<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1995
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 811-3780
----------
PMC CAPITAL, INC.
-----------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2338439
- - ----------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
17290 Preston Road, 3rd Floor, Dallas, TX 75252 (214) 380-0044
- - -------------------------------------------------- ------------------------
(Address of principal executive offices) (Registrant's telephone
number)
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 October 31, 1995, Registrant had outstanding 10,830,987 shares of Common
Stock, par value $.01 per share.
PAGE 1 OF 19
<PAGE> 2
PMC CAPITAL, INC.
INDEX
PART I. Financial Information PAGE NO.
--------------------- --------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 2
Consolidated Statements of Income -
Nine Months Ended September 30, 1995 and 1994 3
Three Months Ended September 30, 1995 and 1994 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
PART II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 16
PAGE 2 OF 19
<PAGE> 3
PART I
Financial Information
ITEM 1.
Consolidated Financial Statements
1 PAGE 3 OF 19
<PAGE> 4
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C>
INVESTMENTS AT VALUE:
Loans receivable, net..............................................$106,061,709 $ 75,264,189
Excess servicing asset, net........................................ 4,945,507 5,100,202
Cash equivalents................................................... 32,902,580 33,003,391
Government securities.............................................. - 4,882,166
Restricted investments............................................. 1,768,000 1,533,591
Real property owned................................................ 60,008 307,658
------------ -------------
TOTAL INVESTMENTS.................................................... 145,737,804 120,091,197
------------ -------------
OTHER ASSETS:
Cash .............................................................. 668,838 693,014
Accrued interest receivable........................................ 782,753 425,038
Receivable for loans sold.......................................... 4,778,413 1,910,080
Due from affiliates................................................ 829,191 437,592
Investment in subsidiary........................................... 26,000 26,000
Property and equipment, net........................................ 203,885 247,735
Deferred charges, deposits and other assets........................ 2,526,768 1,585,444
------------ -------------
TOTAL OTHER ASSETS................................................... 9,815,848 5,324,903
------------ -------------
TOTAL ASSETS.........................................................$155,553,652 $ 125,416,100
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable.............................................$ 43,540,000 $ 26,280,000
Notes payable...................................................... 35,001,000 25,001,000
Accrued interest payable........................................... 912,812 1,033,312
Deferred fee revenue............................................... 455,544 554,738
Borrower advances.................................................. 3,997,462 2,954,162
Dividends payable.................................................. 2,817,764 3,944,260
Accounts payable................................................... 2,062,173 2,153,750
Other liabilities.................................................. 980,938 1,123,558
------------ -------------
TOTAL LIABILITIES.................................................... 89,767,693 63,044,780
------------ -------------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY............................. 7,000,000 5,000,000
------------ -------------
SHAREHOLDERS' EQUITY:
Common stock, authorized 15,000,000 shares of $.01 par value,
10,802,943 and 10,684,035 shares issued and outstanding
at September 30, 1995 and December 31, 1994, respectively..... 108,029 106,840
Additional paid-in capital ........................................ 57,613,651 56,254,654
Undistributed net operating income................................. 1,525,279 1,386,826
Net unrealized depreciation on investments......................... (461,000) (377,000)
------------ -------------
58,785,959 57,371,320
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...........................$155,553,652 $ 125,416,100
============ =============
NET ASSET VALUE PER COMMON SHARE..................................... $5.44 $5.37
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
2 PAGE 4 OF 19
<PAGE> 5
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------ -------------
<S> <C> <C>
INVESTMENT INCOME:
Interest...................................................$ 11,864,775 $ 8,702,047
Premium income............................................. 2,227,535 2,096,589
Other investment income, net............................... 62,247 181,910
------------ -------------
Total investment income...................................... 14,154,557 10,980,546
Other income, net............................................ 1,500,489 1,064,218
------------ -------------
Total income................................................. 15,655,046 12,044,764
------------ -------------
EXPENSES:
Salaries and related benefits.............................. 2,082,394 1,750,792
Rent....................................................... 156,397 140,729
Legal and accounting....................................... 106,840 69,534
Directors and shareholders expense......................... 31,717 36,093
Small Business Administration fees......................... 58,001 31,882
General and administrative................................. 892,648 635,882
Profit sharing plan........................................ 151,994 89,254
Interest................................................... 3,617,482 2,626,868
------------ -------------
Total expenses............................................... 7,097,473 5,381,034
------------ -------------
Net operating income........................................ 8,557,573 6,663,730
------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off........................................ (191,969) (174,144)
Change in unrealized appreciation
(depreciation) on investments.......................... (84,000) 828,564
------------ -------------
Total realized and unrealized gain (loss) on investments..... (275,969) 654,420
------------ -------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS.................................$ 8,281,604 $ 7,318,150
============ =============
EARNINGS PER COMMON SHARE................................... $0.756 $0.682
============ =============
PREFERRED DIVIDENDS......................................... $160,328 $67,351
============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 10,747,363 10,631,584
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3 PAGE 5 OF 19
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................................$ 4,397,372 $ 3,248,666
Premium income.......................................................... 645,649 393,718
Other investment income, net............................................ 57,506 14,322
------------ ------------
Total investment income................................................... 5,100,527 3,656,706
Other income, net......................................................... 533,349 338,310
------------ ------------
Total income.............................................................. 5,633,876 3,995,016
------------ ------------
EXPENSES:
Salaries and related benefits........................................... 646,531 639,621
Rent.................................................................... 46,001 42,907
Legal and accounting.................................................... 8,034 11,180
Directors and shareholders expense...................................... 6,275 8,760
Small Business Administration fees...................................... 29,085 14,779
General and administrative.............................................. 341,191 223,793
Profit sharing plan..................................................... 50,000 37,500
Interest................................................................ 1,352,384 886,348
------------ ------------
Total expenses............................................................ 2,479,501 1,864,888
------------ ------------
Net operating income..................................................... 3,154,375 2,130,128
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off..................................................... (22,742) (70,434)
Change in unrealized appreciation
(depreciation) on investments....................................... (165,000) 756,564
------------ ------------
Total realized and unrealized gain (loss) on investments.................. (187,742) 686,130
------------ ------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS..............................................$ 2,966,633 $ 2,816,258
============ ============
EARNINGS PER COMMON SHARE................................................. $0.269 $0.262
============ ============
PREFERRED DIVIDENDS....................................................... $63,013 $22,191
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................ 10,780,777 10,645,451
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4 PAGE 6 OF 19
<PAGE> 7
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments...........$ 8,261,604 $ 7,318,150
Adjustments to reconcile net operating income and realized and unrealized
gain (loss) on investments to net cash provided by operating activities:
Loans funded, held for sale..................................................... (25,037,580) (23,179,630)
Proceeds from sale of guaranteed loans.......................................... 24,303,329 26,137,476
Change in unrealized depreciation on investments and loans written-off.......... 275,969 (654,420)
Unrealized premium income, net.................................................. 116,523 96,640
Amortization of property and equipment and other deferred costs................. 133,897 106,255
Amortization of excess servicing asset.......................................... 719,853 1,037,663
Accretion of discount on portfolio.............................................. (119,355) (252,708)
Accretion of deferred fees...................................................... (362,778) (334,191)
Accretion on government securities.............................................. (123,318) (4,770)
Deferred fees collected......................................................... 1,092,456 1,003,541
Gain on sale of assets.......................................................... (13,362) (27,867)
Net change in operating assets and liabilities:
Accrued interest receivable.................................................. (357,715) (191,645)
Other assets................................................................. (855,463) 91,810
Accrued interest payable..................................................... (120,500) (252,750)
Borrower advances............................................................ 1,043,300 414,266
Other liabilities............................................................ (479,884) (144,534)
-------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................... 8,476,976 11,163,286
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded.......................................................................... (38,116,118) (34,090,217)
Principal collected................................................................... 6,363,785 12,799,917
Purchase of furniture and fixtures and other assets................................... (14,487) (60,854)
Purchase of government securities..................................................... (3,942,013) -
Proceeds from maturities of government securities..................................... 8,947,497 3,000,000
Investment in restricted cash......................................................... (234,409) -
Proceeds from sale of assets.......................................................... 205,769 311,804
-------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES................................................... (26,789,976) (18,039,350)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of SBA debentures............................................. 15,000,000 6,000,000
Proceeds from issuance of notes payable.............................................. 10,000,000 -
Proceeds from issuance of common stock............................................... 764,862 403,846
Proceeds from issuance of preferred stock............................................ 2,000,000 2,000,000
Payment of dividends on common stock................................................. (549,145) (7,417,874)
Payment of dividends on preferred stock.............................................. 17,973 (67,351)
Advances from (to) affiliates, net................................................... (391,599) (141,392)
Payment of issuance costs............................................................ (446,927) (157,500)
-------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................................... 26,395,164 619,729
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 8,082,164 (6,256,335)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... 33,696,405 25,346,212
-------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................$ 41,778,569 $ 19,089,877
============== ===============
SUPPLEMENTAL DISCLOSURE:
INTEREST PAID........................................................................$ 3,737,982 $ 2,879,618
============== ===============
DIVIDENDS REINVESTED.................................................................$ 595,324 $ 495,924
============== ===============
LOANS RECEIVABLE ACQUIRED IN EXCHANGE FOR SBA DEBENTURES.............................$ 2,109,062 $ -
============== ===============
RECLASSIFICATION FROM LOANS RECEIVABLE TO REAL PROPERTY OWNED........................$ 65,000 $ 661,912
============== ===============
LOANS TO FACILITATE SALE OF REAL PROPERTY OWNED......................................$ 85,000 $ 152,700
============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5 PAGE 7 OF 19
<PAGE> 8
PMC CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of PMC Capital, Inc. ("PMC
Capital") and its subsidiaries (collectively, the "Company") as of and for the
three and nine months ended September 30, 1995 have not been audited by
independent accountants. In the opinion of PMC Capital's management, the
financial statements reflect all adjustments necessary to present fairly the
financial position at September 30, 1995, the results of operations for the
three and nine month periods ended September 30, 1995 and 1994 and cash flows
for the nine month periods ended September 30, 1995 and 1994. These
adjustments are of a normal recurring nature.
Certain notes and other information have been omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1994 Annual Report on Form 10-K.
The results for the nine months ended September 30, 1995 are not necessarily
indicative of future financial results.
Certain prior period amounts have been reclassified to conform to current
period presentation.
NOTE 2. VALUATION OF INVESTMENTS
Loans are reported at their principal outstanding balance net of charge-offs,
deferred loan fees and costs on originated loans, and unearned income and
unamortized discounts on purchased loans. Interest income is generally
recognized using the interest method. Loan origination fees and certain direct
loan origination costs are deferred and the net amounts are amortized as an
adjustment of the loans' yield.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NOS. 114 AND 118
The Company adopted SFAS No.114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
Income Recognition and Disclosures" on January 1, 1995. Under these new
standards, a loan is considered impaired, based on current information and
events, if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Since most of the Company's loans are
collateral dependent, the measurement of impaired loans is generally based on
the fair value of the collateral. To the extent that loans are not collateral
dependent, the measurement of impaired loans will be based on the present value
of expected future cash flows from loan payments discounted at the historical
effective interest rate. The adoption of SFAS Nos. 114 and 118 did not have a
material effect on the Company's consolidated financial statements.
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 60 days. If a loan or a portion of a loan is classified as doubtful
or is partially reserved or charged-off, the loan is classified as
6 PAGE 8 OF 19
<PAGE> 9
PMC CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. VALUATION OF INVESTMENTS (CONTINUED)
nonaccrual. Loans that are on a current payment status or past due less than
60 days may also be classified as nonaccrual if repayment in full of principal
and/or interest is in doubt.
At September 30, 1995, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS No. 114 totaled $1.6 million. Of
this total, approximately $500,000 related to loans with no valuation reserve
since the estimated fair value of the collateral for each loan exceeded the
respective loan balance. Approximately $1.1 million of these loans has a
corresponding valuation allowance of $410,000. The Company recognized
approximately $70,000 of interest on impaired loans (during the portion of the
period that they were impaired) on a cash basis. Had these impaired loans
performed in accordance with their original terms, interest income of
approximately $40,000 and $120,000 would have been recognized during the three
and nine months ended September 30, 1995, respectively.
NOTE 3. EXCESS SERVICING ASSET
During the first quarter of 1995, the Emerging Issues Task Force ("EITF")
reached a consensus on Issue No. 94-9, "Determining a Normal Servicing Fee Rate
for the Sale of an SBA Loan." This consensus provides that for purposes of
allocating the recorded investment in a loan between the portion of the loan
sold and the portion retained, including any excess servicing asset, a normal
servicing fee of 40 basis points should be used. The Company has historically
used 50 basis points as a normal servicing fee. The effect of this change in
estimate was not material to the consolidated financial statements during the
nine months ended September 30, 1995.
NOTE 4. LONG-TERM DEBT
During April 1995, the Company assumed $2,260,000 in SBA debentures from a
non-affiliated small business investment corporation in exchange for loans
receivable of $2,109,062 and cash of $150,938. The loans acquired had been
initially originated by the Company and a portion sold to the non-affiliated
small business investment corporation. All of these loans were purchased at
par and were performing according to their terms at the time of reacquisition.
The SBA debentures assumed were as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Amount
------------- ------------- ------
<S> <C> <C>
September 1, 1997 10.35% $ 800,000
December 1, 1999 8.60% 650,000
September 1, 2000 9.30% 300,000
December 1, 2002 7.51% 510,000
-----------
$ 2,260,000
===========
</TABLE>
7 PAGE 9 OF 19
<PAGE> 10
PMC CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LONG-TERM DEBT (CONTINUED)
On May 8, 1995, PMC Investment Corporation (a subsidiary of PMC Capital, Inc.)
issued 20,000 shares of $100 par value, 4% cumulative preferred stock for $2
million to the SBA pursuant to the Small Business Investment Act of 1958. The
preferred stock must be redeemed at par no later than 15 years from the date of
issuance.
During April 1995, the Company consummated a $10 million private placement of
uncollateralized senior notes, $5 million of which is due in April 2003 with a
fixed interest rate of 8.6%. The remaining $5 million is due in April 2004 with
an interest rate of LIBOR plus 1.3%, reset quarterly. During June 1995, PMC
Investment Corporation ("PMIC") issued $5 million in SBA debentures which
mature June 2005, bearing interest at 3.69% through June 2000 and 6.69%
thereafter. During September 1995, PMIC issued an additional $7 million in SBA
debentures which mature in September 2005 and bear interest at 3.875% through
September 2000 and 6.875% thereafter.
NOTE 5. WRITE-DOWN OF REGISTRATION COSTS
In 1994, PMC Investment Corporation ("PMIC") filed a registration statement
with the Securities and Exchange Commission to register shares of its common
stock. The Company has incurred approximately $106,000 in costs in connection
with the filing of the registration statement. PMIC, a licensed specialized
small business investment company, uses long-term funds provided by the SBA
through the issuance of debentures (which are guaranteed by the SBA and on
which the interest rate is reduced through an SBA subsidy of 3% during the
first five years). Due to recent uncertainties surrounding the availability of
SBA subsidized debentures or preferred stock for the fiscal year of the SBA
ending September 30, 1996, it is unlikely that completion of the registration
process will occur in fiscal year 1995. Accordingly, during the three months
ended September 30, 1995, the Company has expensed the costs of registration.
8 PAGE 10 OF 19
<PAGE> 11
PART I
Financial Information
ITEM 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
CERTAIN ACCOUNTING CONSIDERATIONS
In accordance with its business and financing strategy, the Company sells the
guaranteed portions of its Small Business Administration ("SBA") loans while
retaining servicing rights. A portion of the Company's revenue is recognized
from the premium on the sale of loans, which principally represents excess
servicing spread and may include cash received. The excess servicing spread is
calculated as the present value of the difference between the interest rate
charged by the Company to a borrower and the interest rate received by the
investors who purchased the loan to the extent that this difference exceeds the
normal loan servicing fees (the "Excess Servicing Spread").
At the time of sale, the value of the Excess Servicing Spread is reported as
income and concurrently recorded as a corresponding asset on the Company's
consolidated balance sheet (the "Excess Servicing Asset"). The rate of
amortization of the Excess Servicing Asset is based on certain estimates made
by management at the time such loan is sold including the estimated life of the
loan. Management's expectations of future prepayment rates are based on the
historical rate of repayment of the Company's loans and other considerations.
These other considerations include economic factors, such as the prevailing
interest rate environment and the availability of alternative financing. There
can be no assurance of the accuracy of management's prepayment estimates. If
prepayments occur at a faster rate than expected, the amortization of the
Excess Servicing Asset will be accelerated as a charge to earnings. If actual
prepayments occur at a slower rate than estimated, cash flows from the Excess
Servicing Spread would exceed previously expected amounts and total income in
future periods would be enhanced.
During the first quarter of 1995, the Company completed a reassessment of the
method used to amortize the Excess Servicing Asset. Historically, the Company
had amortized the Excess Servicing Asset based upon the estimated life for each
loan at the time of sale, expectation of prepayments and other considerations.
When a loan was paid in full, the remaining unamortized Excess Servicing Asset,
if any, was charged against income. Considering the above factors and the
Company's historical portfolio performance, the Company extended over the
expected remaining life of the related loans the period over which the
remaining Excess Servicing Asset is amortized for loans originated and sold
prior to January 1, 1995.
RESULTS OF OPERATIONS
General. By increasing other sources of revenues, PMC Capital, Inc. ("PMC
Capital" or collectively with its subsidiaries, the "Company") has been able to
reduce its reliance on the income generated from its SBA guaranteed lending
subsidiary, First Western SBLC, Inc. ("First Western"). As described below,
since 1992 the Company's other lending activities have increased and the Company
has established other revenue sources. In the opinion of management, this
diversification will enhance future profits.
9 PAGE 11 OF 19
<PAGE> 12
In the second half of 1993, PMC Capital issued senior unsecured notes in an
aggregate principal amount of $25,000,000 (the "Senior Unsecured Notes") at a
weighted average interest rate of 7.14%. PMC Capital designated the funds
received from these Senior Unsecured Notes to be utilized in its non-SBA
lending program. All proceeds from the Senior Unsecured Notes were used to
originate non-SBA loans with interest rates ranging from 10.5% to 11.5% plus a
commitment fee of 3%, or to purchase loans from the Resolution Trust
Corporation ("RTC") and/or its agents. The spread between the rate at which
PMC Capital's non-SBA lending program has borrowed funds and the rate at which
it has loaned these funds is currently generating a positive effect on the
Company's net operating income. All of the loans originated by PMC Capital
have penalty provisions as a disincentive for prepayment. However, in a
declining interest rate environment, when borrowers could refinance at lower
interest rates, the likelihood of prepayment increases. If the loans are
prepaid, the Company may have to originate new loans with these funds at a
lower interest rate. The Company anticipates that if relending rates were
lower, they would likely continue to exceed the cost of funds and generate a
positive spread. In periods of rising interest rates, the likelihood of
prepayments on loans with fixed interest rates is less prevalent.
Two subsidiaries of PMC Capital, Western Financial Capital Corporation
("Western Financial"), a small business investment corporation ("SBIC"), and
PMC Investment Corporation ("PMIC"), a specialized small business investment
corporation ("SSBIC"), have continued to increase lending activities. The SBA,
which regulates SBIC operations, provided certain statutory relief during 1994
allowing Western Financial and PMIC to increase their portfolio investments in
the non-developer hospitality industry in excess of one-third of their
respective outstanding portfolios. Consequently, these two subsidiaries have
become more active lenders. During the nine months ended September 30, 1995,
Western Financial and PMIC had loan originations of approximately $7.0 million
and $16.9 million, respectively.
Increased revenues were also generated by PMC Capital's investment advisor
subsidiary, PMC Advisers, Inc. ("Advisers"). Advisers provides investment
advisory services to PMC Commercial Trust ("PMC Commercial", a Texas real
estate investment trust, an affiliate of PMC Capital) pursuant to an investment
management agreement. During the remainder of 1995, increases in advisory fee
income are expected to continue as a result of the increasing loan portfolio of
PMC Commercial.
During periods of economic growth, the Company and its lending programs face
heightened competition from traditional lending sources. From February 1994 to
September 1995, the U.S. economy experienced seven increases in the prime rate
of interest charged by the banking industry. These increases caused the stated
interest rate on First Western's variable rate loan portfolio to be increased
by 300 basis points through September 30, 1995. This upward trend has
increased the yield on First Western's retained loan portfolio. As of October
1, 1995, most of the First Western portfolio was reduced 25 basis points due to
the decrease in the prime rate to 8.75%. First Western has experienced some
prepayments on its variable rate loans primarily due to the rising interest
rate environment. An increase in interest rates and competition from other
lenders may cause additional prepayments.
10 PAGE 12 OF 19
<PAGE> 13
The interest rate environment and certain applicable legislative changes have
affected the secondary market for the SBA 7(a) guaranteed portion of loans
originated by First Western. The most notable legislative changes resulted from
the Revenue Reconciliation Act of 1993 which required SBA program lenders to
pay a fee of 40 basis points per annum on the outstanding principal balance of
any loans sold in the secondary market subsequent to August 31, 1993 and
reduced the SBA guaranteed percentage of certain loans. The value of the
guaranteed portion of loans decreased to compensate for the cost attributable
to this fee and the percentage of loans eligible to be sold through the
secondary market was diminished by the reduction in the SBA guaranteed
percentage. Additionally, as interest rates fluctuated during 1994, the
secondary market demand for the guaranteed portion of the SBA 7(a) loans
decreased and the premiums declined. Continued program and market changes may
have an adverse effect on future periods of operations. The secondary market
demand increased in late 1994 and has continued the increase during 1995.
During December 1994, First Western completed a securitization and structured
sale of $24.8 million of its non- guaranteed SBA loan portfolio. This
transaction was rated "Aaa" by Moody's Investors Service and created an
additional Excess Servicing Spread. The future profitability of the Company's
SBA 7(a) lending activities will be impacted by a number of factors including;
(i) the more efficient capital structure achieved by First Western's
securitization and future securitizatons, (ii) volume of lending, (iii) length
of loans, (iv) structure of sales to the secondary market, (v) interest rates
charged and related terms (vi) quality of portfolio, (vii) prepayment
experience and (viii) legislative and/or regulatory changes.
The SBA is currently operating the 7(a) program under the "continuing
resolution" passed by Congress, which is to remain in effect until November 15,
1995. Certain changes were made to the SBA 7(a) program as follows:
- - - Effective October 1995, the fees to be charged to the borrower by the
SBA for the SBA's guaranty of a loan to the lender has been increased.
The fees are now based on the size of the originated loan and will
range from 2% to 3.875% of the guaranteed portion of the loan. The
fees had been 2% of the guaranteed portion of the loan.
- - - Lenders had been assessed by the SBA a 40 basis point fee per annum on
the guaranteed portion of loans outstanding in the secondary market.
This fee has been increased to 50 basis points for all loans approved
after October 1, 1995 irrespective of whether the guaranteed portion
of these loans are sold into the secondary market . Since the Company
has historically sold the guaranteed portion of its SBA 7(a) loans
into the secondary market, the effect of this change to First Western
will be an increased fee from 40 basis points to 50 basis points.
11 PAGE 13 OF 19
<PAGE> 14
In 1994, PMC Investment Corporation ("PMIC") filed a registration statement
with the Securities and Exchange Commission to register shares of its common
stock. The Company has incurred approximately $106,000 in costs in connection
with the filing of this registration statement. PMIC, a licensed specialized
small business investment company, uses long-term funds provided by the SBA
through the issuance of debentures (which are guaranteed by the SBA and on
which the interest rate is reduced through a SBA subsidy by 3% during the first
five years). It appears that there will be no SBA subsidized debentures or
preferred stock available during the fiscal year of the SBA ending September
30, 1996. As a result, it is unlikely that completion of the registration
process will occur in fiscal year 1995. Accordingly, during the three months
ended September 30, 1995, the Company has expensed the costs of registration.
In anticipation of this potential unavailability of SBA subsidized funds, PMIC
issued $12 million in new subsidized debentures during 1995 and at September
30, 1995 had available approximately $11 million to fund future commitments
made by PMIC. To the extent PMIC has commitments above available working
capital, PMC Capital will originate those loans.
Any other aspect of the SBA programs under which the Company participates could
be modified by legislation or agency policy changes. PMC Capital has
established and is ready to implement contingent strategies if the SBA programs
under which any of its subsidiaries operates were to be eliminated or
curtailed.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1994
Interest income increased by $3,162,728, or 36%, from $8,702,047 for the nine
months ended September 30, 1994 to $11,864,775 for the nine months ended
September 30, 1995. This increase was primarily attributable to: (i) the
additional interest income from Western Financial, PMIC and PMC Capital's
increased loan portfolios, (ii) the increased yield on First Western's loan
portfolio as a result of an increase in variable interest rates and (iii) the
increased interest on temporary investments due to the funds received from the
securitization and structured sale of assets during December 1994 which were
initially placed in short-term investments.
Premium income increased by $130,946, or 6%, from $2,096,589 for the nine
months ended September 30, 1994 to $2,227,535 for the nine months ended
September 30, 1995. The premium income increased in spite of the volume of
loans sold decreasing by $1,834,147, or 7%, from $26,137,476 during the nine
months ended September 30, 1994 to $24,303,329 during the nine months ended
September 30, 1995. This increase in premium income was primarily attributable
to the increased demand for these SBA loan products by the secondary market.
The increased demand was a result of stabilized interest rates and the decrease
in the prime rate in July 1995. Accordingly, the premium on individual loans
sold increased. During the three month period ended September 30, 1995 the
stated maturities of loans sold was longer than during the first six months of
1995. The premium derived from the secondary market is directly related to
the term of the loan.
Other investment income, net, decreased by $119,663, or 66%, from $181,910 for
the nine months ended September 30, 1994 to $62,247 for the nine months ended
September 30, 1995. This decrease was primarily attributable to decreased
prepayment fees received during the nine months ended September 30, 1995.
During the nine month period ended September 30, 1994, the prime interest rate
12 PAGE 14 OF 19
<PAGE> 15
was initially at a low level and began to increase. Consequently, a number of
prepayments were received on PMIC and Western Financial loans during the first
six months of 1994. During the comparable period in 1995, there were fewer
prepayments.
Other income, net, increased by $436,271, or 41%, from $1,064,218 during the
nine months ended September 30, 1994 to $1,500,489 during the nine months ended
September 30, 1995. This increase was primarily attributable to the investment
management fees generated by Advisers.
Operating expenses, not including interest, increased by $725,825, or 26%, from
$2,754,166 during the nine months ended September 30, 1994 to $3,479,991 during
the nine months ended September 30, 1995. Included in operating expenses for
the nine months ended September 30, 1995, are $106,191 pertaining to the
aggregate of costs of the PMIC registration statement. This increase was also
primarily attributable to: (i) increased staff and general overhead necessary
to manage the increased portfolio of the Company, (ii) the operations of
Advisers and (iii) increases in state franchise tax expense.
Interest expense increased by $990,614, or 38%, from $2,626,868 during the nine
months ended September 30, 1994 to $3,617,482 during the nine months ended
September 30, 1995. This increase was primarily attributable to: (i) the
interest expense on $23,260,000 in SBA debentures issued or assumed between
September 1994 and September 1995 by PMIC and Western Financial, (ii) the
scheduled increase in interest rate on $5,000,000 of PMIC's SBA debentures
during the first half of 1995 and (iii) the issuance of $10,000,000 of senior
notes by PMC Capital on April 19, 1995.
Included in realized and unrealized gain (loss) on investments during the nine
months ended September 30, 1994 was a $752,000 gain related to the recognition
of value attributable to the assets underlying a securitization of loans by
First Western. During 1995, there has not been a comparable transaction. Not
including the aforementioned gain, realized and unrealized gain (loss) on
investments has increased by $178,389, or 182%, from a loss of $97,580 for the
nine months ended September 30, 1994 to a loss of $275,969 during the nine
months ended September 30, 1995. This increase in loss is attributable
primarily to loans presently in the process of liquidation. Based on updated
area demographics, appraisals and the condition of the collateral properties,
valuation reserves were increased. Loan losses for the nine month period ended
September 30, 1995 continue at a low annualized rate, approximately 0.41% of
average outstanding loans receivable, primarily attributable to: (i) minimal
losses incurred in the Company's largest industry concentration (the lodging
industry), (ii) continued monitoring efforts, (iii) the strong economy and (iv)
the low interest rates over the previous several years.
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1994
Interest income increased by $1,148,706, or 35%, from $3,248,666 for the three
months ended September 30, 1994 to $4,397,372 for the three months ended
September 30, 1995. This increase was primarily attributable to: (i) the
additional interest income from Western Financial, PMIC and PMC Capital's
increased loan portfolios, (ii) the increase in the variable interest rate on
First Western's
13 PAGE 15 OF 19
<PAGE> 16
portfolio and (iii) the increased interest on temporary investments due to the
funds received from the securitization and structured sale of assets during
December 1994 which were initially placed in short-term investments.
Premium income increased by $251,931, or 64%, from $393,718 for the three
months ended September 30, 1994 to $645,649 for the three months ended
September 30, 1995. This increase was primarily attributable to the longer
stated maturities of loans sold during the three month period ended September
30, 1995 and the increased demand for these SBA loan products by the secondary
market. The premium derived from the secondary market is directly related to
the term of the loan.
Other investment income, net, increased by $43,184, or 302%, from $14,322 for
the three months ended September 30, 1994 to $57,506 for the three months ended
September 30, 1995. This increase was primarily attributable to prepayment
fees received during the three months ended September 30, 1995.
Other income, net, increased by $195,039, or 58%, from $338,310 during the
three months ended September 30, 1994 to $533,349 during the three months ended
September 30, 1995. This increase was primarily attributable to the investment
management fees generated by Advisers.
Operating expenses, not including interest, increased by $148,577, or 15%, from
$978,540 during the three months ended September 30, 1994 to $1,127,117 during
the three months ended September 30, 1995. This increase was primarily a
result of $106,191 pertaining to the aggregate of costs of the PMIC
registration statement.
Interest expense increased by $466,036, or 53%, from $886,348 during the three
months ended September 30, 1994 to $1,352,384 during the three months ended
September 30, 1995. The increase was primarily attributable to; (i) the
interest expense on $23,260,000 in SBA debentures issued or assumed between
September 1994 and September 1995 by PMIC and Western Financial, (ii) the
scheduled increase in interest rate on $5,000,000 of PMIC's SBA debentures
during 1995 and (iii) the issuance of $10,000,000 in senior notes by PMC
Capital on April 19, 1995.
Included in realized and unrealized gain (loss) on investments during the three
months ended September 30, 1994 was a $752,000 gain related to the recognition
of value attributable to the assets underlying a securitization of loans by
First Western. During 1995, there has not been a comparable transaction. Not
including the aforementioned gain, realized and unrealized gain (loss) on
investments has increased from a loss of $65,870 for the three months ended
September 30, 1994 to a loss of $187,242 during the three months ended
September 30, 1995. This increase in loss pertains primarily to loans
presently in the process of liquidation. Based on updated area demographics,
appraisals and collateral condition on these properties, valuation reserves
were increased. Loan losses are at an annualized rate of loss of approximately
0.74% of average outstanding loans receivable during the three month period
ended September 30, 1995. This annualized rate of loss is comparable to the
loss history of PMC Capital, Inc. and subsidiaries over the past five years.
14 PAGE 16 OF 19
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans. In addition, the
Company may use funds to acquire loans from governmental agencies and/or their
agents. The Company also uses funds for general and administrative expenses,
dividends to shareholders, interest expense, capital expenditures, advances on
loan liquidations and payments due on borrowing facilities. There are no
scheduled principal payments due on any of the Company's indebtedness in 1995.
Approximately $2.5 million of the Company's SBA debentures become payable in
September 1996. This amount could, subject to SBA approval, be rolled over into
new SBA debentures. As a regulated investment company, pursuant to the
Internal Revenue Code of 1986, the Company is required to pay out substantially
all of its net investment company taxable income to the common shareholders.
To sustain growth in the size of its investment portfolio, the Company
continually reviews the need for obtaining additional funds from either: (i)
debt offerings and additional credit facilities, (ii) securitization and sale
of a portion of the loan portfolio and/or (iii) equity offerings.
Historically, the Company's primary sources of capital and liquidity have been
debentures issued through programs of the SBA, private and public issuances of
common stock, the issuance of senior unsecured notes, a securitization and sale
of its loan portfolio and the utilization of its short-term, uncollateralized
line of credit.
Loan commitments outstanding at September 30, 1995 to various prospective
small business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $67 million. Of these
commitments, $34 million were for loans partially guaranteed by the SBA of
which approximately $26 million will be sold into the secondary market. Such
commitments are made in the ordinary course of the Company's business.
Commitments to extend credit are agreements to lend to a customer provided that
the terms established in the contract are met. Commitments generally have
fixed expiration dates and require payment of a fee. Since some commitments
expire without the proposed loan closing, the total commitment amounts do not
necessarily represent future cash requirements.
At September 30, 1995, the Company has $33.6 million in cash and cash
equivalents available to fund these loan commitments. During April 1995, the
Company issued an additional $10 million in senior unsecured notes, $5 million
of which is due in April 2003 with a fixed interest rate of 8.6% and the
remaining $5 million is due in April 2004 with a variable interest rate of
LIBOR plus 1.30%. During May 1995, PMIC issued $2 million in preferred stock
and Western Financial assumed $2.26 million in SBA debentures in exchange for
the previously participated portion of certain loans.
During June 1995 and September 1995, the Company issued $5 million and $7
million in SBA debentures, respectively. The Company also has a short-term
line of credit under which it can borrow approximately $10 million. If
additional funds are required, the Company would attempt to either issue
additional senior unsecured notes, privately or publicly raise equity and/or
securitize and structure a sale of either the unguaranteed portion of SBA loans
or the portfolio of PMC, Western Financial and PMIC. Management believes that
through utilization of one or more of these sources of debt or equity capital,
the Company should meet its liquidity needs for the forseeable future. PMC
Capital is required to maintain a minimum of 200% asset coverage of debt as
defined in sections 18 and 61 of the Investment Company Act of 1940 as modified
by exemptive orders obtained by the Company from the Securities and Exchange
Commission.
15 PAGE 17 OF 19
<PAGE> 18
PART II
Other Information
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 - Financial Data Schedule.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1995.
16 PAGE 18 OF 19
<PAGE> 19
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.
PMC Capital, Inc.
Date: 11/13/95 /s/ Lance B. Rosemore
----------------------------- ---------------------------------------
Lance B. Rosemore
President
Date: 11/13/95 /s/ Barry N. Berlin
----------------------------- ---------------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
17 PAGE 19 OF 19
<PAGE> 20
Exhibit Index
Exhibit Description
_____________ __________________________________________
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1995 FORM 10-Q OF PMC CAPITAL, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 668,838
<SECURITIES> 32,902,580
<RECEIVABLES> 112,032,875<F1>
<ALLOWANCES> (410,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 399,240
<DEPRECIATION> (195,355)
<TOTAL-ASSETS> 155,553,652<F2>
<CURRENT-LIABILITIES> 9,790,211<F3>
<BONDS> 78,541,000
<COMMON> 57,721,680
4,000,000<F4>
3,000,000<F4>
<OTHER-SE> 1,064,279
<TOTAL-LIABILITY-AND-EQUITY> 155,553,652<F5>
<SALES> 0
<TOTAL-REVENUES> 15,655,046
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,479,991
<LOSS-PROVISION> 275,969
<INTEREST-EXPENSE> 3,617,482
<INCOME-PRETAX> 8,281,604
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,281,604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,281,604
<EPS-PRIMARY> 0.756
<EPS-DILUTED> 0.756
<FN>
<F1> Includes current and long term portion of all loans receivable - before
reserve, interest receivable on loans and receivable for loans sold. Does
not include receivable from affiliate.
<F2> Includes the following items not included above
(i) Excess servicing asset $ 4,945,507
(ii) Restricted investments 1,768,000
(iii) Real property owned 111,008
(iv) Reserve on real property owned (51,000)
(v) Due from affiliates 829,191
(vi) Deferred charges, deposit and
other assets, net 2,526,768
(vii) Investment in subsidiary 26,000
-----------
$10,155,474
===========
<F3> Includes the following:
(i) Accrued interest payable $ 912,812
(ii) Borrower advances 3,997,462
(iii) Dividends payable 2,817,764
(iv) Accounts payable 2,062,173
-----------
$ 9,790,211
===========
<F4> Preferred stock of subsidiary held by SBA. See footnotes to financial
statements.
<F5> Includes the following items not included above
(i) Deferred fee revenue $ 455,544
(ii) Other liabilities 980,938
-----------
$ 1,436,482
===========
</FN>
</TABLE>
