UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-14888
PRIME CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3347311
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
10275 West Higgins Road, Suite 200, Rosemont, Illinois 60018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847)294-6000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of September 30, 1997, there were 4,292,665 shares of common
stock outstanding.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations --
Three and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Balance Sheets --
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
PART II. OTHER INFORMATION 11
Item 6. Exhibits and Reports on Form 8-K 11
Exhibit Index 11
Reports on Form 8-K 11
SIGNATURE 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Fee income $2,488,126 148,513 9,130,228 6,027,207
Direct financing
leases 1,347,003 1,008,270 3,882,620 1,636,567
Rentals on leased
equipment 314,766 331,930 796,059 630,927
Interest 173,412 119,339 747,028 704,544
Other income 81,649 86,122 212,455 205,882
--------- --------- --------- ---------
Total revenues 4,404,956 1,694,174 14,768,390 9,205,127
Expenses:
Depreciation on
leased equipment 172,841 219,432 432,514 358,156
Interest 1,021,612 856,523 2,924,523 2,006,789
Provision for
credit losses - - 4,000,000 -
Selling, general
and administrative 2,546,793 1,602,527 6,255,224 4,436,437
--------- --------- -------- ---------
Total expenses 3,741,246 2,678,482 13,612,261 6,801,382
Income (loss)
before income taxes
and dividends 663,710 (984,308) 1,156,129 2,403,745
Income taxes - - - -
Preferred dividends 56,250 - 168,750 -
--------- --------- --------- ---------
Net income
available to common
share holders $607,460 (984,308) 987,379 2,403,745
========= ========== ========= ==========
Net income (loss)
per common and
common equiva-
lent share $0.12 (0.23) 0.20 0.54
Number of common
and dilutive common
equivalent shares
outstanding 4,872,650 4,282,665 4,860,580 4,456,754
========= ========== ========== ==========
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited) (Audited)
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,733,111 7,063,398
Restricted cash 8,037,416 7,873,004
Receivables:
Rentals on leased equipment 119,776 172,758
Due from equipment trusts - 46,948
Securitization receivables, net
of loss reserves 2,496,361 3,181,112
Other 5,102,079 4,039,720
Net investment in direct financing
leases and loans 9,677,157 56,004,417
Leased equipment, net of accumulated
Depreciation of $14,365 and
$78,885 at September 30, 1997 and
December 31, 1996 897,121 1,370,289
Deposits on equipment 680,192 134,487
Property and equipment, net of accumu-
lated depreciation of $1,723,310 and
$1,156,512 at September 30, 1997 and
December 31, 1996 628,786 364,499
Other assets 1,023,517 761,317
------------ -----------
Total assets $34,395,516 81,011,949
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 5,382,687 46,418,920
Accounts payable for equipment 3,092,540 7,780,691
Accrued expenses and other
Liabilities 8,030,860 8,162,837
Deposits and advances 2,846,701 4,592,210
Subordinated debt 5,000,000 5,000,000
------------ -----------
Total liabilities 24,352,788 71,954,658
Stockholders' equity
Preferred stock, $100 par value:
authorized 250,000 shares,
issued 25,000 shares 2,500,000 2,500,000
Common stock, $0.05 par value:
authorized 10,000,000 shares;
issued 4,386,865 and 4,384,365
shares at September 30, 1997
and December 31, 1996 219,343 219,218
Additional paid-in capital 9,481,109 9,480,675
Accumulated deficit (1,857,924) (2,842,802)
Treasury stock, at cost; 94,200
shares at September 30, 1997
and December 31, 1996 (299,800) (299,800)
------------ -----------
Total stockholders' equity 10,042,728 9,057,291
Total liabilities and
stockholders' equity $34,395,516 81,011,949
============ ===========
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before dividends $ 1,156,129 2,403,745
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and other amortization 599,791 482,571
Amortization of debt financing fees 91,172 -
Non-cash gain on securitization (1,372,348) (2,244,719)
Provision for credit losses 4,000,000 -
Capitalized initial direct costs (383,622) (251,715)
Changes in assets and liabilities:
Rentals on leased equipment and
other receivables 1,139,489 289,448
Other assets 1,069,471 (1,014,850)
Accrued expenses and other
liabilities (4,129,542) (116,746)
Due from equipment trusts 46,948 (3,930)
----------- ----------
Net cash provided by (used in)
operating activities 2,217,488 (456,196)
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of equipment acquired for
lease and principal amounts
disbursed for loans (111,457,907)(87,189,433)
Customer deposits and principal
payments on direct finance leases
and loans 7,058,977 5,806,358
Purchase of fixed assets (381,086) (145,937)
----------- ---------
Net cash used in investing activities (104,780,016)(81,529,012)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable, net
of borrowing (41,036,234) (4,439,044)
Proceeds from securitization reducing
book value of leases and loans 108,795,723 58,923,020
Discounted lease rentals reducing
investment in direct finance
leases and loans 33,643,439 27,529,845
Preferred stock dividends (171,250) -
Other 563 625
----------- ---------
Net cash provided by financing
activities 101,232,241 82,014,446
Increase (decrease) in cash and
cash equivalents (1,330,287) 29,238
Cash and cash equivalents:
Beginning of period 7,063,398 2,001,949
----------- ---------
End of period $ 5,733,111 2,031,187
=========== =========
Interest paid during the period $ 3,144,198 1,674,177
=========== =========
See accompanying notes to consolidated financial statements
</TABLE>
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
BASIS OF PRESENTATION
The interim financial statements have been prepared by Prime
Capital Corporation ("the Company" or "Prime Capital"), without
audit, pursuant to the rules and regulations of the Securities
and Exchange Commission applicable to quarterly reports on Form
10-QSB. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion
of management, all adjustments which are of a normal recurring
nature and are necessary for a fair presentation have been
included. However, results for interim periods are not
necessarily indicative of the results that may be expected for a
full year. It is suggested that these financial statements be
read in conjunction with the consolidated financial statements
and related notes and schedules included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
Certain reclassifications have been made to the 1996 financial
statements to conform to the classifications used in the
September 30, 1997 financial statements. These reclassifications
had no effect on net income or stockholders' equity as previously
reported.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The operating results of Prime Capital are primarily affected by
the following factors: (1) the volume of financial contract
activations, (2) the amount and timing of financial contract
sales, (3) the level of operating expenditures required to
originate and service the volume of financial contract
activations and sales, and (4) credit losses.
Once a financial contract is activated, it is sold to a third
party or, in most cases, funded through a warehouse finance
facility until it is sold through securitization. Sale of a
contract to a third party results in immediate fee income.
Warehousing a contract for a period of time results in increased
rentals on leased equipment or direct finance lease income and
correspondingly increased interest expense and, if the contract
is an operating lease, depreciation on leased equipment. When
contracts are accumulated to a certain level and sold into
securitization, the Company recognizes fee income from the gain
on securitization and ceases to recognize rental or direct
finance lease income and interest and depreciation expense
associated with the sold contracts. Future revenues from the
securitizations include fee income derived from servicing the
securitization pool and interest income earned on cash reserve
balances until all the contracts in the pool have expired.
SECURITIZATIONS AND WHOLE LOAN SALE COMPLETED DURING THE NINE-
MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
On January 22, 1996, the Company issued and sold equipment lease-
backed pay-through notes with an initial aggregate contract value
of $85.3 million. Through this issuance, the Company permanently
financed certain assets and liabilities carried on the Company's
balance sheet as of December 31, 1995. These assets and
liabilities were removed from the balance sheet and the resulting
gain of $4.1 million was recognized on the Company's statement of
operations in the first quarter of 1996.
On March 20, 1997, the Company issued and sold equipment lease
backed pay-through notes with an initial aggregate contract value
of $77.5 million. Through this issuance, the Company permanently
financed certain assets and liabilities carried on the Company's
balance sheet as of December 31, 1996. These assets and
liabilities were removed from the balance sheet and the resulting
gain of $6.6 million was recognized on the Company's statement of
operations in the first quarter of 1997.
On September 30, 1997, the Company completed a whole loan sale
of financial contracts with an initial contract value of $44.0
million. A gain of $1.3 million was recognized on the Company's
statement of operations in the third quarter of 1997.
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996
The Company activated financial contracts totaling $117.7 million
in 1997, an increase of 7.3% from the $109.7 million activated in
1996.
Fee income increased $3.1 million, or 51.5% to $9.1 million in
1997 from $6.0 million in 1996. Fee income primarily relates to
gains from the sale or securitization of financial contracts.
The initial value of the contracts sold or securitized was $164.1
million and $112.8 million in 1997 and 1996, respectively.
Direct financing lease income increased $2.3 million to $3.9
million in 1997 from $1.6 million in 1996. The longer holding
period of financial contracts and higher average contract
balances held in the warehouse accounted for this increase.
Rentals on leased equipment increased $165,000, or 26.2%, to
$796,000 in 1997 from $631,000 in 1996 due to the longer holding
period of financial contracts and higher average contract
balances held in the warehouse. There was a corresponding
increase in depreciation of leased equipment of $75,000, or
20.8%, to $433,000 in 1997 from $358,000 in 1996.
Interest income increased $42,000, or 6.0%, to $747,000 in 1997
from $705,000 in 1996.
Other income increased $6,000, or 3.2%, to $212,000 in 1997 from
$206,000 in 1996.
Interest expense increased $0.9 million, or 45.7%, to $2.9
million in 1997 from $2.0 million in 1996. Interest related to
subordinated debt totaled $474,000 in 1997. Also contributing to
increased interest expense was the amortization of debt issuance
costs and the longer holding period as well has higher average
balances of financial contracts funded on the warehouse line of
credit. (See "Liquidity and Capital Resources.")
The Company recorded a provision for credit losses of $4.0
million in 1997. No provision was recorded in 1996. (See
"Credit Losses.")
Selling, general and administrative expenses increased $1.9
million, or 41.0%, to $6.3 million in 1997 from $4.4 million in
1996. Employee compensation and related costs, including
commissions, accounted for 64.8% and 68.7% of total selling,
general and administrative expenses in 1997 and 1996,
respectively. The Company had 68 and 51 employees at September
30, 1997 and 1996, respectively. Selling, general and
administrative expenses have increased primarily due to the
hiring of additional employees and the increase in the serviced
financial contract portfolio.
In 1997, earnings available for common shareholders was reduced
by $169,000 for dividends payable to holder of preferred stock.
There were no preferred stock dividends payable for 1996. (See
"Liquidity and Capital Resources.")
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996
The Company activated financial contracts totaling $42.6 million
in 1997, an increase of 34.3% from the $31.7 million activated in
1996.
Fee income increased $2.4 million to $2.5 million in 1997 from
$0.1 million in 1996. Fee income includes gains from the sale
of financial contracts. The initial value of the contracts sold
was $70.7 million and $2.6 million in 1997 and 1996,
respectively.
Direct financing lease income increased $0.3 million, or 33.6%,
to $1.3 million in 1997 from $1.0 million in 1996. The longer
holding period of financial contracts and higher average contract
balances held in the warehouse accounted for this increase.
Rentals on leased equipment decreased $17,000, or 5.2%, to
$315,000 in 1997 from $332,000 in 1996. There was a
corresponding decrease in depreciation of leased equipment of
$46,000, or 21.2%, to $173,000 in 1997 from $219,000 in 1996.
Interest expense increased $0.1 million, or 19.3%, to $1.0
million in 1997 from $0.9 million in 1996. Interest related to
subordinated debt totaled $161,000 in 1997, which accounted for
the increase in interest expense. (See "Liquidity and Capital
Resources.")
Selling, general and administrative expenses increased $0.9
million, or 58.9%, to $2.5 million in 1997 from $1.6 million in
1996. Employee compensation and related costs, including
commissions, accounted for 64.6% and 60.7% of total selling,
general and administrative expenses in 1997 and 1996,
respectively. Selling, general and administrative expenses have
increased primarily due to the hiring of additional employees and
the increase in the serviced financial contract portfolio.
In 1997, earnings available for common shareholders was reduced
by $56,000 for dividends payable to the holder of preferred
stock. There were no preferred dividends payable for 1996. (See
"Liquidity and Capital Resources.")
CREDIT LOSSES
Prime Capital has identified four customers who have experienced
significant deterioration in their financial condition, which has
adversely impacted their ability to repay the financial
obligations to the Company. In the case of three customers, the
Company has alleged fraud and material misrepresentation of the
customer's financial condition or the contract's underlying
collateral.
In each case the Company has and will continue to aggressively
pursue various loss mitigation strategies; including repossession
and sale of collateral, litigation, and other actions against the
lessee-obligors, guarantors of the financial contracts, or other
individuals whose actions may have been detrimental to Prime
Capital.
Prime Capital's aggregate exposure to credit loss from these four
customers totaled $10.5 million. However, the Company expects to
be successful in several of its loss mitigation strategies and
has established loss reserves accordingly. Through June 30,
1997, Prime had expected to incur credit losses of approximately
$4.6 million, net of estimated recoveries, for these four
customers. For the nine months ended September 30, 1997, Prime
has recorded additional charge-offs, net of estimated recoveries,
totaling $354,000 for other accounts in its portfolio of
financial contracts. At September 30, 1997, the Company's
balance sheet loss reserves totaled $2.6 million after giving
effect to the aforementioned $5.0 million of charge-offs.
FINANCIAL CONDITION
The Company's financial condition will continue to be dependent
upon certain critical elements. First, the Company must be able
to obtain recourse and non-recourse financing to fund future
acquisitions and originations of financial contracts. Second,
the Company must originate a sufficient volume of new business
which is structured and priced in such a way so as to permit the
Company to finance or sell those financial contracts for an
amount which, in the aggregate, covers the Company's cost of
operations, plus provides a return on stockholders' equity. The
Company intends to utilize a combination of interim warehouse
borrowing and long-term funding methodologies to provide it with
borrowing and funding availability at competitive rates of
interest. The long-term funding methodologies will include: (1)
the continued issuance of asset backed securities, (2) portfolio
sales, (3) program financings, and (4) the discounting of
individual financial contracts.
The Company conducts its business in a manner designed to
conserve its working capital and minimize its credit exposure.
The Company does not purchase equipment or disburse funds until:
(1) it has received a noncancelable lease or loan agreement from
its customer, and (2) it has determined that the lease or loan
agreement (a) can be discounted with a bank or financial
institution on a non recourse basis, or (b) meets the origination
standards established for a securitized pool.
LIQUIDITY AND CAPITAL RESOURCES
On October 4, 1996, Prime Capital Corporation raised additional
capital by completing a private sale of $5.0 million principal
amount of five year, 12.5% subordinated debentures and $2.5
million of 9% preferred stock to Banc Once Capital Corporation
(BOCC), a subsidiary of Bank One Corporation, Columbus, Ohio. As
part of the transaction, BOCC also received warrants to purchase
499,606 shares of Prime Capital's common stock at $1.00 per
share.
Management believes that in order to meet its ongoing funding
needs, the Company will require additional capital resources to
supplement the expected cash flows of its operating activities
and anticipated borrowings under its warehouse financing
facility. The Company is expecting to complete one or more sales
of financial contracts before the end of the year. The Company
is also exploring other sources of liquidity to satisfy its
ongoing needs for additional capital resources.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit Index
Exhibit No. Description
11. Statement Regarding Computation of Per Share
Earnings
27 Financial Data Schedule
b)Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PRIME CAPITAL CORPORATION
(Registrant)
November 14, 1997 /s/ Vern Landeck
----------------------------------------
Vern Landeck, Chief Financial Officer
Vern Landeck is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
Registrant
November 14, 1997 /s/ James A. Friedman
----------------------------------------
James A. Friedman, Chief Executive
Officer
EXHIBIT 11
<TABLE>
PRIME CAPTIAL CORPORATION
Computation of Earnings Per Share (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) available
to common shareholders $607,460 (984,308) 987,379 2,403,745
======== ========= ======== =========
Weighted average number
of common shares
outstanding 4,292,351 4,282,665 4,860,580 4,456,754
Primary incremental dilution
from common share
equivalents 580,299 - 568,730 175,440
-------- --------- -------- ---------
Common and dilutive common
equivalent shares 4,872,650 4,282,665 4,860,580 4,456,754
========= ========= ========= =========
Net income (loss) per common
and dilutive common
equivalent shares
outstanding $ 0.12 $ (0.23) $ 0.20 $ 0.54
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10QSB and is qualified in its entirety by reference to such financial
statements. Individual data items on this schedule may not add up due to
rounding.
Prior periods are shown to reflect reclassifications and adjustments to
more accurately reflet the financial structure of the the Company and are
explained in the footnotes herein.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 5,733,111 2,549,765 7,490,316
<SECURITIES> 0 0 0
<RECEIVABLES> 9,292,036 7,463,511 11,678,917
<ALLOWANCES> (1,573,820) (2,364,963) (4,280,731)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> <F1> 0 0 0
<PP&E> 1,902,096 1,827,845 1,707,215
<DEPRECIATION> (1,273,310) (1,233,474) (1,189,709)
<TOTAL-ASSETS> 34,395,517 65,432,831 42,981,848
<CURRENT-LIABILITIES> <F1> 0 0 0
<BONDS> <F2> 5,000,000 5,000,000 5,000,000
0 0 0
2,500,000 2,500,000 2,500,000
<COMMON> 219,343 219,318 219,318
<OTHER-SE> 7,323,386 6,718,329 9,464,726
<TOTAL-LIABILITY-AND-EQUITY> 34,395,517 65,432,831 42,981,848
<SALES> <F3> 0 0 0
<TOTAL-REVENUES> <F4> 14,768,389 10,363,435 8,657,761
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 6,687,738 3,968,104 1,852,627
<LOSS-PROVISION> 4,000,000 4,000,000 2,500,000
<INTEREST-EXPENSE> <F4> 2,924,523 1,902,911 1,122,568
<INCOME-PRETAX> <F5> 987,379 379,920 3,126,315
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> <F5> 987,379 379,920 3,126,315
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> <F5> 987,379 379,920 3,126,315
<EPS-PRIMARY> .20 .08 .65
<EPS-DILUTED> .20 .08 .65
<FN>
<F1> Prior reporting included figures for current assets and liabilities.
Prime Capital represents its assets and liabilities in an unclassified
balance sheet; it does not differentiate between current and long term
assets and liabilities.
<F2> Prior reporting did not include subordinated debt of the Company; it
is included herein.
<F3> Prior reporting included financial contract activations as sales. The
definition for this line defines sales to be of tangible assets. Since
financial contracts are not tangible assets, it has been omitted from
current and prior reporting.
<F4> Prior periods include reclassification of interest expense to revenue.
<F5> Prior periods reflected net income before preferred dividends and have
been restated to reflect net income after preferred dividends.
</TABLE>
