years caused an increase in interest expense and
depreciation on leased equipment. The Sales force required to
generate the increased activation volume and the staffing
required to support and administer the increased activations and
financings have also required an increase in salaries and
benefits. Overall, the total number of employees has increased
from 44 at the end of 1994 and 1995 to 52 at the end of 1996.
Other selling, general and administrative expenses such as
brokers fees and commissions have increased directly from the
increase in volume; expenses related to office space,
telecommunications and information systems have been affected by
increased personnel and technological innovations. Activation
volume and the increased number of securitization pools have also
had an upward pressure on associated legal, audit and accounting
expenses.
With a desire to expand further, in October of 1996 the company
issued $5 million of subordinated debt bonds and $2.5 million of
preferred stock with warrants to purchase common stock in order
to raise additional capital. The bonds bear interest at 12.5%
and the preferred stock requires a 9% annual dividend. While
1996 bore approximately 25% of the annual interest expense and
dividend allocation associated with these instruments due to the
date of the transaction, future years will be impacted to a
greater extent. It is the intent of the Company that the
investment will provide opportunity to expand its revenue
capability to more than offset the expenses associated with the
increased interest and dividend requirements.
Revenue Trends - Three Years Ended December 31, 1996. Revenues
were $17,481,773 in 1996, $7,038,063 in 1995, and $4,678,401 in
1994. The increase in revenue of $10.4 million, or 148%, in 1996
was largely attributable to (i) the private placement of two
separate securitizations in January 1996 and December 1996,
compared to one placement in March 1995 and (ii) an increase in
the volume of transactions activated (approximately $182 million
activated in 1996 versus approximately $150 million activated in
1995). The $2.4 million, or 50%, increase in revenue in 1995
was largely attributable to (i) the gain on the March 1995
securitization, (ii) the permanent financing of individual
Financial Contracts, and (iii) an increase in the volume of
transactions activated (approximately $150 million activated in
1995 versus approximately $76 million activated in 1994).
Rental income increased by approximately $435,000, or 60%, in
1996 compared to 1995 due mainly to activating and carrying a
higher volume of operating leases. There was a minimal increase
of $22,327, or 3%, in rentals on leased equipment in 1995.
Direct finance lease income increased approximately $2.1 million,
or 146%, from 1995 due mainly to an increase in the amount of
direct finance lease contracts activated and held during the
year. Direct finance lease income increased $663,116 or 87% in
1995 for the same reason as the increase in 1996.
Fee Income increased by approximately $7.5 million, or 201%, in
1996 due mainly to the completion of $151,595,817 in Financial
Contract securitizations in 1996 compared to $56,725,781 in
Financial Contract securitizations in 1995. Fee income increased
approximately $1.5 million, or 65%, in 1995. This increase is
largely attributable to a higher gain on securitization
recognized in 1995 ($2.1 million) versus the gain on
securitization recognized in 1994 ($.6 million).
The gain on sale of leased equipment decreased $91,954, or 67%,
in 1996 from 1995 and by $139,295 or 50% in 1995. The reductions
in this income account are a result of a decrease in gains
realized from the remarketing of equipment on behalf of managed
investor programs. In the past, the company shared in gains on
remarketing of investor owned equipment after the investors
received a predetermined return. The company reported gains from
these programs of approximately $280,000 in 1994, $137,000 in
1995 and none in 1996. The reduction is a result of the
expiration of the remaining leases under these programs.
Interest income increased $328,873, or 45% in 1996 and $310,281
or 75% in 1995. These increases are largely attributable to the
Company having higher invested cash balances each year due mainly
to required cash collateral reserves associated with Financial
Contract securitizations on which the company recognizes interest
income.
Expense Trends - Two Years Ended December 31, 1996
Expenses were $13,455,715 in 1996, an increase of approximately
$4.6 million, or 52% over 1995. This increase is a result of (i)
increased selling, general and administrative expenses associated
with increased personnel and activation volume, (ii) increased
interest expense related to maintaining higher warehouse balances
of Financial Contracts, and (iii) increased depreciation expense
relating to leased equipment held and depreciated for a longer
period. Expenses were $8,874,296 in 1995, an increase of 33%
from the expenses in 1994 of $6,676,405. This increase is a
result of (i) increased selling, general and administrative
expenses associated with expanded marketing efforts (primarily
increased salaries and commissions), (ii) increased interest
expense associated with Financial Contract warehouse holding
periods and (iii) one-time non-recurring expenses, detailed
below.
Depreciation expense increased $290,614 or 92% in 1996 due mainly
to carrying a higher level of operating leases for a longer
period of time before securitization. Depreciation expense
decreased $102,656 or 24% in 1995 due mainly to carrying lower
levels operating leases before securitization.
In 1996, selling, general and administrative expenses increased
approximately $2 million, or 27%. Salaries and related benefits
increased approximately $500,000 or 17%, due mainly to increased
personnel (52 employees at the end of 1996 vs. 44 employees at
the end of 1995, an 18% increase). Brokers fees, legal expense
and commissions expenses collectively increased by approximately
$1.6 million (92%) primarily due to a 96% increase in total
financings and a 21% increase in financial contract activations.
Partially offsetting the above increases was the effect of the
one-time non-recurring charges in 1995 of approximately
$1,050,000, as detailed below.
In 1995 selling, general and administrative expenses increased by
approximately $1.7 million, or 30%, over 1994 due mainly to one-
time non-recurring expenses relating to a write-off of prepaid
expenses totaling approximately $632,000 and the establishment of
a reserve related to certain pending tax audits totaling
approximately $418,000. Also contributing were increased
expenses associated with increased Financial Contract
activations, primarily commissions.
In 1996, interest expense increased by $2.4 million (204%) over
1995 due to increased average warehouse balances resulting from
increased Financial Contract activation volume and longer holding
periods of Financial Contracts in warehouses before disposition.
For example, the majority of 1996 Financial Contract activations
were warehoused into December 1996, whereas in 1995, some of the
Financial Contracts activated were securitized in March 1995.
Also contributing to the increase was the accrual of $156,250 in
interest expense on the $5 million subordinated debt and the
amortization of fees associated with the transaction.
In 1995, interest expense increased by approximately $450,000
(60%) due mainly to holding Financial Contracts in the warehouse
for longer periods of time. In 1995, Financial Contracts were
securitized in March and subsequent Financial Contract
activations were warehoused until securitization in January 1996.
In 1994, Financial Contract activations were securitized in
September.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the registrant and the
report thereon of KPMG Peat Marwick LLP are filed as part of this
annual report on Form 10-KSB:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations - Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
Directors of the Registrant
<CAPTION>
Principal Occupation During Past Director
Name Five Years and Other Information Age since
<S> <C> <C> <C>
James A. President and Chief Executive 51 1978
Friedman Officer of the Company or its
predecessor since November 1978.
Leander W. President of Jennings & Associates 68 1986
Jennings since September 1986; Managing
Partner, Chicago Office of KPMG
Peat Marwick from January 1977 to
February 1985; Director of A.O.
Smith Corporation, Alberto Culver
Corporation, Fruit of the Loom
Corporation and Teppco Partners
L.P..
William D. Chairman of The Quaker Oats 58 1986
Smithburg Company since 1983 and Chief
Executive Officer thereof since
1981; Director of The Quaker Oats
Company, Abbott Laboratories, The
Northern Trust Corporation and
Corning Glass Works.
Robert R. Practicing Orthodontist and owner 47 1978
Youngquist of Robert R. Youngquist D.D.S.,
D.D.S. Ltd. during the past six years.
Mark P. Senior Managing Partner of 49 1996
Bischoff Bischoff, Maurides & Swabowski,
Ltd. since 1988; Secretary of the
Board of Directors and General
Counsel of the Company since 1986.
</TABLE>
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name of Principal Occupation During Past Age
Officer Five Years and Other Information
<S> <C> <C>
James A. President and Chief Executive 51
Friedman Officer of the Company or its
predecessor since November 1978.
Robert C. Senior Vice President of the Company 51
Benson since August 1995. From 1983 to
1995 Senior Vice President and Chief
Financial Officer of various
financial services divisions of
Heller Financial, Inc..
Joseph Senior Vice President of Operations 50
Rinehart of the Company since July 1996.
From 1992 to 1996 Vice President of
leasing and operations at StorageTek
Distributed Systems Division, Inc.
From 1988 to 1992 Director of Equity
for Meridian Leasing Corporation.
John Senior Vice President of the Company 36
Altergott since January 1996. Vice President
of the Healthcare Finance Group of
Prime Capital Corporation since
March 1988.
</TABLE>
Item 10.-EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table shows all the cash compensation paid or
to be paid by the Company or any of its subsidiaries, as
well as certain other compensation paid or accrued, during
the fiscal years indicated, to the President and Chief
Executive Officer, and the highest paid executive officer
of the Company whose compensation was at least $100,000 for
the last fiscal year in all capacities in which they
served:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
Pay-
Annual Compensation Awards outs
(a) (b) (c) (d) (e) (f) (g) (h) (I)
Other All
Annual Restricte Other
Name and Compen- d LTIP Compen-
Principal Salary Bonus sation Stock Option Payou sation
Position Year ($) ($) ($) Award(s) s ts ($)
($) /SARs ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James A. 1996 296,050
Friedman 1995 288,000
President 1994 357,000 3,625
and Chief
Executive
Officer
Robert C. 1996 109,720 20,100 25,000
Benson
Senior
Vice
President
John 1996 97,500 195,849 50,000
Altergott
Senior
Vice
President
</TABLE>
<TABLE>
Options/SAR Grants in Last Fiscal Year
Individual Grants
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities % of Total
Underlying Options/SARs Exercise
Options/SARs Granted to or Base
Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Sh) Date
<S> <C> <C> <C> <C>
Robert C. 25,000 $5.50 Aug. 9,
Benson 2006
Joseph Rinehart 50,000 5.38 Jun. 24,
2006
John Altergott 50,000 1.88 Jan. 3,
2006
</TABLE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
and Option/SAR Values
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options/SARs Options/SARs at
Shares at FY-End FY-End
Acquired on Value (#) ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert C.
Benson 8,250/41,750 $34,568/$70,182
John
Altergott 2,000 $9,500 85,000/50,000 $435,325/$168,500
Joseph
Rinehart 0/50,000 $0/$0
</TABLE>
Director's Compensation
Each Director of the Company who is not an Executive Officer
receives an annual retainer of $10,000 plus a fee of $500 for
attendance at each meeting of the Board. In addition, members of
the Committees of the Board who are not Executive Officers
receive a fee of $300 for each Committee meeting attended.
Directors of the Company who are also Executive Officers receive
no compensation for rendering services as a Director except for
reimbursement of out-of-pocket expenses.
Compensation Pursuant to Plans
The Company adopted the 1984 Incentive Stock Option Plan (the
"ISO Plan"), the 1986 Non-Qualified Stock Option Plan (the "Non-
Qualified Plan") and the 1987 Stock Option Plan (the "1987
Plan"). All descriptions of the various plans are qualified in
their entirety by reference to the actual Plan documents which
are available for examination.
The ISO Plan is administered by a committee of not less than two
Directors of the Board (the "Committee"). The Board must select
the members of the Committee from among those Directors who are
ineligible to participate in, and who have not within the year
preceding appointment to the Committee been eligible to
participate in, the ISO Plan or any other stock option plan of
the Company. The ISO Plan empowered the Committee to grant
incentive stock options to "key employees" of the Company and its
subsidiaries to purchase shares of the Company's Common Stock at
any time prior to the approval of the 1987 Plan. Subject to
certain limitations, the ISO Plan empowered the Committee to
determine the persons to whom options were granted, the number of
shares to be covered by each option, the option price per share
(which must have been at least equal to 100% of the fair market
value of the Common Stock of the Company on the date the option
is granted) and all other terms and conditions of the option and
its exercise. Termination of an optionee's employment with the
Company or its subsidiaries results in the termination of all
options held by such optionee which were not exercisable at the
time of such termination of employment. All options granted
under the ISO Plan are non-assignable and non-transferable other
than by will or the laws of descent and distribution.
The Non-Qualified Plan empowered the Board of Directors for a
period of 10 years commencing on March 26, 1986, to grant non-
qualified stock options to purchase shares of the Company's
Common Stock to Directors of the Company who are not Officers or
employees of the Company or its subsidiaries and to key employees
who are not Directors of the Company. The Non-Qualified Plan
provided for the issuance of up to 25,000 shares of Common Stock
upon the exercise of options thereunder at any time prior to the
approval of the 1987 Plan. A Director participant could not be
granted options to purchase more than 7,500 shares of Common
Stock under the plan. On March 26, 1986, the Board of Directors
delegated the responsibility for the administration of the Non-
Qualified Plan to the Committee. Subject to the provisions of
the Non-Qualified Plan, the Committee determined the persons to
whom options are granted, the number of shares subject to each
option, the exercise price of each option and all other terms and
conditions of exercise. Pursuant to an amendment adopted on May
1, 1986, options must have been granted at not less than 85% of
the current fair market value of the shares of Common Stock.
Each option granted under the Non-Qualified Plan was and is
immediately exercisable in full. A portion of the shares
purchased upon exercise of an option granted under the Non-
Qualified Plan may, however, be subject to repurchase by the
Company at the option price if the optionee ceases to be an
employee or a Director, as the case may be, of the Company within
five years after the date of grant of the option. Such
repurchase option lapses pro-rata over such period and lapses
entirely where certain transactions involving the Company have
occurred. Options are not transferable, except that options may
be exercised by the executor, administrator or personal
representative of a deceased optionee for a period of not longer
than one year after the death of such optionee at such time and
to such extent that the optionee, had he lived, would have been
entitled to exercise such option.
The 1987 Plan was adopted by the Board of Directors on March 24,
1987 and was approved by the stockholders on May 27, 1987. An
aggregate of 300,000 shares of the Company's Common Stock was
reserved for issuance pursuant to the exercise of options under
the 1987 Plan, 200,000 of which were transferred from the ISO
Plan and 15,000 of which were transferred from the Non-Qualified
Plan. On August 31, 1994 the stockholders approved an additional
200,000 shares of the Company's Common Stock be reserved for
issuance pursuant to the exercise of options under the 1987 Plan.
In August 1996 the stockholders approved an additional 250,000
shares of the Company's Common Stock be reserved for issuance
pursuant to the exercise of options under the 1987 Plan.
The Board of Directors may grant options to purchase shares of
the Company's Common Stock at the times and prices provided for
in the agreements granting the options, subject to the terms of
the 1987 Plan, to key employees (who are not Directors of the
Company) and Directors (who are not Officers or employees of the
Company or its subsidiaries) of the Company or its subsidiaries.
Only key employees are eligible to receive incentive stock
options. Key employees and Directors are eligible to receive non-
qualified options. All options are subject to the specific terms
and conditions evidenced by written agreements between the
Company and the optionee. The maximum number of shares for which
an option may be granted to any one key employee (who is not a
Director of the Company) is not limited other than in the
discretion of the Board.
An optionee may exercise options granted under the 1987 Plan for
a period of three months following, in the case of an optionee
who is an employee, termination of the optionee's employment (12
months if termination of employment is due to total and permanent
disability), or, in the case of an optionee who is a non-employee
Director, the time the optionee ceases to be a Director of the
Company (12 months if he ceases to be a Director due to total and
permanent disability) to the same extent that the optionee might
have exercised such option at the time of such termination of
employment or the time he ceased to be a Director, as the case
may be. The Company shall have the right to repurchase certain
shares on termination of employment or directorship. Options
shall not be transferable, except that options may be exercised
by the executor, administrator or personal representative of a
deceased optionee for a period of not longer than one year after
the death of such optionee at such time and to such extent that
the optionee, had he lived, would have been entitled to exercise
such option.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Current Ownership
The following table sets forth certain information as of December
31, 1996 with respect to the beneficial ownership of the
Company's Common Stock by each stockholder or group known by the
Company to be the beneficial owner of more than 5% of its
outstanding Common Stock, by each Director, and by all Executive
Officers and Directors as a group. The information is based, in
part, on data furnished by such Executive Officers, Directors and
stockholders. The address of each holder of more than 5% of the
Company's Common Stock other than First Financial Fund, Inc. and
Wellington Management Company is O'Hare International Center,
10275 West Higgins Road, Rosemont, Illinois 60018. The address
for Wellington Management Company is 75 State Street, Boston,
Massachusetts 02109. First Financial Fund, Inc.'s address is One
Seaport Plaza, 25th Floor, New York, New York 10292.
<TABLE>
<CAPTION>
Name of Amount and Nature
Beneficial Owner of Beneficial Ownership Percent of Class
<S> <C> <C>
James A. Friedman (1) 2,198,375 48.6%
Leander W. Jennings (2) 27,100 *
Mark P. Bischoff 10,000 *
William D. Smithburg (2) 27,000 *
Robert R. Youngquist, D.D.S. (3) 20,000 *
Robert C. Benson (2) 8,250 *
John Altergott (2) 92,000 2.0%
First Financial Fund, Inc. (4) 330,000 7.3%
All Executive Officers and
Directors as a group
(8 persons) (2) 2,382,725 52.6%
<FN>_________________________
*Less than 1%
(1) Includes 459,975.67 shares owned by a trust for the benefit
of Mr. Friedman's children for which Mr. Friedman disclaims
beneficial ownership. The named trustee of the trust is
Mark P. Bischoff.
(2) Includes outstanding options which are currently exercisable
with respect to the following named individuals or groups:
Messrs. Jennings, 25,000 shares; Smithburg, 25,000 shares;
Benson, 8,250 shares; Altergott, 85,000 shares. All
Executive Officers and Directors as a group, 143,250 shares.
(3) Includes 15,000 shares held in a pension plan of which Dr.
Youngquist is a fiduciary and for which Dr. Youngquist
disclaims beneficial ownership.
(4) According to Schedules 13G filed with the Securities and
Exchange Commission on January 24, 1997, First Financial
Fund, Inc., an investment Company, is the beneficial owner
of such shares, and Wellington Management Company, its
investment advisor, may also be deemed to be a beneficial
owner of those shares.
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no family relationships among the Directors and
Executive Officers of the Company.
In September 1991, James A. Friedman purchased one lease and the
underlying telecommunications equipment from the Company for a
price of approximately $350,000, made up of cash and an
assumption of the debt secured by those assets. The transaction
was approved by the Company's outside directors in accordance
with the Company's policy of related party transactions. The
Company originally purchased the equipment for approximately
$456,000 and entered into this lease in February, 1990. At the
date of the sale to Mr. Friedman, the assets were carried on the
Company's books at approximately $373,000. There were no
proceeds received by Mr. Friedman on this lease in 1994. $27,511
was received by Mr. Friedman in 1995 and $223,749 was received by
Mr. Friedman in 1996 on this transaction.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
1.Financial Statements
The following financial statements of Prime Capital Corporation
and subsidiaries are filed as part of this annual report on Form
10-KSB:
Sequential
Page No.
a) Independent Auditors' Report 24
b) Consolidated Balance Sheets as of
December 31, 1996 and 1995 25
c) Consolidated Statements of Operations
for the years ended December 31, 1996,
1995 and 1994 26
d) Consolidated Statements of Stockholders'
Equity for the years ended
December 31, 1996, 1995 and 1994 27
e) Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994 28
f) Notes to Consolidated Financial Statements 29
2.Exhibits
The exhibits filed in response to Item 601 of
Regulation S-B as part of this Annual Report on Form 10-
KSB are listed in the Exhibit Index on pages 39 through
40.
3.Reports on Form 8-K
There were no reports on Form 8-K filed by the Company
during the fourth quarter of the Company's fiscal year
ended December 31, 1996.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Prime Capital Corporation:
We have audited the accompanying consolidated balance sheets of
Prime Capital Corporation and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. 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 financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 Capital Corporation and subsidiaries at
December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 10 , 1997
<PAGE>
<TABLE>
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,063,398 $ 2,001,949
Restricted cash 7,873,004 3,717,591
Receivables:
Rentals on leased equipment 172,758 100,589
Due from equipment trusts 46,948 38,068
Securitization receivable, net loss reserves 1,851,433 1,643,891
Other 5,369,399 829,204
Net investment in direct financing leases
and loans 56,004,417 58,561,185
Leased equipment, net of accumulated
depreciation
of $78,885 and $164,542 in 1996 and 1995
respectively 1,370,289 2,581,032
Deposits on equipment 134,487 114,836
Property and equipment, net of accumulated
depreciation of $1,156,512 and $1,062,527
in 1996 and 1995, respectively 364,499 285,599
Other assets 761,317 80,482
Total assets $ 81,011,949 $ 69,954,426
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 46,418,920 $ 58,300,252
Accounts payable for equipment 7,780,691 4,057,179
Accrued expenses and other liabilities 8,413,696 4,246,376
Deposits and advances 4,341,351 563,711
Subordinated debt 5,000,000 ---
Total Liabilities 71,954,658 67,167,518
Stockholders' equity
Preferred stock, $100 par value: authorized
250,000 shares, issued 25,000 shares in 1996 2,500,000 ---
Common stock, $0.05 par value: authorized
10,000,000 shares; issued 4,384,365 and
4,374,365 shares in 1996 and 1995,
respectively 219,218 218,718
Additional paid-in capital 9,480,675 9,681,225
Accumulated deficit (2,842,802) (6,813,235)
Treasury stock, at cost; 94,200 shares
at December 31, 1996 and 1995 (299,800) (299,800)
Total stockholders' equity 9,057,291 2,786,908
Total liabilities and stockholders' equity $ 81,011,949 $ 69,954,426
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<CAPTION>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Rentals on leased equipment $ 1,158,419 $ 723,265 $ 700,938
Direct financing leases
and loans 3,514,885 1,427,943 764,827
Fee income 11,253,085 3,736,491 2,267,641
Gain on sale of leased
equipment 45,599 137,553 276,848
Interest 1,055,574 726,701 416,420
Other income 454,211 286,110 251,727
Total revenues 17,481,773 7,038,063 4,678,401
Expenses:
Amortization of deferred
finance costs -- -- 4,357
Depreciation of leased
equipment 607,795 317,181 419,837
Selling, general and
administrative 9,572,687 7,531,351 5,785,905
Interest 3,650,901 1,200,662 749,952
Net capitalized initial
direct costs (375,668) (174,898) (283,646)
Total expenses 13,455,715 8,874,296 6,676,405
Income (loss) before income
taxes and dividends $ 4,026,058 $ (1,836,233) $ (1,998,004)
Income tax expense -- -- --
Net income (loss) $ 4,026,058 $ (1,836,233) $ (1,998,004)
Preferred dividends 55,625 -- --
Net income (loss) available
to common shareholders $ 3,970,433 $ (1,836,233) $ (1,998,004)
Net income (loss) per
common share $ 0.85 $ (0.43) $ (0.47)
Number of common shares
and dilutive common
equivalent shares
outstanding 4,668,962 4,280,165 4,280,165
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
Additional Total
Balance Preferred Common paid-in Accumulated Treasury Shareholder
at stock stock capital Deficit Stock Equity
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 $ -- $ 218,718 $ 9,681,225 $ (2,978,998) $ (299,800) $ 6,621,145
Net Loss (1,998,004) (1,998,004)
December 31, 1994 $ -- $ 218,718 $ 9,681,225 $ (4,977,002) $ (299,800) $ 4,623,141
Net Loss (1,836,233) (1,836,233)
December 31, 1995 $ -- $ 218,718 $ 9,681,225 $ (6,813,235) $ (299,800) $ 2,786,908
Net Income 4,026,058 4,026,058
Cash dividends -
preferred (55,625) (55,625)
Exercise of options 500 2,163 2,663
Issuance of preferred
stock and warrants 2,500,000 (202,713) 2,297,287
December 31, 1996 $ 2,500,000 $ 219,218 $ 9,480,675 $ (2,842,802) $ (299,800) $ 9,057,291
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,026,058 $ (1,836,233) $ (1,998,004)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation 754,350 436,818 531,936
Amortization of unearned income (3,514,886) (1,427,943) (756,654)
Amortization of deferred finance
costs on direct finance leases
and loans -- -- 4,356
Amortization of debt financing fees 30,719 -- --
Gain on securitization (8,281,078) (2,054,114) (632,459)
Changes in assets and liabilities:
Rentals on leased equipment and
other receivables (4,819,906) 723,201 1,084,162
Deferred charges (89,402) 351,236 (261,286)
Other assets (4,380,867) (1,311,568) (1,864,686)
Accrued expenses and other
liabilities 4,167,320 2,250,375 (31,646)
Due from equipment trusts (8,880) 30,541 122,366
Net cash used in operating activities (12,116,572) (2,837,687) (3,801,915)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired for lease (158,497,874) (114,532,687) (63,753,378)
Net proceeds from sale of assets 854,917 317,268 479,954
Net cash used in investing activities (157,642,957) (114,215,419) (63,273,424)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
subordinated debt 5,000,000 -- --
Net proceeds from issuance of
preferred stock and warrants 2,297,287 -- --
Proceeds from exercise of options 2,663 -- --
Payment of debt financing fees (608,143) -- --
Preferred stock dividends (55,625) -- --
Discounted lease proceeds and
proceeds from sale of fully
leveraged finance leases and loans 50,936,717 35,932,007 22,810,629
Proceeds from (reduction in)
notes payable, net (11,881,332) 50,410,749 6,797,244
Proceeds from securitization,
net of expenses 129,129,411 30,766,946 35,352,740
Net cash provided by
financing activities 174,820,978 117,109,702 64,960,613
Increase (decrease) in cash and
cash equivalents 5,061,449 56,596 (2,114,726)
Cash and cash equivalents:
Beginning of year 2,001,949 1,945,353 4,060,079
End of year $ 7,063,398 $ 2,001,949 $ 1,945,353
Cash paid during the year for:
Interest $ 3,030,240 $ 1,225,401 $ 732,618
Supplemental schedule of noncash
financing activities:
Discounted lease rentals on direct
finance leases collected by
financial institutions $ -- $ -- $ 168,920
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
(1) Summary of Significant Accounting Policies
Prime Capital Corporation, through its wholly-owned
subsidiaries, is engaged principally in providing financial
services to clients and customers throughout the United
States. The Company's primary focus is on providing
specialty and high value-added financial products that are
targeted to specific markets through its three Business
Units. The Company is primarily engaged in the business of
originating (or, in some cases, purchasing) leases, secured
loans or installment purchase agreements (collectively,
"Financial Contracts"), warehousing such Financial
Contracts, and ultimately securitizing (or, in some cases,
selling outright) such Financial Contracts. The
accompanying consolidated financial statements include the
accounts of Prime Capital Corporation and its wholly-owned
subsidiaries, Prime Leasing, Inc., Prime Finance Corporation
1993-A, Prime Finance Corporation 1994-A, Prime Finance
Corporation 1995-A and Prime Finance Corporation 1996-A.
All material intercompany transactions have been eliminated.
(a) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
(b) Revenue Recognition
Completed lease contracts which qualify as direct financing
leases or loans, as defined by Statement of Financial
Accounting Standards (SFAS) No. 13, are accounted for by
recording on the consolidated balance sheet the total
minimum lease payments receivable, plus the estimated
unguaranteed residual value of the leased equipment, less
the unearned income. The unearned lease income represents
the excess of the total minimum lease payments, plus the
estimated residual expected to be realized at the end of the
lease term, over the cost of the related equipment.
Unearned lease income is recognized as revenue over the term
of the lease as a constant percentage interest return on the
net investment. The initial direct costs are capitalized as
part of the net investment in direct financing leases and
amortized over the lease term as a reduction in yield.
The cost of equipment acquired for the Company's lease
transactions that qualify as operating leases, as defined by
SFAS No. 13, is recorded as leased equipment and depreciated
on a straight-line basis to an estimated residual value at
lease termination. Lease revenue consists of periodic
rentals. Initial direct costs of originating operating
leases are capitalized and amortized on a straight-line
basis over the lease term.
Fee income is generated from the sale of equipment and
receivables. The Company records as fee income from the
sale of equipment the difference between the net sales
proceeds received and the book value of equipment. When the
sale of contract receivables occurs, the net proceeds on the
sale less the net book value of the sold receivables is
recorded as fee income.
(c) Cash and Cash Equivalents
Cash and cash equivalents are generally comprised of highly
liquid instruments with original maturities of 90 days or
less.
(d) Restricted Cash
In connection with each Securitization completed by the
Company, certain cash reserves are set aside for credit
enhancement of the securitization pools. These reserve
balances are classified as restricted cash on the company's
consolidated balance sheets. Cash reserve accounts are
initially funded from the proceeds received from the
securitization and are increased by the excess spread
realized from the receipt of payments from borrowers or
lessees over the interest payment due to the securitization
bondholders. In the event of default or delinquency by a
borrower or lessee, payments to the bondholders are disbursed
from the cash reserve fund. Typically, the cash reserve
funds become available as unrestricted cash to the Company
once all contracts in the securitization pool are paid in
full, however, payout is sometimes sooner depending upon the
specific pool indenture agreement.
(e) Income Taxes
The Company uses the asset and liability method to account
for income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
basis. The measurement of deferred tax assets is reduced,
if necessary, by a valuation allowance for any tax benefits
of which future realization is uncertain.
(f) Net Income (Loss) per Common Share
Net income/(loss) per common share is computed by dividing
net income/(loss) after deduction of preferred stock
dividends by the weighted average number of common and
common equivalent shares outstanding during each period.
Stock options are not included in the number of common and
common equivalent shares for the years ended December 31,
1995 and 1994 because they were not dilutive. The number of
common and common equivalent shares used in the computation
of net income/(loss) per common share for the years ended
December 31, 1996, 1995 and 1994 was 4,668,962, 4,280,165,
and 4,280,165 respectively.
(g) Financial Instruments
The carrying value of the Company's financial instruments
approximates their fair value.
(h) Stock Based Compensation
The Company uses the intrinsic value based method of
accounting for its stock-based compensation arrangements.
(i) Reclassifications
Certain 1995 and 1994 amounts have been reclassified to
conform with the 1996 presentation.
(2) Net Investment in Direct Financing Leases and Loans
The components of the net investment in direct financing
leases and loans as of December 31 are as follows:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Minimum lease/loan payments
receivable 73,784,482 $72,778,029
Estimated unguaranteed residual
value of leased equipment 231,961 449,810
Capitalized initial direct costs 22,875 63,784
Unearned income (18,024,901) (14,720,438)
Allowance for uncollectible
accounts (10,000) (10,000)
Net investment in direct
financing leases and loans $56,004,417 $58,561,185
</TABLE>
The estimated unguaranteed residual value of leased
equipment at December 31, 1996 and 1995 includes residuals
of $72,388 and $83,698, respectively, recorded from residual
sharing agreements with investor programs and other third
parties.
Minimum lease and loan payments to be received on direct
financing leases and loans in each of the next five years
and beyond are as follows:
<TABLE>
<S> <C>
Year ending
December 31,
1997 $17,325,013
1998 14,678,894
1999 15,365,869
2000 13,727,358
2001 8,449,822
Thereafter 4,237,526
Minimum lease and
loan payments
to be received $73,784,482
</TABLE>
Leased equipment in the Company's portfolio consists
primarily of medical, telecommunication and other equipment
with average 46-month lease terms, for which estimated
residual values of 5% to 25% have been assigned. The
following table summarizes the estimated unguaranteed
residual value on direct financing leases by year of lease
termination:
<TABLE>
<S> <C>
Year ending
December 31,
1997 $72,388
1998 --
1999 --
2000 102,727
2001 48,809
2002 8,037
Total $231,961
</TABLE>
(3) Notes Payable
Notes payable at December 31, 1996 and 1995 includes
$46,282,960 and $58,030,594, respectively, representing
amounts borrowed under warehouse lines used to finance the
Company's purchase of certain equipment on lease.
Outstanding borrowings under the warehouse lines are secured
by the related equipment. The various warehouse lines bear
different interest rates and maturities. Also included in
notes payable at December 31, 1996 and 1995 is a note and
security agreement bearing interest at 9% due November 10,
1998 with outstanding balances of $135,960 and $269,658,
respectively.
(4) Securitizations
On September 19, 1994, the Company completed an asset
securitization pursuant to which a wholly-owned, newly-
formed, limited-purpose subsidiary of the Company issued two
classes of receivables-backed, pay-through notes secured by
the Company's entire interest in the pooled assets. The
initial aggregate contract value of the securitization was
$39,424,940. The Company established its own allowance for
expected losses under its recourse obligations to
Noteholders based on its historical loss experience and
management's best estimate of future losses equal to one-
half of one percent (0.5%) of the initial equipment cost.
For financial reporting purposes, the asset securitization
was treated as a sale and a gain of $632,459 was recognized
as fee income in the accompanying consolidated
financial statements.
On March 16, 1995, the Company issued and sold equipment
lease-backed pay-through notes with an initial aggregate
contract value of $56,725,781. Through this issuance of
such notes, the Company permanently financed certain assets
and liabilities carried on the Company's consolidated
balance sheet as of December 31, 1994. These assets and
liabilities were removed from the consolidated balance
sheets and the resulting gain was recognized on the
Company's consolidated statement of operations in the first
quarter of 1995. The Company established its own allowance
for expected losses under its recourse obligations to the
Noteholders based on its historical loss experience and
management's best estimate of future losses equal to one-
half of one percent (0.5%) of the initial equipment cost.
For financial reporting purposes, the asset securitization
was treated as a sale and a gain of $2,054,114 was recognized
as fee income in the accompanying consolidated
financial statements.
On January 22, 1996, the Company issued and sold equipment
lease-backed pay-through notes with an initial aggregate
contract value of $85,273,476. Through the issuance of such
notes, the Company permanently financed certain assets and
liabilities carried on the Company's consolidated balance
sheet as of December 31, 1995. These assets and liabilities
were removed from the consolidated balance sheet and the
resulting gain, for financial reporting purposes, of
$4,199,789 was recognized as fee income on the Company's
consolidated statement of operations in the first quarter of 1996.
The Company established its own allowance for expected losses
under its recourse obligations to the Noteholders based on
its historical loss experience and management's best
estimate of future losses equal to one-half of one percent
(0.5%) of the initial equipment cost.
On December 13, 1996, the Company completed an asset
securitization pursuant to which a wholly-owned, newly-
formed, limited-purpose subsidiary of the Company issued
four classes of receivables-backed, pay-through notes with
an aggregate contract value of $66,322,341, secured by the
Company's entire interest in the pooled assets. The Company
established its own allowance for expected losses under its
recourse obligations to Noteholders based on its historical
loss experience and management's best estimate of future
losses equal to one-half of one percent (0.5%) of the
initial equipment cost. For financial reporting purposes,
the asset securitization was treated as a sale and a gain of
$4,081,289 has been included in fee income in the
accompanying consolidated financial statements.
(5) Subordinated Debt and Preferred Stock with Warrants
On October 4, 1996, Prime Capital Corporation received
$7,500,000 cash and incurred approximately $800,000 in
expenses, in exchange for a $5 million principal amount of
five year, 12.5% subordinated debentures and 25,000 shares
of $100 par value 9% Dividend Preferred Stock with warrants
to purchase 499,606 shares of the Company's common stock at
$1.00 per share. Expenses related to the transaction were
allocated between the subordinated debt, preferred stock and
warrants based upon their fair value. Expenses allocated to
the subordinated debt were capitalized and are being
amortized over five years. The unamortized balance of these
expenses were included in "Other assets" on the Company's
consolidated balance sheet at December 31, 1996 and the 1996
amortization of $30,719 is included in interest expense on
the Company's consolidated statement of operations. The
warrants are exercisable in March 1998.
(6) Income Taxes
The Company's net income tax provision after consideration
of the tax effect from utilization of net operating loss
carryforwards was zero for the years ended December 31,
1996, 1995 and 1994.
The reported income tax expense differs from the "expected"
tax expense (benefit) (computed by applying the Federal
corporate tax rate to the income before income taxes) as
follows:
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Computed "expected"
tax expense (benefit) $1,368,860 ($624,320) ($679,321)
State income tax
expense (benefit)
net of Federal
income tax expense 201,411 (89,130) (97,550)
Other - net 14,571 12,111 9,282
Net operating loss
carryforward
(utilized) unused
benefit (1,584,842) 701,339 767,589
Total Expense --- --- ---
</TABLE>
Deferred tax assets and liabilities at December 31, 1996 and
1995 include:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Deferred Tax Assets:
Net operating and passive
activity loss carryforwards $9,344,056 $8,407,937
Investment tax credit
carryforward 614,361 645,307
Financial statement reserves
not currently deductible
for tax purposes 324,331 341,779
Gross deferred tax assets 10,282,748 9,395,023
Less: Valuation allowance (5,296,678) (6,901,753)
Total deferred tax assets 4,986,070 2,493,270
Deferred Tax Liabilities:
Difference in securitization
accounting for tax
purposes and financial
statement purposes 4,694,228 2,209,253
Other, net 291,842 284,017
Total deferred tax
liabilities 4,986,070 2,493,270
Net deferred taxes $ --- $ ---
</TABLE>
Included at January 1, 1996 were valuation allowances of
$6,901,753. During fiscal 1996, the valuation allowance
decreased by $1,605,075 due primarily to the deferred gains
on the new securitizations: Prime Finance Corporation 1995-
A and Prime Finance Corporation 1996-A.
The Company has $614,361 of unused investment tax credit
carryforwards that are available for consolidated tax return
purposes which expire at various times between 1997 and
2001. At December 31, 1996, the Company had a passive
activity loss carryforward of approximately $18,903,976 and
a net operating loss carryforward of approximately
$5,055,000 available for tax return purposes. The passive
activity loss carryforward does not expire, and must be used
before the Company's net operating loss carryforward to
offset income from future business activities of the
Company. The net operating loss carryforward expires in the
following manner: $1,878,000 in 2001, $1,238,000 in 2002,
$1,215,000 in 2003, $102,000 in 2004, $5,000 in 2005,
$575,000 in 2006, $15,000 in 2007, $8,000 in 2008, $9,000 in
2009, $5,000 in 2010 and $5,000 in 2011.
(7) Commitments and Contingencies
The Company rents office space and equipment under various
operating lease agreements expiring during the next seven
years. The following is a schedule of future minimum rental
payments required under these leases and does not include
the Company's proportionate share of future real estate
taxes and building operating expenses.
<TABLE>
<CAPTION>
Year ending
December 31, Amount
<S> <C>
1997 $339,680
1998 204,089
1999 213,807
2000 223,526
2001 233,244
2002 242,963
2003 252,681
</TABLE>
Rent expense, including the Company's proportionate share of
real estate taxes and building operating expenses, for the
years ended December 31, 1996, 1995, and 1994 was $294,656,
$282,513, and $283,777 respectively.
During 1995 and 1996, the Company established itself as a
credit facility for several major east coast hospital
networks with major projects to expand their integrated
health care delivery systems. The projects totaled over
$190 million and will be funded over the next three to four
years. As of December 31, 1996, approximately $40 million
has been drawn on these credit facilities and the Company
has a commitment to finance the approximate remaining $150
million in the future. The management of the Company feels
confident that funding for these credit facilities will be
obtained throughout the normal course of business.
(8) Stock Option Plans
In 1987, the Company adopted the 1987 Stock Option Plan
("Plan") under which certain employees and Directors of the
Company may be granted the right to purchase shares of
common stock at its fair market value on the date of grant.
The Company has authorized an aggregate of 750,000 shares of
common stock for issuance under the Plan.
The Company applies APB Opinion No. 25 and related
Interpretations in accounting for the Plan. Accordingly, no
compensation cost has been recognized for options granted
under the Plan. Had compensation cost for the Company's
Plan been determined consistent with FASB Statement No. 123,
the Company's net income (loss) and net income (loss) per
common share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C> <C>
Net Income (loss) As Reported $3,970,433 $(1,836,233)
available to common
shareholders Pro Forma $3,712,230 $(1,859,826)
Net Income (loss) As Reported $.85 $(.43)
per common share
Pro Forma $.80 $(.43)
</TABLE>
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants
in 1996 and 1995, respectively: dividend yield of 0% for
both years; expected volatility of 78% and 109%; risk-free
interest rates of 6.12% and 6.56%; and expected lives of 5
years for both 1996 and 1995. Additional adjustments were
made regarding a 5.5% estimated forfeit rate on the grants
for the years following 1996.
A summary of the status of the Company's Stock Option Plan
as of December 31, 1996, 1995 and 1994 and changes during
the years ended on those dates is presented below:
<TABLE>
<CAPTION> Weigh Weigh Weigh
t- t- t-
ed ed ed
Shares Aver- Shares Aver- Shares Aver-
age age age
Exer- Exer- Exer-
cise cise cise
Price Price Price
<S> <C> <C> <C> <C> <C> <C>
Shares
under
option at
beginning
of year 336,094 $1.28 356,162 $1.39 274,662 $1.24
Options
granted 289,500 $4.37 85,000 $1.17 94,500 $1.67
Options
expired (24,094) $10.59 (18,568) $1.03 -- --
Options
termin-
ated (18,000) $1.25 (86,500) $1.67 (13,000) $ .27
Options
exercised (10,000) $ .27 -- -- -- --
Shares
under
option
at end
of year 573,500 $2.47 336,094 $1.28 356,162 $1.39
Options
exercis-
able at
year-end 236,150 $ .39 237,428 $1.33 214,831 $1.44
Weighted
average
fair
value of
options
granted
during
the year $2.59 $.96 n/a
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options
Exercisable
Weighted
-average Weighted Weighted
Range of remain- -average -average
exercise Number ing exercise Number exercise
prices of contrac- price of price
shares tual shares
life
<S> <C> <C> <C> <C> <C>
$ .01 - 291,500 5.06 $ .55 236,150 $ .39
$1.50 years
$1.51 - 57,000 9.02 $ 1.86 -- --
$3.00 years
$3.01 - -- -- -- -- --
$4.50
$4.51 - 225,000 9.71 $ 5.11 -- --
$6.00 years
Total 573,500 7.28 $ 2.47 236,150 $ .39
years
</TABLE>
(9) Employee Benefit Plan
During 1985, the Company established a defined contribution
benefit plan under Internal Revenue Code (the "Code")
section 401(a) with a cash deferred benefit arrangement
under section 401(k) of the Code. The plan covers all
employees. Contributions to the plan are based on
percentages of employee contributions plus discretionary
contributions determined annually by the Board of Directors.
Contributions of approximately $39,000 were made in 1994 for
participants in the plan. There were no contributions made
in 1995 or 1996.
(10) Subsequent Event (unaudited)
The Company closed a securitization with an initial
aggregate contract value of $77,476,378 on March 20, 1997.
While most of the securitized pool consists of contracts
originated during 1996, accounting rules require that the
gain realized by the Company from accounting for the
securitization as a sale be recognized in the first quarter
of 1997.
EXHIBIT INDEX
PRIME CAPITAL CORPORATION
Copies of the following documents are filed herewith as exhibits:
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
<S> <C>
3.1 Certificate of Incorporation *
3.2 By-Laws **
10.1 Sublease dated October 8, 1985 between
the Dow Chemical Company and Registrant *
10.2 1984 Incentive Stock Option Plan of Registrant *
10.3 1986 Non-Qualified Stock Option Plan of Registrant
10.13 Master Lease Agreements of Registrant *
10.13(a) Revised Master Lease Agreements of Registrant ****
10.15 Stock Restriction Agreement dated July 2, 1985
between Registrant and Marvin T. Keeling *
10.23 Form of Equipment Bill of Sale and Assignment
contracts used in equipment sale-lease assignment
transactions between Registrant and each of
James A. Friedman, Marvin T. Keeling,
Robert Youngquist, Thomas W. Heimsoth
and Allen M. Olinger, III *
10.48 Bill of Sale of Lease to James Friedman *****
21 Subsidiaries of Registrant 39
23 Consent of KPMG PEAT MARWICK LLP 40
27 Financial Data Schedule ***
</TABLE>
* Incorporated by reference to the Company's Registration
Statement on Form S-1, effective May 29, 1986, in which each
Exhibit had the same number as herein.
** Exhibit 3.2 is incorporated by reference to the Company's
Proxy Statement, effective April 29, 1987.
*** Incorporated by reference to the Company's electronic filing
of the December 31, 1996 10 KSB as filed on March 26, 1997.
**** Incorporated by reference to the Company's Annual Report on
Form 10-K as filed on May 10, 1991.
***** Incorporated by reference to the Company's Annual Report on
Form 10-K. For the years ended December 31, 1991 as filed on
August 28, 1992 and amended on Form 8 filed on October 20, 1992.
Exhibits 21 and 23 have been included herein.
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.
PRIME CAPITAL
CORPORATION
(Registrant)
Date: March 26, 1997 /S/ James A. Friedman
James A. Friedman
President, Chairman and
Chief 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 indicated on
this 26 day of March, 1997.
Signature Title
/s/ James A. Friedman President, Chairman, and
Chief Executive Officer
James A. Friedman (Principal Executive
Officer)
/s/ Robert C. Benson Chief Financial Officer
Robert C. Benson (Principal Financial
Officer)
Directors
/s/ James A. Friedman /s/ William D. Smithburg
James A. Friedman William D. Smithburg
/s/ Mark Bischoff /s/ Robert R. Youngquist
Mark Bischoff Robert R. Youngquist
/s/ Leander W. Jennings
Leander W. Jennings
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.
PRIME CAPITAL
CORPORATION
(Registrant)
Date: March 25, 1997
James A. Friedman
President, Chairman and
Chief 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 indicated on
this 25th day of March, 1997.
Signature Title
James A. Friedman Chairman, President,
(Principal Executive Officer) Director and Chief
Executive Officer
Robert C. Benson Chief Financial
(Principal Financial Officer) Officer
Directors
James A. Friedman William D. Smithburg
Mark P. Bischoff Robert R. Youngquist
Leander W. Jennings
EXHIBIT 21
Subsidiaries of Registrant
Jurisdiction
of
Name of Subsidiary Incorporation
Prime Leasing, Inc.
d/b/a's: Americom Financial, Inc. Illinois
ITC Leasing Co. Prime Equities, Ltd. Illinois
Americom Resources, Inc.
(formerly Interstate Telecommunications
Corporation) Illinois
Prime Finance Corp. 1993-A Illinois
Prime Finance Corp. 1994-A Illinois
Prime Finance Corp. 1995-A Illinois
Prime Finance Corp. 1996-A Illinois
Prime Finance Corp. 1997-A Illinois
Prime Healthcare, Inc. Illinois
Capital Alliance Corporation Illinois
f/k/a Financial Alliance Corporation
EXHIBIT 23
PRIME CAPITAL CORPORATION
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors and Stockholders
Prime Capital Corporation:
We consent to incorporation by reference in the Registration Statement
No. 33-8386 on Form S-8 of Prime Capital Corporation of our report dated
March 10, 1996 relating to the consolidated balance sheets of Prime
Capital Corporation and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended
December 31, 1996, which report appears in this December 31, 1996 annual
report on Form 10-KSB of Prime Capital Corporation.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from SEC Form 10KSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,936,402
<SECURITIES> 0
<RECEIVABLES> 7,440,538
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,774,446
<PP&E> 57,739,205
<DEPRECIATION> 607,795
<TOTAL-ASSETS> 81,011,949
<CURRENT-LIABILITIES> 66,954,658
<BONDS> 0
0
2,500,000
<COMMON> 219,218
<OTHER-SE> 6,338,073
<TOTAL-LIABILITY-AND-EQUITY> 81,011,949
<SALES> 45,599
<TOTAL-REVENUES> 17,481,773
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,197,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,650,901
<INCOME-PRETAX> 4,026,058
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,026,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,026,058
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
