UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-14888
PRIME CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3347311
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
10275 West Higgins Road, Suite 200, Rosemont, Illinois 60018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 294-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
As of March 31, 1999, there were 4,467,840 shares of common stock outstanding.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations --
Three Months Ended
March 31, 1999 and 1998 3
Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statement 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II. OTHER INFORMATION 12
SIGNATURES 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
1999 1998
Revenues:
Fee income $ 2,232,773 976,778
Direct financing leases and loans 487,585 786,026
Rentals on operating leases 856,721 300,436
Interest income 441,189 178,264
Other income 173,363 1,497,759
Total revenues 4,191,631 3,739,263
Expenses:
Depreciation on leased equipment 649,860 192,315
Interest 819,069 594,576
Provision for credit losses 50,000 0
Selling, general and administrative 2,412,555 2,212,468
Total expenses 3,931,484 2,999,359
Income before income taxes 260,147 739,904
Income taxes 0 0
Net income $ 260,147 739,904
Basic earnings per share $ 0.05 0.16
Dilutive earnings per share $ 0.04 0.14
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
ASSETS 1999 1998
(Unaudited) (Audited)
Cash and cash equivalents $ 2,806,766 2,265,780
Receivables:
Operating lease rentals 63,218 143,371
Inventory finance receivables 7,137,326 5,659,700
Other 4,655,016 4,386,922
Net investment in direct financing leases
and loans 36,094,676 26,712,504
Investment in securitized receivables,
including restricted cash 14,855,990 12,388,932
Leased equipment, net of accumulated
depreciation 10,222,508 10,217,831
Deposits on equipment 0 91,082
Equipment and furniture, net of accumulated
depreciation 645,355 715,326
Other assets 1,564,404 1,554,105
Total assets 78,045,259 64,135,553
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable 27,107,508 27,645,329
Accounts payable for equipment 25,411,253 16,106,095
Accrued expenses and other liabilities 15,907,072 11,586,839
Deposits and advances 3,074,042 2,455,803
Subordinated debt 5,000,000 5,000,000
Total liabilities 76,499,875 62,794,066
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
4,467,840 and 4,467,840 shares at
March 31, 1999 and December 31, 1998,
respectively 223,392 223,392
Additional paid-in capital 9,518,356 9,518,356
Accumulated deficit (10,396,564) (10,600,461)
Treasury stock, at cost, 94,200 shares (299,800) (299,800)
Total stockholders' equity 1,545,384 1,341,487
Total liabilities and stockholders' equity 78,045,259 64,135,553
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 260,147 739,904
Adjustments to reconcile net income
to net cash provided by or used in
operating activities:
Depreciation of leased equipment 649,861 192,315
Other depreciation and amortization 168,056 58,326
Amortization of debt financing fees 30,391 30,391
Non-cash gain on securitization of
receivables 333,453 (1,165,196)
Provision for credit losses 50,000 0
Changes in assets and liabilities:
Other receivables (2,539,103) (1,516,453)
Other assets (46,667) (210,261)
Accrued expenses and other liabilities 1,253,055 876,772
Net cash provided by (used in) operating
activities 159,193 (994,202)
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of equipment acquired for lease (41,584,379)(41,902,425)
Customer deposits and payments on direct
finance leases and loans 3,522,585 1,828,154
Purchase of equipment and furniture (1,026) (38,527)
Investment in inventory finance receivables (1,477,626) (1,158,598)
Proceeds from sales of finance receivables 37,711,087 35,246,651
Net cash provided by (used in) investing
activities (1,829,359) (6,024,745)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 0 6,438
Preferred stock dividends (56,250) (56,250)
Other liabilities 2,805,223 895,336
Net increase (decrease) in notes payable (537,821) 3,603,960
Net cash provided by (used in) financing
activities 2,211,152 4,449,484
Increase (decrease) in cash and cash equivalents 540,986 (2,569,463)
Cash and cash equivalents:
Beginning of period 2,265,780 3,572,553
End of period $ 2,806,766 1,003,090
Cash paid during the period for interest $ 519,137 527,786
See accompanying notes to consolidated financial statements.
PRIME CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The interim financial statements have been prepared by Prime Capital
Corporation ("the Company" or "Prime Capital"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission applicable to
quarterly reports on Form 10-QSB. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, all adjustments which are
of a normal recurring nature and are necessary for a fair presentation have
been included. However, results for interim periods are not necessarily
indicative of the results that may be expected for a full year. It is suggested
that these financial statements be read in conjunction with the consolidated
financial statements and related notes and schedules included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
Certain reclassifications have been made to the 1998 financial statements to
conform to the classifications used in the March 31, 1999 financial statements.
These reclassifications had no effect on net income or stockholders' equity as
previously reported.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Prime Capital Corporation is a diversified specialty finance company that
originates, aggregates and services loans, installment purchase agreements and
leases ("Financial Contracts") primarily in the software, specialty vehicle,
communications and medical industries. Prime Capital Corporation principally
operates through its wholly-owned subsidiary, Prime Leasing, Inc. and has
several wholly-owned subsidiaries including special purpose bankruptcy remote
corporations that have been organized in order to complete the sale of certain
asset-backed securities (collectively referred to as "Prime" or the "Company").
Prime develops new business through formal vendor finance programs with
equipment manufacturers, dealers and distributors and, to a lesser degree,
directly with end users. Prime seeks to become an effective business partner
with its clients by creating comprehensive programs and structures to develop,
promote and administer customer financing programs. Prime funds its loan and
lease receivables primarily by issuing asset-backed securities to institutional
investors.
Headquartered in Rosemont, Illinois, Prime's target markets are those which are
underserved and underdeveloped, with the objective of developing niche markets
that combine high growth potential with credit and collateral characteristics
consistent with Prime's underwriting standards. Currently, management believes
that the specialty vehicle and communications industries offer strong
opportunity for accelerated growth.
Prime originates business through formal alliances with major vendors,
distributors and others. As part of a re-engineering program that was initiated
in 1997, Prime strengthened its operating platform processes by implementing
a Time Based Response ("TBR") strategy that allows Prime to provide rapid and
efficient execution of transactions. Also in 1997, Prime began its Inventory
Floorplan and Leasing Programs for the specialty vehicle industry, with a
division known as Capital Alliance Financial Services ("Capital Alliance").
The specialty vehicle industry includes hearses, limousines, and shuttle buses,
among other commercial vehicles.
Prime differentiates itself through its sales culture, which continues to focus
more on relationships rather than transactions. Salespeople are continually
involved in assessing the needs of their clients, and the structuring of
flexible financing options to promote the sale of its vendor's product.
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.
Sales and Securitizations of Finance Receivables During the Three Months Ended
March 31, 1999 and 1998
Once a Financial Contract is activated, it is generally funded through a
warehouse finance facility until it is sold through securitization. Warehousing
a contract for a period of time results in increased rentals on leased equipment
or direct finance lease income and correspondingly increased interest expense
and, if the contract is an operating lease, depreciation on leased equipment.
When contracts are accumulated to a certain level and sold into securitization,
the Company recognizes fee income from the gain on securitization and ceases to
recognize direct finance lease income and interest expense associated with the
sold contracts. Future revenues from the securitizations include fee income
derived from servicing the securitization pool and interest income earned on
cash reserve balances until all the contracts in the pool have expired.
Sale of a contract to a third party results in immediate fee income.
The following table summarizes the sale and securitization of Financial
Contracts completed during the three months ended March 31, 1999 and 1998.
Three Months Ended March 31,
(Amounts in thousands)
Description Date 1999 1998
- --------------------- --------------- --------- --------
Prime Finance
Corporations 1998-A-1 March, 1998
and 1998-A-2 0 38,937
True sale facility Various 21,952 0
Other sale transactions 13,230 0
--------- -------
Total $ 35,182 38,937
========= =======
In March 1998, equipment lease-receivables backed pay through notes were
jointly issued by Prime Finance Corporation 1998-A-1 and Prime Finance
Corporation 1998-A-2 (collectively referred as "PFC-1998A"), both wholly
owned subsidiaries of the Company.
The initial principal amount of the notes issued by PFC 1998A totaled $106.1
million, which included $62.2 million of receivables related to the
consolidation of certain securitizations completed in prior years, $5.0
million that represents the pre-funding of finance receivables that will be
sold after March 31, 1998, and $1.8 million of proceeds from the assignment of
rentals and residual values of operating leases. Proceeds attributable to
operating lease contracts are reported as debt in the Company's financial
statements.
Results of Operations For The Three Months Ended March 31, 1999 and 1998.
The Company activated financial contracts totaling $49.6 million in 1999,
an increase from the $33.6 million activated in 1998.
Fee income increased $1.2 million, or 128.6%, to $2.2 million in 1999 from
$1.0 million in 1998. Fee income includes gain from the securitization of
financial contracts of $0.7 million in 1999 and $0.5 million in 1998. The
March 1998 gain from sale of contracts has been reduced by a $745,000 loss
attributable to the $62.2 million of receivables related to the consolidation
of certain securitizations completed in prior years, and excludes any gain or
loss attributable to the $5.0 million of prefunded receivables.
Direct financing lease income decreased $298,000, or 38.0%, to $488,000
in 1999 from $786,000 in 1998. This decrease is attributable to a shorter
holding period of financial contracts resulting in lower average contract
balances held in the warehouse.
Rentals on leased equipment increased $557,000, or 185.2%, to $857,000 in
1999 from $300,000 in 1998. Depreciation of leased equipment increased
$458,000, or 237.9%, to $650,000 in 1999 from $192,000 in 1998.
Interest income increased $263,000, or 147.5%, to $441,000 in 1999 from
$178,000 in 1998.
Other income decreased $1.3 million, or 88.4%, to $0.2 million in 1999 from
$1.5 million in 1998. Other income for March 1998, includes a $1.4 million
gain from the sale of warrants that were received by the Company in connection
with originating a lease transaction.
Interest expense increased $224,000, or 37.8%, to $819,000 in 1999
from $595,000 in 1998, primarily due to higher average borrowings under the
Company's warehouse credit facilities.
Provision for credit losses was $50,000 in 1999. There was no provision
for credit losses in 1998.
Selling, general and administrative expenses increased $0.2 million, or
9.0%, to $2.4 million in 1999 from $2.2 million in 1998. Employee compensation
and related costs, including commissions, accounted for 68.5% and 59.4% of total
selling, general and administrative expenses in 1999 and 1998, respectively.
The Company had 73 and 68 employees at March 31, 1999 and 1998, respectively.
Selling, general and administrative expenses have increased primarily due to
the hiring of additional employees and the increase in the serviced financial
contract portfolio.
Credit Losses
- -------------
An allowance for credit losses is initially established when Financial
Contracts are sold or securitized in transactions where the Company retains
recourse for losses, partial or otherwise. This initial estimate of future
losses reduces the gain recorded at the time sale. If necessary, a provision
for credit losses is charged against earnings to maintain the allowance for
credit losses at an amount management believes necessary to absorb potential
losses in the finance contract portfolio.
Management evaluates the adequacy of the allowance for credit losses by
reviewing credit loss experience, delinquencies, the value of the underlying
collateral, including third party guarantees or insurance recoveries, the
level of finance contract portfolio, as well as, general economic conditions.
The Company has incurred charge-offs totaling $2,675,000 and $8,178,000
during the years ended December 31, 1998 and 1997, respectively. During 1997,
the charge-offs were caused by a small number of customers that represented
a relatively significant investment in the Company's various pools of
securitized receivables. During 1998, the charge-offs predominately
stemmed from contracts that had been originated by third-party broker-business
originated between May 1996 through May 1997.
When recording charge-offs, legal fees and other costs reduce estimated
recoveries. However, salaries paid to employees directly associated
with pursuing recoveries are expensed as incurred.
The Company has recorded additional provisions for credit losses totaling
$4,300,000 and $7,000,000 during the years ended December 31, 1998 and 1997,
respectively. These provisions were recorded to replenish the allowance for
credit losses, and are exclusive of the Company's policy to record provisions
against current period new business originations. The allowance for credit
losses totaled $5.2 million and $5.7 million at March 31, 1999 and December 31,
1998, respectively. Management believes that it has adequately reserved for its
future credit losses, including potential charge-offs that might stem from
contracts originated by third-party broker-business between May 1996 and May
1997.
Liquidity and Capital Resources
- -------------------------------
Prime conducts its business in a manner designed to conserve its working
capital and minimize its credit exposure. The Company does not purchase
equipment or disburse funds until: (1) it has received an executed 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.
At December 31, 1998, the Company had credit available totaling $188.0 million
under four credit facilities. These credit facilities will be used to fund
Financial Contracts that arise during the normal course of business. During
the first and second calendar quarters of 1999, $78.0 million of these
facilities expired. The Company plans to negotiate the renewal of these
facilities in the second calendar quarter of 1999.
On May 4, 1999, the Company completed the sale of Financial Contracts by issuing
asset-backed notes. The notes were issued through the Company's wholly-owned
subsidiaries, Prime Finance Corporation 1999-A-1 and Prime Finance Corporation
1999-A-2. The initial aggregate principal amount of the notes was $74.0
million. Proceeds from the issuance of the notes were used to reduce borrowings
under several of the Company's warehouse credit facilities and to increase
working capital.
Management believes that in order to meet the expected growth in new business,
the Company will require additional capital resources to supplement the expected
cash flows of its operating activities and anticipated borrowings under its
warehouse credit facilities. Prime expects to continue using securitization
as a means of permanently funding a significant portion of its Financial
Contracts. The Company is exploring other sources of liquidity to satisfy
its ongoing need for additional capital resources.
Year 2000 Compliance
- --------------------
Year 2000 compliance refers to the ability of computer hardware and software
to respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not
be able to differentiate between the year 2000 and 1999. Failure to address
this problem could result in system failures and the generation of erroneous
data.
The Company believes that its information technology ("IT") systems are year
2000 compliant. The Company also has several non-IT systems, including voice
mail and phone systems, which use dates electronically that are being
reviewed for compliance. The Company expects to have all systems year 2000
compliant by the end of the second quarter of 1999 and plans to complete
comprehensive, full system testing in the second quarter of 1999. The Company
believes that significant third parties in which the Company conducts
business with, including parties to the Company's credit facilities, are or
will be year 2000 compliant by January 1, 1999.
The Company has not prepared estimates of costs for the correction of year 2000
issues. Based on information available at this time, including the year 2000
compliance status of information technology systems as well as the anticipated
replacement costs for non-compliant systems, the Company does not believe that
the cost will have a material adverse effect on the Company's results of
operations or financial condition. However, there can be no assurance of
unforeseen problems in its own computer systems or computer systems of third
parties with which the Company conducts business. Such problems, depending on
the extent and nature, could materially and adversely effect the Company's
operations and financial condition. For each primary counterparty upon which
the Company relies, there are alternate providers of such services in the
marketplace. Based on its assessment of the year 2000 issue to date, the
Company has not developed a contingency plan. However, the Company continues
to evaluate the impact of year 2000 issues and will create a contingency plan
if considered warranted.
Forward-Looking Statements
- --------------------------
This Form 10-QSB contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Form 10-QSB, the
words and phrases "expects", "intends", "believes", "will seek", and
"will realize" and similar expressions as they relate to the Company
or its management are intended to identify such forward-looking statements.
The Company's actual results, performance or achievements could differ
materially from the results, performance or achievements expressed in,
or implied by, these forward-looking statements.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit Index
Exhibit No. Description
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME CAPITAL CORPORATION
(Registrant)
June 3, 1999 /s/ Vern Landeck
Vern Landeck, Vice President and
Chief Financial Officer
Vern Landeck is the Principal Financial and
Accounting Officer and has been duly authorized
to sign on behalf of the Registrant
June 3, 1999 /s/ James A. Friedman
James A. Friedman, Chief Executive Officer
EXHIBIT 11
PRIME CAPITAL CORPORATION
Computation of Earnings Per Share
(Unaudited)
Three Months Ended March 31,
1999 1998
---------- ----------
Numerator:
Net income $ 260,147 739,904
Preferred dividends (56,250) (56,250)
--------- --------
Numerator for basic
and diluted earnings
per share-income
(loss) available to
common shareholders $ 203,897 683,654
========= =========
Denominator:
Denominator for basic
earnings per share-
weighted average shares 4,373,648 4,333,158
Effect of dilutive securities:
Options and warrants 433,663 621,165
--------- ---------
Denominator for diluted
earnings per share-
adjusted weighted
average shares and
assumed conversions 4,807,311 4,954,323
========= =========
Basic earnings per share $ 0.05 0.16
========= =========
Diluted earnings per share $ 0.04 0.14
========= =========
Options to purchase an average of 219,500 shares of common stock at prices
between $4.00 and $6.00 per share in 1999 were outstanding but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive. Options to purchase an average
of 100,000 shares of common stock at prices between $5.25 and $6.00 per share in
1998 were outstanding but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
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.
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] MAR-31-1999
[CASH] 2,806,766
[SECURITIES] 0
[RECEIVABLES] 68,027,368
[ALLOWANCES] (5,221,143)
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2,303,659
[DEPRECIATION] (1,658,304)
[TOTAL-ASSETS] 78,045,259
[CURRENT-LIABILITIES] 0
[BONDS] 5,000,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 2,500,000
[COMMON] 223,392
[OTHER-SE] (1,178,008)
[TOTAL-LIABILITY-AND-EQUITY] 78,045,259
[SALES] 0
[TOTAL-REVENUES] 4,191,631
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 3,062,415
[LOSS-PROVISION] 50,000
[INTEREST-EXPENSE] 819,069
[INCOME-PRETAX] 260,147
[INCOME-TAX] 0
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 260,147
[EPS-BASIC] 0.05
[EPS-DILUTED] 0.04
</TABLE>
