<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 June 30, 1996
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 August 1, 1996, Registrant had outstanding 10,994,567 shares of Common
Stock, par value $.01 per share.
<PAGE> 2
PMC CAPITAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 2
Consolidated Statements of Income -
Six Months Ended June 30, 1996 and 1995 3
Three Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE> 3
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
------- -------
<S> <C> <C>
INVESTMENT INCOME:
Interest ................................................. $ 9,106 $ 7,467
Premium income ........................................... 998 1,582
Other investment income, net ............................. 204 5
------- -------
Total investment income .................................... 10,308 9,054
Equity in income of subsidiaries ........................... 10 -
Other income, net .......................................... 1,066 967
------- -------
Total income ............................................... 11,384 10,021
------- -------
EXPENSES:
Salaries and related benefits ............................ 1,460 1,436
Rent ..................................................... 100 110
Legal and accounting ..................................... 97 99
Directors and shareholders expense ....................... 30 26
Small Business Administration fees ....................... 40 29
General and administrative ............................... 353 551
Profit sharing plan ...................................... 102 102
Interest ................................................. 2,844 2,265
------- -------
Total expenses ............................................. 5,026 4,618
------- -------
Net operating income ....................................... 6,358 5,403
------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ........................................ - (169)
Recoveries on loans written-off .......................... 29 -
Change in unrealized appreciation
(depreciation) on investments ........................... (47) 81
------- -------
Total realized and unrealized gain (loss) on investments ... (18) (88)
------- -------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ................................ $ 6,340 $ 5,315
======= =======
PREFERRED DIVIDENDS ........................................ $ 125 $ 97
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 10,398 10,723
======= =======
EARNINGS PER COMMON SHARE .................................. $ 0.57 $ 0.49
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
PART I
Financial Information
ITEM 1.
Financial Statements
1
<PAGE> 5
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
INVESTMENTS AT VALUE:
Loans receivable, net .................................................. $ 134,324 $ 110,499
Excess servicing asset, net............................................. 5,136 4,991
Cash equivalents........................................................ 12,102 31,135
Restricted investments.................................................. 1,606 1,785
Real property owned..................................................... 5 5
----------- ------------
TOTAL INVESTMENTS......................................................... 153,173 148,415
----------- ------------
OTHER ASSETS:
Cash ................................................................... 306 439
Accrued interest receivable............................................. 904 723
Receivable for loans sold............................................... 2,183 4,371
Due from affiliates..................................................... 656 1,135
Investment in subsidiaries.............................................. 88 27
Property and equipment, net............................................. 206 199
Deferred charges, deposits and other assets............................. 1,033 1,170
----------- ------------
TOTAL OTHER ASSETS........................................................ 5,376 8,064
----------- ------------
TOTAL ASSETS ............................................................. $ 158,549 $ 156,479
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ................................................. $ 44,570 $ 43,540
Notes payable........................................................... 35,000 35,001
Accrued interest payable................................................ 1,474 1,434
Deferred fee revenue.................................................... 868 779
Borrower advances....................................................... 3,118 2,260
Dividends payable....................................................... 3,131 3,596
Accounts payable........................................................ 1,753 2,500
Other liabilities....................................................... 1,273 1,281
----------- ------------
TOTAL LIABILITIES......................................................... 91,187 90,391
----------- ------------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY.................................. 7,000 7,000
----------- ------------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares of $.01 par value,
10,959,267 and 10,871,040 shares issued and outstanding
at June 30, 1996 and December 31, 1995, respectively............... 110 109
Additional paid-in capital ............................................. 59,508 58,429
Undistributed net operating income...................................... 1,258 1,017
Net unrealized depreciation on investments.............................. (514) (467)
----------- ------------
60,362 59,088
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 158,549 $ 156,479
=========== ============
NET ASSET VALUE PER COMMON SHARE......................................... $ 5.51 $ 5.44
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 4,704 $ 3,927
Premium income 507 948
Other investment income, net 137 2
-------- --------
Total investment income 5,348 4,877
Equity in income of subsidiaries 3 --
Other income, net 553 451
-------- --------
Total income 5,904 5,328
-------- --------
EXPENSES:
Salaries and related benefits 768 726
Rent 54 50
Legal and accounting 47 47
Directors and shareholders expense 21 16
Small Business Administration fees 18 16
General and administrative 178 249
Profit sharing plan 52 57
Interest 1,420 1,284
-------- --------
Total expenses 2,558 2,445
-------- --------
Net operating income 3,346 2,883
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off -- (169)
Change in unrealized appreciation
(depreciation) on investments (1) 92
-------- --------
Total realized and unrealized gain (loss) on investments (1) (77)
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS $ 3,345 $ 2,806
======== ========
PREFERRED DIVIDENDS $ 63 $ 55
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,957 10,739
======== ========
EARNINGS PER COMMON SHARE $ 0.30 $ 0.26
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 7
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments ...... $ 6,340 $ 5,315
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 ................................................ (12,183) (18,525)
Proceeds from sale of guaranteed loans ..................................... 9,290 17,105
Change in unrealized depreciation on investments and loans written-off ..... 47 88
Unrealized premium income, net ............................................. (286) 117
Depreciation and amortization .............................................. 600 574
Accretion of loan discount and deferred fees .............................. (458) (448)
Deferred fees collected .................................................... 737 505
(Gain) on sale of assets ................................................... -- (10)
Equity in loss of subsidiary ............................................... (10) --
Net change in operating assets and liabilities:
Accrued interest receivable ............................................. (181) (69)
Other assets ............................................................ 237 (618)
Accrued interest payable ................................................ 40 348
Borrower advances ....................................................... 859 (327)
Other liabilities ....................................................... (754) (637)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................................... 4,278 3,418
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ..................................................................... (28,931) (24,055)
Principal collected .............................................................. 9,501 4,381
Purchase of furniture and fixtures and other assets .............................. (31) (14)
Purchase of government securities ................................................ -- (3,942)
Proceeds from maturities of government securities ................................ -- 8,947
Release of (investment in) restricted cash ...................................... 179 (159)
Proceeds from sale of assets ..................................................... -- 195
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .............................................. (19,282) (14,647)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of SBA debentures ........................................ 940 8,000
Proceeds from issuance of senior debt ........................................... -- 10,000
Proceeds from issuance of common stock .......................................... 647 312
Proceeds from issuance of preferred stock ....................................... -- 2,000
Payment of dividends on common stock ............................................ (6,053) (6,086)
Payment of dividends on preferred stock ......................................... (125) (142)
Proceeds on advances from affiliates, net ....................................... 479 4
Payment of debt issuance costs .................................................. -- (263)
Investment in unconsolidated subsidiary ......................................... (50) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................................ (4,162) 13,825
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... (19,166) 2,596
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... 31,574 33,696
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 12,408 $ 36,292
======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ................................................................... $ 2,804 $ 1,917
======== ========
Dividends reinvested ............................................................ $ 433 $ 438
======== ========
Loans receivable acquired in exchange for SBA debentures ........................ $ 158 $ 2,109
======== ========
Reclassification from loans receivable to real property owned ................... $ -- $ 65
======== ========
Loans to facilitate sale of real property owned ................................. $ 103 $ 85
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<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 six month periods ended June 30, 1996 have not been audited by
independent accountants. In the opinion of the Company's management, the
financial statements reflect all adjustments necessary to present fairly the
financial position at June 30, 1996, the results of operations for the three and
six month periods ended June 30, 1996 and 1995 and the cash flows for the six
month periods ended June 30, 1996 and 1995. 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 financial statements
and notes thereto contained in the Company's 1995 Annual Report on Form 10-K.
The results for the six months ended June 30, 1996 are not necessarily
indicative of future financial results.
NOTE 2. LONG-TERM DEBT
During May 1996, the Company assumed $1,030,000 in SBA debentures from a
non-affiliated small business investment corporation ("SBIC") in exchange for
loans receivable of approximately $200,000 and cash of approximately $900,000.
The loans acquired were initially originated by the Company and a portion sold
to the non-affiliated SBIC.
6
<PAGE> 9
PART I
Financial Information
ITEM 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
GENERAL:
PMC CAPITAL, INC. ("PMC" or "PMC Capital") is a diversified,
closed-end management investment company that on June 7, 1994 elected to operate
as a business development company under the Investment Company Act of 1940 (the
"1940 Act"). PMC engages in the business of originating loans to small
businesses either directly or through its three principal subsidiaries; First
Western SBLC, Inc. ("First Western"), PMC Investment Corporation ("PMIC") and
Western Financial Capital Corporation ("Western Financial"). First Western, PMIC
and Western Financial are registered under the 1940 Act as diversified,
closed-end management investment companies. In addition, PMC is the sole
shareholder of PMC Advisers, Inc. ("PMC Advisers") and PMC Funding Corp. PMC has
elected to be taxed as a regulated investment company and distributes
substantially all of its taxable income as dividends to shareholders.
FIRST WESTERN is a small business lending company that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration ("SBA") pursuant to its Section 7(a) program. While the
eligibility requirements of the Section 7(a) program vary by the industry of the
borrower and other factors, the general eligibility requirements are that: (i)
gross sales of the borrower cannot exceed $5.0 million (other than with respect
to certain industries where eligibility is determined based on the number of
employees), (ii) liquid assets or real estate equity of the borrower (and
certain affiliates) cannot exceed certain limits and (iii) the maximum aggregate
SBA loan guarantees to a borrower cannot exceed $750,000.
At June 30, 1996, First Western had outstanding loans receivable,
net, valued at $28.6 million. During the six months ended June 30, 1996, First
Western originated $16.2 million in loans and sold $9.3 million of the
guaranteed portion of its loans into the secondary market (without recourse to
the Company). At June 30, 1996, First Western had loans with an aggregate
balance of approximately $815,000 (2.8% of First Western loans, net) greater
than 60 days past due. Loans written-off and the change in unrealized
depreciation on First Western's investments, net of recoveries, was $22,000
during the six months ended June 30, 1996.
PMIC is a licensed specialized small business investment company
("SSBIC") under the Small Business Investment Act of 1958, as amended ("SBIA").
PMIC uses long-term funds provided by the SBA, together with its own capital, to
provide long-term, fixed-rate collateralized loans to eligible small businesses
owned by "disadvantaged" persons, as defined under the regulations of the SBA.
As an SSBIC, PMIC is eligible to obtain long-term, fixed-rate funding, generally
at below-market rates, from 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 by 3% during the first five years) and preferred stock (which is
currently issuable to the SBA with a 4% per annum cumulative dividend rate).
7
<PAGE> 10
At June 30, 1996, PMIC had outstanding loans receivable valued at
$46.5 million. During the six months ended June 30, 1996, PMIC originated $13.8
million in loans. At June 30, 1996, PMIC had loans with an aggregate balance of
approximately $157,000 (0.3% of PMIC loans, net) greater than 60 days past due.
PMIC had no realized and unrealized losses and a realized recovery of $15,000
during the six months ended June 30, 1996.
WESTERN FINANCIAL is a licensed small business investment company
("SBIC") under the SBIA that provides fixed-rate loans to borrowers whether or
not they qualify as "disadvantaged". As an SBIC, Western Financial is eligible
to obtain long-term, fixed-rate funding, generally at below-market rates, from
the SBA through the issuance of debentures.
At June 30, 1996, Western Financial had outstanding loans
receivable valued at $26.9 million. During the six months ended June 30, 1996,
Western Financial originated $4.0 million in loans. At June 30, 1996, Western
Financial had loans with an aggregate balance of approximately $515,000 (1.9% of
Western Financial loans, net) greater than 60 days past due. Realized and
unrealized losses on Western Financial's investments were $11,000 during the six
months ended June 30, 1996.
PMC has originated loans to borrowers on a non-SBA supported
basis using criteria similar to that utilized by its three principal
subsidiaries whose loans are funded under the SBA programs. These loans are: (i)
to borrowers who exceed the eligibility requirements of the SBA 7(a) or SBIC
programs, (ii) payable in monthly installments of principal and interest based
upon four to 25 year amortization tables, with the balance due at maturity
(typically four to 10 years), (iii) primarily collateralized by real estate and
(iv) generally guaranteed by the principals of the borrowers. The funding for
this lending program is limited to the extent of leverage available to the
Company. However, the Company expects that most non-SBA supported loans will be
made by PMC Commercial Trust ("PMC Commercial" or the "Trust", a Texas real
estate investment trust and an affiliate of PMC Capital, Inc.) in the future and
that such loans will be made by the Company only to the extent that PMC
Commercial does not have available funds.
At June 30, 1996, PMC Capital had outstanding loans receivable
valued at $32.3 million. During the six months ended June 30, 1996, PMC Capital
originated $7.2 million in loans. At June 30, 1996, PMC Capital had no loans
greater than 60 days past due. PMC Capital had no realized and unrealized losses
during the six months ended June 30, 1996.
PMC ADVISERS, organized in July 1993, is a registered investment
advisor under the Investment Advisers Act of 1940 which acts as the investment
advisor for PMC Commercial.
CERTAIN ACCOUNTING CONSIDERATIONS
In accordance with its business and financing strategy, the
Company sells the guaranteed portions of its Small Business Administration 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
either cash received or an excess servicing spread. The excess servicing spread
is calculated as the present value of the difference between the interest rate
charged by the
8
<PAGE> 11
Company to a borrower and the interest rate received by the investors who
purchased the loan (adjusted for prepayment assumptions) 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
recorded as income and concurrently recorded as a corresponding asset (the
"Excess Servicing Asset").
During 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 to the expected remaining
life of the related loans, on a pooled basis, the period over which the
remaining Excess Servicing Asset would be amortized for loans originated and
sold prior to January 1, 1995. The Excess Servicing Asset is amortized on an
accelerated method over the estimated remaining lives of the related assets.
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. Management evaluates the future benefit
anticipated from the Excess Servicing Asset on an ongoing basis. If it is
determined the future benefit is impaired, the Company will reflect the
impairment as a charge to earnings during the period evaluated. To the extent
future Excess Servicing Spread exceeds the estimated amortization of the Excess
Servicing Asset pertaining to these loans, additional revenues will be
recognized.
RESULTS OF OPERATIONS
By increasing other sources of revenues, PMC Capital has been
able to reduce its reliance on the income generated from its SBA guaranteed
lending subsidiary, First Western. Since 1992, the Company's other lending
activities have increased and the Company has established other revenue sources.
This diversification has increased net income and in the opinion of management,
will enhance future profits. Such future profits may be adversely impacted by an
unexpected significant amount of prepayments.
Substantially all of the loans of First Western are variable rate
which are reset quarterly based on a spread above the prime rate of interest
charged by the banking industry ("Prime Rate"). The spread over the Prime Rate
is typically 2.5% to 2.75%. During the three months ended March 31, 1995 and the
three months ended June 30, 1995, the prime rate utilized for First Western
loans was 9.0% and 8.5%, respectively. During the three months ended March 31,
1996 and the three months ended June 30, 1996, the prime rate utilized for First
Western loans was 8.50% and 8.25%, respectively. Accordingly, the yield on First
Western's loans was reduced when comparing the three and six months ending June
30, 1996 to the prior year comparable periods. Primarily as a result of the
current interest rate environment for both fixed-rate and variable rate loans,
First Western experienced prepayments on its variable rate loans during the six
months ended June 30, 1996 at a rate higher than prior periods.
9
<PAGE> 12
The interest rate environment and certain applicable legislative
changes have affected the secondary market for the SBA Section 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 and reduced the SBA
guaranteed percentage of certain loans. This fee increased from 40 basis points
to 50 basis points for all loans approved after October 1, 1995 irrespective of
whether the guaranteed portions of these loans are sold into the secondary
market. Since the Company has historically sold the guaranteed portion of its
SBA Section 7(a) loans into the secondary market, the effect of this change to
First Western will be the increase in fees from 40 basis points to 50 basis
points. The value of the guaranteed portion of loans decreases as a result of
the fee increase and the percentage of loans eligible to be sold through the
secondary market is diminished by the reduction in the SBA guarantee percentage.
The effect to the Company as a result of this change was not significant during
the three and six months ended June 30, 1996. Continued program and market
changes may have an adverse effect on future periods of operations.
Any aspect of the SBA programs under which the Company
participates could be modified by legislation or agency policy changes. PMC
Capital has evaluated alternative lending strategies and would employ such
strategies should the SBA programs under which its subsidiaries operate were to
be eliminated or significantly curtailed.
Effective October 1995, the fee charged to the borrower by the
SBA (for the SBA's guaranty of a loan to the lender) increased and is based on
the amount of the originated loan, ranging from 2% to 3.875% of the guaranteed
portion of the loan. The fee had been 2% of the guaranteed portion of the loan.
The Company does not know what impact, if any, these changes will have on future
loan originations of First Western.
The future profitability of the Company's SBA Section 7(a)
lending activities will be impacted by a number of factors including: (i) the
more efficient capital structure achieved as a result of 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.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Interest income increased by $1,639,000, or 22%, from $7,467,000
for the six months ended June 30, 1995 to $9,106,000 for the six months ended
June 30, 1996. This increase was primarily attributable to the substantial
growth in the Company's loan portfolios. The lending activities of PMIC, Western
Financial and PMC Capital have continued to increase. As a result, the average
loan portfolio outstanding during the six months ended June 30, 1996 was $123.0
million, a 45% increase from $84.8 million in the comparable period of 1995.
Accordingly, interest income on loans increased by $2,027,000, or 31%, from
$6,541,000 during the six months ended June 30, 1995 to $8,568,000 during the
six months ended June 30, 1996. The average temporary investments outstanding
during the six months ended June 30, 1996 was $22.3 million, a 29% decrease from
$31.5 million in the comparable period of 1995. Accordingly interest income on
temporary investments decreased by $388,000, or 42%, from $926,000 during the
six months ended June 30, 1995 to $538,000 during the six months June 30, 1996.
10
<PAGE> 13
Premium income decreased by $584,000, or 37%, from $1,582,000 for
the six months ended June 30, 1995 to $998,000 for the six months ended June 30,
1996. This decrease was primarily attributable to the decrease in the amount of
loans held for sale or sold during the six months ended June 30, 1995 ($16.4
million) as compared to the six month period ended June 30, 1996 ($9.9 million)
including reasons as described under the caption "Results of Operations".
Other investment income, net, increased by $199,000 from $5,000
for the six months ended June 30, 1995 to $204,000 for the six months ended June
30, 1996. This increase was primarily attributable to prepayment fees received
on loans during the six months ended June 30, 1996. There were no prepayment
fees assessed during the six months ended June 30, 1995.
Other income, net, increased by $99,000, or 10%, from $967,000
during the six months ended June 30, 1995 to $1,066,000 during the six months
ended June 30, 1996. This increase was primarily a result of investment
management fees generated by PMC Advisers which are based on the assets of PMC
Commercial under management.
Operating expenses, not including interest, decreased by
$171,000, or 7%, from $2,353,000 during the six months ended June 30, 1995 to
$2,182,000 during the six months ended June 30, 1996. This was primarily a
result of a $198,000 decrease in administrative and general costs, including
advertising, telephone, postage, travel and miscellaneous expenses. These
decreases were partially offset by a $24,000 increase in salaries and related
benefits related to staffing of several new employee positions.
Interest expense increased by $579,000, or 26%, from $2,265,000
during the six months ended June 30, 1995 to $2,844,000 during the six months
ended June 30, 1996. The increase was primarily attributable to; (i) the
interest expense on $17,260,000 of SBA debentures which were issued or assumed
during the period from March 1995 to September 1995 by PMIC and Western
Financial, (ii) the scheduled increase in interest rate on $2,000,000 of PMIC's
SBA debentures during June 1995 and (iii) the issuance of $10,000,000 of Senior
Notes by PMC Capital in April 1995.
Realized and unrealized gain (loss) on investments changed from a
loss of $88,000 during the six months ended June 30, 1995 to a loss of $18,000
during the six months ended June 30, 1996. During both periods, losses were
minimal. During the six months ended June 30, 1996, the Company recognized
$29,000 in recoveries and decreases to previously established reserves of
$35,000 which reduced the net loss during the period. There were no recoveries
during the six months ended June 30, 1995.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1995
Interest income increased by $777,000, or 20%, from $3,927,000
for the three months ended June 30, 1995 to $4,704,000 for the three months
ended June 30, 1996. This increase was primarily attributable to the substantial
growth in the Company's loan portfolios. The lending activities of PMIC, Western
Financial and PMC Capital have continued to increase. As a result, the average
loan portfolio outstanding during the second quarter of 1996 was $129.3 million,
a 44% increase from $89.5 million in the comparable period of 1995. Accordingly,
interest income on loans increased by
11
<PAGE> 14
$1,047,000, or 30%, from $3,465,000 during the three months ended June 30, 1995
to $4,512,000 during the three months ended June 30, 1996. The average temporary
investments outstanding during the second quarter of 1996 was $17.1 million, a
43% decrease from $29.9 million in the comparable period of 1995. Accordingly
interest income on temporary investments decreased by $270,000, or 58%, from
$462,000 during the three months ended June 30, 1995 to $192,000 during the
three months June 30, 1996.
Premium income decreased by $441,000, or 47%, from $948,000 for
the three months ended June 30, 1995 to $507,000 for the three months ended June
30, 1996. This decrease was primarily attributable to the decrease in the amount
of loans held for sale or sold during the three month period ended June 30, 1995
($10.9 million) as compared to the three month period ended June 30, 1996 ($5.3
million) including reasons as described under the caption "Results of
Operations".
Other investment income, net, increased by $135,000 from $2,000
for the three months ended June 30, 1995 to $137,000 for the three months ended
June 30, 1996. This increase was primarily attributable to prepayment fees
received on loans during the three months ended June 30, 1996. There were no
prepayment fees assessed during the three months ended June 30, 1995.
Other income, net, increased by $102,000, or 23%, from $451,000
during the three months ended June 30, 1995 to $553,000 during the three months
ended June 30, 1996. This increase was primarily a result of investment
management fees generated by PMC Advisers which are based on the assets of PMC
Commercial under management.
Operating expenses, not including interest, decreased by $23,000,
or 2%, from $1,161,000 during the three months ended June 30, 1995 to $1,138,000
during the three months ended June 30, 1996. This was primarily a result of a
$71,000 decrease in administrative and general costs. The decrease was primarily
in advertising, telephone, postage, travel and miscellaneous expenses. These
decreases were partially offset by a $42,000 increase in salaries and related
benefits related to staffing of several new employee positions.
Interest expense increased by $136,000, or 11%, from $1,284,000
during the three months ended June 30, 1995 to $1,420,000 during the three
months ended June 30, 1996. The increase was primarily attributable to: (i) the
interest expense on $11,260,000 of SBA debentures which were issued or assumed
after March 31, 1995 by PMIC and Western Financial, (ii) the scheduled increase
in interest rate on $2,000,000 of PMIC's SBA debentures during June 1995 and
(iii) the issuance of $10,000,000 of Senior Notes by PMC Capital in April 1995.
Realized and unrealized gain (loss) on investments changed from a
loss of $77,000 during the three months ended June 30, 1995 to a loss of $1,000
during the three months ended June 30, 1996. During both periods, losses were
minimal. During the second quarter of 1996, the Company recognized $35,000 in
decreases to previously established reserves which reduced the net loss during
the period. There were no comparable recoveries during the three months ended
June 30, 1995.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $12.4 million in cash and cash
equivalents. In addition, the Company has a revolving credit facility under
which it can borrow up to $15 million. 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. Approximately $2.5 million of the Company's SBA debentures
become payable in September 1996. This amount should, 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 its 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 short-term, uncollateralized credit
facilities.
Funding availability under the SBA's SBIC and SSBIC programs is
limited. With regard to leverage, the SBA currently has leverage funding
availability based upon prior years funded amounts. In order to determine which
licensees are to receive funding, the SBA will give first priority to issue
debentures to those licensees which are to use such funds to refinance matured
debentures and second priority to fund those licensees requesting leverage which
when issued will not cause outstanding leverage to be greater than two times
their regulatory capital. PMIC and Western Financial have aggregate amounts of
SBA leverage which are currently at or greater than two times their regulatory
capital. The SBA has notified its licensees under the SSBIC program that there
is no subsidized leverage or preferred stock available for the SBA's current
fiscal year ending September 30, 1996.
Loan commitments outstanding at June 30, 1996 to various
prospective small business companies, including the unfunded portion of projects
in the construction phase, amounted to approximately $52.6 million. Of these
commitments, $25.7 million were for loans, including the remaining disbursements
($6.8 million to fund on $15.3 million in aggregate funding) on partially funded
loans, partially guaranteed by the SBA. Assuming all of the SBA loan commitments
were funded, approximately $25.8 million would be received by the Company from
sales of these loans into the secondary market. Commitments (which are
agreements to lend to a customer provided the terms established in the contract
are met) are made in the ordinary course of the Company's business. 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.
During 1995; (i) the Company issued $10 million of 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% (6.74% at June 30, 1996), (ii) PMIC issued $2
million in preferred stock, (iii) Western Financial assumed $2.26 million in SBA
debentures
13
<PAGE> 16
in exchange for the previously participated portion of certain loans and (iv)
the Company's subsidiaries issued $15 million in SBA debentures. During 1996,
the Company assumed $1.0 million in SBA debentures in exchange for cash and the
previously participated portion of certain loans.
The lack of availability to issue SBA debentures through
September 30, 1996 will require the Company to utilize other sources of funds
prior to that time. The cost and terms of these other sources of funds will not
be as favorable as those typically achieved on SBA debentures, however, the
Company has historically been able to issue debt through private placement of
notes and receive working capital through securitization and sale of a portion
of its portfolio. When additional funds are required, the Company will 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 Capital, 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
foreseeable future. The Company has commenced the process of securitizing a pool
of fixed rate loans for sale through a private placement. The proposed
transaction is ongoing and there can be no assurance that it will be completed.
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. The Company is in compliance with these
requirements at June 30, 1996.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED ON THIS FORM 10-Q
This Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
14
<PAGE> 17
PART II
Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders, the following
members were re-elected to the Board of Directors:
Martha R. Greenberg
Robert Diamond
Lee Ruwitch
Other members of the Board of Directors are as follows:
Fredric M. Rosemore
Lance B. Rosemore
Andrew S. Rosemore
Irvin M. Borish
Thomas Hamill
Barry A. Imber
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Abstentions
Affirmation Negative and Broker
Votes Votes Non-Votes
----------- -------- -----------
<S> <C> <C> <C> <C>
1 To approve a change in the Company's
Articles of Incorporation to increase
the Company's authorized common stock
from 15,000,000 to 30,000,000 shares 8,642,307 109,552 46,271
2 To ratify the appointment of Coopers &
Lybrand L.L.P. as the independent public
accountants of the Company 8,670,970 11,156 116,006
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Ex-27 Financial Date Schedule
B. Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended June 30, 1996.
15
<PAGE> 18
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: 8/14/96 \s\ Lance B. Rosemore
------------------ -------------------------------
Lance B. Rosemore
President
Date: 8/14/96 \s\ Barry N. Berlin
------------------ -------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
16
<PAGE> 19
Exhibit Index
Ex-27 Financial Date Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1996 FORM 10-Q OF PMC CAPITAL INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 306
<SECURITIES> 12,102
<RECEIVABLES> 137,925<F1>
<ALLOWANCES> (514)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 482
<DEPRECIATION> (276)
<TOTAL-ASSETS> 158,549<F2>
<CURRENT-LIABILITIES> 9,476<F3>
<BONDS> 79,570
4,000<F4>
3,000<F4>
<COMMON> 59,618
<OTHER-SE> 744
<TOTAL-LIABILITY-AND-EQUITY> 158,549<F5>
<SALES> 0
<TOTAL-REVENUES> 11,384<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,182
<LOSS-PROVISION> 18
<INTEREST-EXPENSE> 2,844
<INCOME-PRETAX> 6,340
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,340
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
<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 assets $ 5,136
(ii) Restricted investments 1,606
(iii) Real property owned 5
(iv) Due from affiliates 656
(v) Deferred charges, deposit and
other assets, net 1,033
(vi) Investment's in subsidiary 88
---------
$ 8,524
=========
<F3>Includes the following:
(i) Accrued interest payable $ 1,474
(ii) Borrower advances 3,118
(iii) Dividends payable 3,131
(iv) Accounts payable 1,753
---------
$ 9,476
=========
<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 $ 868
(ii) Other liabilities 1,273
---------
$ 2,141
=========
<F6>Revenues consist primarily of interest and other yield on investments.
</FN>
</TABLE>
