<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, 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
of incorporation or organization) Identification No.)
17290 Preston Road, 3rd Floor,
Dallas, TX 75252 (972) 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 November 1, 1996, Registrant had outstanding 11,099,518 shares of Common
Stock, par value $.01 per share.
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PMC CAPITAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 2
Consolidated Statements of Income -
Nine Months Ended September 30, 1996 and 1995 3
Three Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 8
PART II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
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PART I
Financial Information
ITEM 1.
Financial Statements
1
<PAGE> 4
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
INVESTMENTS AT VALUE:
Loans receivable, net .................................................. $ 135,973 $ 110,499
Excess servicing asset, net ............................................ 4,813 4,991
Cash equivalents ....................................................... 8,550 31,135
Restricted investments ................................................. 1,459 1,785
Real property owned .................................................... 249 5
------------ ------------
TOTAL INVESTMENTS ........................................................ 151,044 148,415
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OTHER ASSETS:
Cash ................................................................... 351 439
Accrued interest receivable ............................................ 708 723
Receivable for loans sold .............................................. 4,193 4,371
Due from affiliates .................................................... 1,091 1,135
Investment in subsidiaries ............................................. 76 27
Property and equipment, net ............................................ 194 199
Deferred charges, deposits and other assets ............................ 930 1,170
------------ ------------
TOTAL OTHER ASSETS ....................................................... 7,543 8,064
------------ ------------
TOTAL ASSETS ............................................................. $ 158,587 $ 156,479
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ................................................. $ 44,570 $ 43,540
Notes payable .......................................................... 35,000 35,001
Accrued interest payable ............................................... 984 1,434
Deferred fee revenue ................................................... 809 779
Borrower advances ...................................................... 2,127 2,260
Dividends payable ...................................................... 3,323 3,596
Accounts payable ....................................................... 1,954 2,500
Other liabilities ...................................................... 1,251 1,281
------------ ------------
TOTAL LIABILITIES ........................................................ 90,018 90,391
------------ ------------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY ................................. 7,000 7,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares of $.01 par value, 11,051,807
and 10,871,040 shares issued and outstanding
at September 30, 1996 and December 31, 1995, respectively ......... 111 109
Additional paid-in capital ............................................. 60,639 58,429
Undistributed net operating income ..................................... 1,275 1,017
Net unrealized depreciation on investments ............................. (456) (467)
------------ ------------
61,569 59,088
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................... $ 158,587 $ 156,479
============ ============
NET ASSET VALUE PER COMMON SHARE ......................................... $ 5.57 $ 5.44
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE> 5
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest ................................................. $ 13,867 $ 11,865
Premium income ........................................... 1,482 2,228
Other investment income, net ............................. 373 62
------------ ------------
Total investment income .................................... 15,722 14,155
Equity in loss of subsidiaries ............................. (2) --
Other income, net .......................................... 1,715 1,500
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Total income ............................................... 17,435 15,655
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EXPENSES:
Salaries and related benefits ............................ 2,248 2,082
Rent ..................................................... 157 156
Legal and accounting ..................................... 124 107
Directors and shareholders expense ....................... 36 32
Small Business Administration fees ....................... 74 58
General and administrative ............................... 577 893
Profit sharing plan ...................................... 152 152
Interest ................................................. 4,288 3,617
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Total expenses ............................................. 7,656 7,097
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Net operating income ...................................... 9,779 8,558
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REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ...................................... (87) (192)
Recoveries on loans written-off ........................ 35 --
Change in unrealized appreciation
(depreciation) on investments ........................ 11 (84)
------------ ------------
Total realized and unrealized gain (loss) on investments ... (41) (276)
------------ ------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................... $ 9,738 $ 8,282
============ ============
PREFERRED DIVIDENDS ........................................ $ 188 $ 160
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 10,963 10,747
============ ============
EARNINGS PER COMMON SHARE .................................. $ 0.87 $ 0.76
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
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PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
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<S> <C> <C>
INVESTMENT INCOME:
Interest ................................................. $ 4,761 $ 4,397
Premium income ........................................... 484 646
Other investment income, net ............................. 169 58
------------ ------------
Total investment income .................................... 5,414 5,101
Equity in loss of subsidiaries ............................. (12) --
Other income, net .......................................... 649 533
------------ ------------
Total income ............................................... 6,051 5,634
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EXPENSES:
Salaries and related benefits ............................ 788 647
Rent ..................................................... 57 46
Legal and accounting ..................................... 27 8
Directors and shareholders expense ....................... 6 6
Small Business Administration fees ....................... 34 29
General and administrative ............................... 224 341
Profit sharing plan ...................................... 50 50
Interest ................................................. 1,444 1,352
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Total expenses ............................................. 2,630 2,479
------------ ------------
Net operating income ...................................... 3,421 3,155
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REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ...................................... (87) (23)
Recoveries on loans written-off ........................ 6 --
Change in unrealized appreciation
(depreciation) on investments ........................ 58 (165)
------------ ------------
Total realized and unrealized gain (loss) on investments ... (23) (188)
------------ ------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................... $ 3,398 $ 2,967
============ ============
PREFERRED DIVIDENDS ........................................ $ 63 $ 63
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 11,012 10,781
============ ============
EARNINGS PER COMMON SHARE .................................. $ 0.30 $ 0.27
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
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PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments .. $ 9,738 $ 8,282
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 ............................................ (18,005) (25,038)
Proceeds from sale of guaranteed loans ................................. 15,782 24,303
Change in unrealized depreciation on investments and loans written-off . 41 276
Unrealized premium income, net ......................................... (7) 116
Depreciation and amortization .......................................... 789 854
Accretion of loan discount and deferred fees .......................... (569) (605)
Deferred fees collected ................................................ 878 1,092
Gain on sale of assets ................................................. -- (13)
Equity in loss of subsidiary ........................................... 2 --
Net change in operating assets and liabilities:
Accrued interest receivable ......................................... 15 (358)
Other assets ........................................................ 244 (855)
Accrued interest payable ............................................ (450) (120)
Borrower advances ................................................... (134) 1,043
Other liabilities ................................................... (574) (480)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 7,750 8,497
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ................................................................. (39,243) (38,116)
Principal collected .......................................................... 15,142 6,364
Purchase of furniture and fixtures and other assets .......................... (52) (14)
Purchase of government securities ............................................ -- (3,942)
Proceeds from maturities of government securities ............................ -- 8,947
Release of (investment in) restricted cash .................................. 326 (234)
Proceeds from sale of assets ................................................. -- 205
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .......................................... (23,827) (26,790)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption of SBA debentures ...................... 940 15,000
Proceeds from issuance of senior debt ....................................... -- 10,000
Proceeds from issuance of common stock ...................................... 1,574 765
Proceeds from issuance of preferred stock ................................... -- 2,000
Payment of dividends on common stock ........................................ (8,908) (8,616)
Payment of dividends on preferred stock ..................................... (188) (142)
Advances from (to) affiliates, net .......................................... 44 (392)
Payment of debt issuance costs .............................................. (8) (447)
Investment in unconsolidated subsidiary ..................................... (50) --
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............................ (6,596) 18,168
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ...................................... (22,673) (125)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 31,574 33,696
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 8,901 $ 33,571
============ ============
SUPPLEMENTAL DISCLOSURE:
Interest paid ............................................................... $ 4,739 $ 3,738
============ ============
Dividends reinvested ........................................................ $ 645 $ 595
============ ============
Loans receivable acquired in exchange for SBA debentures .................... $ 158 $ 2,109
============ ============
Reclassification from loans receivable to real property owned ............... $ 224 $ 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 nine month periods ended September 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 September 30, 1996, the results of operations for the
three and nine month periods ended September 30, 1996 and 1995 and the cash
flows for the nine month periods ended September 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 nine months ended September 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 company ("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.
NOTE 3. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement (the "Investment Management
Agreement') between PMC Advisers LP ("PMC Advisers"), a subsidiary of PMC
Capital, and PMC Commercial Trust ("PMC Commercial"), a Texas real estate
investment trust which is an affiliated entity, PMC Advisers charged fees of
approximately $1.3 million for the nine months ended September 30, 1996.
Effective July 1, 1996, the Investment Management Agreement was amended to
include compensation to PMC Advisers for its assistance in any issuance of debt
or equity securities for PMC Commercial. Such compensation includes a
consulting fee based on (i) 12.5% of any offering fees incurred by PMC
Commercial pursuant to the public offering or private placement of its common
shares, and (ii) 50% of any issuance or placement fees incurred by PMC
Commercial pursuant to the public offering or private placement of its debt
securities or preferred shares of beneficial interest. Of the amount of
servicing and advisory fees paid or payable to PMC Advisers as of September 30,
1996, approximately $251,000 was earned pursuant to a public offering of common
shares by PMC Commercial.
6
<PAGE> 9
PMC CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
Pursuant to the amended Investment Management Agreement, the quarterly
servicing and advisory fee (the "Base Fee") is based on the assets and capital
structure of PMC Commercial. As defined in the Investment Management
Agreement, the Base Fee is the sum of (i) 0.4167% (1.67% on an annual basis)
of the lesser of (a) the average quarterly value of common equity capital or
(b) the average quarterly value of all invested assets and (ii) 0.21875%
(0.875% on an annual basis) of the difference between the average quarterly
value of all invested assets and the average quarterly value of common equity
capital. For purposes of calculating the Base Fee, the average quarterly value
of common equity capital shall not be increased by the proceeds received from
any public offering of common shares by PMC Commercial (other than pursuant to
its dividend reinvestment plan or any employee/trust manager benefit plan)
during the 180 calendar day period immediately following such public offering.
In no event will the aggregate annual fees charged under the new agreement be
greater than that which would have been charged had there been no revision to
the investment management agreement.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS No. 125), "Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities." Those
standards have been established to provide a consistent application of
accounting based on a financial-components approach which distinguishes the
transfer of financial assets that are sales from those that are secured
borrowings. This approach is based upon control of the related assets, whereby
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes financial assets when control has been surrendered and liabilities
are extinguished. SFAS No. 125 is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and may only be applied prospectively.
NOTE 5. SUBSEQUENT EVENTS
On November 13, 1996, a newly formed special purpose affiliate of the Company,
PMC Capital Limited Partnership, a Delaware limited partnership, (the
"Partnership"), completed a private placement of approximately $40.7 million of
its Loan-Backed Fixed Rate Notes, Series 1996-A (the "Notes"). The Notes,
issued at par, which mature in 2011 and bear interest at the rate of 6.725% per
annum, are collateralized by approximately $46.3 million of loans contributed by
the Company to the Partnership. In connection with this private placement, the
Notes were given a rating of "Aa2" by Moody's Investors Service. The loans were
originated or purchased by the Company in accordance with the Company's lending
strategy and underwriting criteria. The Partnership has the exclusive
obligation for the repayment of the Notes, and the holders of the Notes have no
recourse to the Company or its assets in the event of nonpayment of the loans.
The net proceeds from the issuance of the Notes (approximately $37.5 million
after giving effect to payment of offering costs of approximately $234,000 and
the funding of an approximately $2.04 million reserve fund held by the trustee
as collateral) were distributed to the Company. The Company will use such
proceeds to make additional loans in accordance with its lending criteria.
7
<PAGE> 10
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 has 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 limited partner
of PMC Advisers ("PMC Advisers") and is the sole shareholder of PMC Funding
Corp., the sole general partner of PMC Advisers. 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 September 30, 1996, First Western had outstanding loans receivable,
net, valued at $27.2 million. During the nine months ended September 30, 1996,
First Western originated $24.0 million in loans and sold $15.8 million of the
guaranteed portion of its loans into the secondary market (without recourse to
the Company). At September 30, 1996, First Western had loans with an aggregate
principal balance of approximately $581,000 (2.1% 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 $45,000
during the nine months ended September 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. For any debentures issued prior to
1996, the interest rate was reduced through an SBA subsidy by 3% during the
first five years. As an SSBIC, prior to 1996 PMIC was eligible to issue
preferred stock to the SBA with either a 3% or a 4% per annum cumulative
dividend rate.
8
<PAGE> 11
At September 30, 1996, PMIC had outstanding loans receivable valued at
$48.5 million. During the nine months ended September 30, 1996, PMIC
originated $16.6 million in loans. At September 30, 1996, PMIC had loans with
an aggregate principal balance of approximately $302,000 (0.6% 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 nine months ended September 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 September 30, 1996, Western Financial had outstanding loans
receivable valued at $25.8 million. During the nine months ended September 30,
1996, Western Financial originated $5.4 million in loans. At September 30,
1996, Western Financial had loans with an aggregate principal balance of
approximately $155,000 (0.6% 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 nine months ended September 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 20 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 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 September 30, 1996, PMC Capital had outstanding loans receivable
valued at $34.3 million. During the nine months ended September 30, 1996, PMC
Capital originated $11.4 million in loans. At September 30, 1996, PMC Capital
had no loans greater than 60 days past due. PMC Capital had no realized and
unrealized losses during the nine months ended September 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 pursuant to the terms of an investment management agreement
between PMC Advisers and PMC Commercial (the "Investment Management
Agreement").
PMC Advisers has been the investment advisor to PMC Commercial since the
completion of PMC Commercial's initial public offering in December 1993. The
independent boards of PMC Commercial and PMC Capital entered into negotiations
to revise the Investment Management Agreement to fairly compensate PMC Advisers
in accordance with current market conditions. The amended agreement, effective
July 1, 1996, provides for fees to be charged on loans outstanding, up to the
amount of PMC Commercial's equity, to be reduced from 2.5% to 1.67%
9
<PAGE> 12
annually. For loans outstanding in excess of the equity of PMC Commercial, the
fee is reduced from 1.5% to 0.875% annually. A new fee based on the successful
completion of any debt or equity offering of PMC Commercial is provided for
based on the underwriting/placement fees paid as part of such offering (see
Footnote 3 to the Financial Statements included in this Form 10-Q). In no
event will the aggregate annual fees charged under the amended agreement be
greater than that which would have been charged had there been no revision to
the Investment Management Agreement. The amended Investment Management
Agreement contains a non-competition agreement that, upon termination, requires
PMC Commercial to pay PMC Advisers an annual fee of 1% of the average
outstanding loans which were originated under the Investment Management
Agreement.
SBA PROGRAM LEGISLATIVE UPDATE
SBICS. As part of the omnibus funding bill signed into legislation by
Congress in October 1996, the SBIC program was authorized to issue a minimum of
$256 million in SBA debentures in the fiscal year of the SBA ending September
30, 1997. This is significantly above amounts available in 1996. There will
be increased costs for new SBA debentures. A flat 3% "draw-down" fee will
replace the 2% commitment fee and there will be an increase of 100 basis points
in the interest rates to be charged. The interest rates previously charged on
SBA debentures were approximately 70 basis points over the 10 year Treasury
Note. As adjusted, the new rates would be approximately 170 basis points over
the 10 year Treasury Note. As part of this legislation, the availability of 3%
subsidized debentures and the right of the SBA to purchase preferred stock of
an SSBIC was repealed. This will have no effect on previously issued
debentures or preferred stock of SSBICs including PMIC.
SBA SECTION 7(A) PROGRAM. Appropriations under the omnibus funding
bill for the fiscal year ending September 30, 1997 were approved. The national
SBA 7(a) program will receive an aggregate of $158 million in direct
appropriation with an additional $40.5 million carry over of unused funds from
1996. According to industry sources, the total government expenditure of
$198.5 million (which is in excess of prior years availability) will result in
up to approximately $7.8 billion in loans to be funded under the program for
the 1997 fiscal year of the SBA.
CERTAIN ACCOUNTING CONSIDERATIONS
In accordance with its business and financing strategy, the Company
sells the guaranteed portions of its 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 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
Company to a borrower and the interest rate paid to 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").
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<PAGE> 13
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 and establishing other sources of revenues, PMC Capital
has reduced its reliance on the income generated from its SBA guaranteed
lending subsidiary, First Western. These sources and an increase in the
Company's outstanding loan portfolio has resulted in increased net income and,
in the opinion of management, should 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 between 1.5% and 2.75%. During the three and nine months ended
September 30, 1995 the weighted average Prime Rate was 9.00% and 8.83%,
respectively. During the three and nine months ended September 30, 1996 the
weighted average Prime Rate was 8.25% and 8.33%, respectively. Accordingly,
the yield on First Western's loans was reduced when comparing the three and
nine months ending September 30, 1996 to the prior year's comparable periods.
Primarily as a result of the current interest rate environment for both fixed-
rate and variable rate loans, First Western has experienced prepayments on its
variable rate loans during the nine months ended September 30, 1996 at a rate
higher than prior periods.
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 is 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 nine months ended September 30, 1996.
Continued program and market changes may have an adverse effect on future
periods of operations.
11
<PAGE> 14
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 securitizations, (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.
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.
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.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
Interest income increased by $2,002,000, or 17%, from $11,865,000 for
the nine months ended September 30, 1995 to $13,867,000 for the nine months
ended September 30, 1996. This increase was primarily attributable to the
growth in the Company's loan portfolios. The average loan portfolio
outstanding during the nine months ended September 30, 1996 was $126.2 million,
a 40% increase from $90.1 million in the comparable period of 1995.
Accordingly, interest income on loans increased by $2,766,000, or 27%, from
$10,435,000 during the nine months ended September 30, 1995 to $13,201,000
during the nine months ended September 30, 1996. Average temporary investments
outstanding during the nine months ended September 30, 1996 were $18.9 million,
a 41% decrease from $32.3 million in the comparable period of 1995.
Accordingly, interest income on temporary investments decreased by $763,000, or
53%, from $1,429,000 during the nine months ended September 30, 1995 to
$666,000 during the nine months September 30, 1996.
Premium income decreased by $746,000, or 33%, from $2,228,000 for the
nine months ended September 30, 1995 to $1,482,000 for the nine months ended
September 30, 1996. This decrease was primarily attributable to a 28%
decrease in the amount of loans held for sale or sold (under the SBA 7(a) loan
program) during the nine months ended September 30, 1995 ($25.0 million) as
compared to the nine month period ended September 30, 1996 ($18.0 million). In
addition, a portion of the decrease was attributable to the reasons described
under the caption "Results of Operations".
Other investment income, net, increased by $311,000 from $62,000 for the
nine months ended September 30, 1995 to $373,000 for the nine months ended
September 30, 1996. This increase was primarily attributable to prepayment
fees received on loans during the nine months ended September 30, 1996. There
were no prepayment fees assessed during the nine months ended September 30,
1995.
Other income, net, increased by $215,000, or 14%, from $1,500,000 during
the nine months ended September 30, 1995 to $1,715,000 during the nine months
ended September 30, 1996. This increase was primarily a result of investment
management fees generated by PMC Advisers (see Footnote 3 to the Financial
Statements included on this Form 10-Q).
12
<PAGE> 15
Operating expenses, not including interest, decreased by $112,000, or
3%, from $3,480,000 during the nine months ended September 30, 1995 to
$3,368,000 during the nine months ended September 30, 1996. This was primarily
a result of a $316,000 decrease in administrative and general costs. During
the third quarter of 1995, the Company expensed approximately $106,000 of costs
pertaining to its decision not to pursue an offering of common shares of PMIC.
Also, the Company had reductions in advertising, telephone, postage, travel and
miscellaneous expenses when comparing the nine months ended September 30, 1996
as to the nine months ended September 30, 1995. These decreases were partially
offset by a $166,000 increase in salaries and related benefits related
primarily to the staffing of several new employee positions.
Interest expense increased by $671,000, or 19%, from $3,617,000 during
the nine months ended September 30, 1995 to $4,288,000 during the nine months
ended September 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 $276,000 during the nine months ended September 30, 1995 to a loss of
$41,000 during the nine months ended September 30, 1996. During the nine
months ended September 30, 1996, the Company recognized $35,000 in recoveries
and decreases to previously established reserves of $11,000 which reduced the
net loss during the period. During the third quarter of 1995, the Company
recognized increases of $165,000 to reserves relating to the liquidation of
several loans. There were no recoveries during the nine months ended September
30, 1995. Realized and unrealized gain (loss) on investments as a percentage
of average loans receivable for the nine month periods ended September 30, 1996
and 1995 were at annualized rates of 0.04% and 0.41%, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Interest income increased by $364,000, or 8%, from $4,397,000 for the
three months ended September 30, 1995 to $4,761,000 for the three months ended
September 30, 1996. This increase was primarily attributable to the 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 third quarter of 1996 was $135.1
million, a 33% increase from $101.2 million in the comparable period of 1995.
Accordingly, interest income on loans increased by $739,000, or 19%, from
$3,894,000 during the three months ended September 30, 1995 to $4,633,000
during the three months ended September 30, 1996. Average temporary
investments outstanding during the third quarter of 1996 were $11.1 million, a
69% decrease from $35.9 million in the comparable period of 1995. Accordingly,
interest income on temporary investments decreased by $375,000, or 75%, from
$503,000 during the three months ended September 30, 1995 to $128,000 during
the three months September 30, 1996.
13
<PAGE> 16
Premium income decreased by $162,000, or 25%, from $646,000 for the
three months ended September 30, 1995 to $484,000 for the three months ended
September 30, 1996. This decrease was primarily attributable to a 15% decrease
in the amount of loans held for sale or sold (under the SBA 7(a) loan program)
during the three month period ended September 30, 1995 ($7.1 million) as
compared to the three month period ended September 30, 1996 ($6.0 million). In
addition, a portion of the decrease was attributable to the reasons described
under the caption "Results of Operations".
Other investment income, net, increased by $111,000 from $58,000 for
the three months ended September 30, 1995 to $169,000 for the three months
ended September 30, 1996. This increase was primarily attributable to an
increase in prepayment fees of $50,000 received on loans and $61,000 of
forfeited fee income during the three months ended September 30, 1996. There
were no prepayment fees assessed or forfeited fee income earned during the
three months ended September 30, 1995.
Other income, net, increased by $116,000, or 22%, from $533,000 during
the three months ended September 30, 1995 to $649,000 during the three months
ended September 30, 1996. This increase was primarily the result of investment
management fees generated by PMC Advisers.
Operating expenses, not including interest, increased by $59,000, or
5%, from $1,127,000 during the three months ended September 30, 1995 to
$1,186,000 during the three months ended September 30, 1996. This was
primarily the result of a $141,000 increase in salaries and related benefits.
The increase was partially offset by a $117,000 decrease in general and
administrative costs relating to the expensing in the third quarter of 1995
approximately $106,000 of costs pertaining to the Company's decision not to
proceed with the offering of common shares of PMIC.
Interest expense increased by $92,000, or 7%, from $1,352,000 during
the three months ended September 30, 1995 to $1,444,000 during the three months
ended September 30, 1996. The increase was primarily attributable to the
interest expense on $7,000,000 of SBA debentures which were issued by PMIC in
September 1995 and $1,030,000 assumed by Western Financial in May 1996.
Realized and unrealized gain (loss) on investments changed from a loss
of $188,000 during the three months ended September 30, 1995 to a loss of
$23,000 during the three months ended September 30, 1996. During the third
quarter of 1995, the Company recognized $165,000 in increases to reserves
relating to the liquidation of several loans. Realized and unrealized gain
(loss) on investments as a percentage of average loans receivable for the three
month periods ended September 30, 1996 and 1995 were at low annualized rates of
approximately 0.07% and 0.74%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. At September 30, 1996, the Company had $8.9 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 February 1997.
14
<PAGE> 17
This amount could: (i) subject to SBA approval, be rolled over into a new SBA
debenture, (ii) be refinanced by other long-term debt or (iii) be paid in full
with available cash and cash equivalents.
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.
PMC Capital is required to maintain a minimum of 200% asset coverage
of debt as defined in sections 18 and 61 of the 1940 Act, as modified by
exemptive orders obtained by the Company from the Securities and Exchange
Commission. The Company is in compliance with these requirements at September
30, 1996.
COMMITMENTS. Loan commitments outstanding at September 30, 1996 to
various prospective small business companies, including the unfunded portion of
projects in the construction phase, amounted to approximately $33.0 million.
Of these commitments, $19.0 million were for loans, including the remaining
disbursements ($4.0 million to fund on $11.8 million in aggregate funding) on
partially funded loans, partially guaranteed by the SBA. Assuming all of the
SBA loan commitments were funded, approximately $18.8 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 committed amount does not necessarily represent future
cash requirements.
RECENT DEBT ACTIVITY. 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% (6.94% at September 30,
1996), (ii) PMIC issued $2 million in preferred stock, (iii) Western Financial
assumed $2.26 million in SBA debentures 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 and a $2,490,000 SBA debenture was "rolled-over" for
an additional 10 year term at an interest rate of 7.59%.
15
<PAGE> 18
ANTICIPATED FUTURE CASH REQUIREMENTS. The changes to the cost
structure regarding SBA debentures may require the Company to further utilize
other sources of funds for its SBIC activities. The cost and terms of these
other sources of funds may be more favorable than those able to be achieved on
SBA debentures; however, no assurance can be given that the Company will be
able to obtain such alternative financing on terms acceptable to the Company.
The Company has historically been able to raise capital through the private
placement of notes and through securitization and sale of a portion of its
portfolio. When additional funds are required, the Company will determine the
most favorable form of financing, including either: (i) the issuance of SBA
debentures, (ii) the issuance of additional senior unsecured notes, (iii) the
private or public issuance of equity and/or (iv) the securitization and
structure of 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 be able to meet its liquidity needs for the foreseeable
future.
On November 13, 1996, a newly formed special purpose affiliate of the
Company, PMC Capital Limited Partnership, a Delaware limited partnership, (the
"Partnership"), completed a private placement of approximately $40.7 million of
its Loan-Backed Fixed Rate Notes, Series 1996-A (the "Notes"). The Notes,
issued at par, which mature in 2011 and bear interest at the rate of 6.725% per
annum, are collateralized by approximately $46.3 million of loans contributed
by the Company to the Partnership. In connection with this private placement,
the Notes were given a rating of "Aa2" by Moody's Investors Service. The loans
were originated or purchased by the Company in accordance with the Company's
lending strategy and underwriting criteria. The Partnership has the exclusive
obligation for the repayment of the Notes, and the holders of the Notes have no
recourse to the Company or its assets in the event of nonpayment of the loans.
The net proceeds from the issuance of the Notes (approximately $37.5 million
after giving effect to payment of offering costs of approximately $234,000 and
the funding of an approximately $2.04 million reserve fund held by the trustee
as collateral) were distributed to the Company. The Company will use such
proceeds to make additional loans in accordance with its lending criteria.
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.
16
<PAGE> 19
PART II
Other Information
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Ex-27 Financial Data Schedule.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended September 30, 1996.
17
<PAGE> 20
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.
<TABLE>
<S> <C> <C>
PMC Capital, Inc.
Date: 11/14/96 \s\ Lance B. Rosemore
--------------------------- -----------------------------
Lance B. Rosemore
President
Date: 11/14/96 \s\ Barry N. Berlin
-------------------------- -----------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting
Officer)
</TABLE>
18
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
EX-27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 FORM 10-Q OF PMC CAPITAL INC. AND ITS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 351
<SECURITIES> 8,550
<RECEIVABLES> 141,330<F1>
<ALLOWANCES> (456)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 493
<DEPRECIATION> (299)
<TOTAL-ASSETS> 158,587<F2>
<CURRENT-LIABILITIES> 8,388<F3>
<BONDS> 79,570
4,000<F4>
3,000<F4>
<COMMON> 60,750
<OTHER-SE> 819
<TOTAL-LIABILITY-AND-EQUITY> 158,587<F5>
<SALES> 0
<TOTAL-REVENUES> 17,435<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,368
<LOSS-PROVISION> 41
<INTEREST-EXPENSE> 4,288
<INCOME-PRETAX> 9,738
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,738
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
<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 terms not included above:
(i) Excess servicing asset $ 4,813
(ii) Restricted investements 1,459
(iii) Real property owned 249
(iv) Due from affiliates 1,091
(v) Deferred charges, deposit
other assets, net 930
(vi) Investment in subsidiary 76
--------
$ 8,618
========
<F3>Includes the following:
(i) Accrued interest payable $ 984
(ii) Borrower advances 2,127
(iii) Dividends payable 3,323
(iv) Accounts payable 1,954
--------
$ 8,388
========
<F4>Preferred stock of subsidiary held be SBA. See footnotes to financial
statements.
<F5>Includes the following items not included above:
(i) Deferred fee revenue $ 809
(ii) Other liabilities 1,251
--------
2,060
========
<F6>Revenues consist primarily of interest and other yield on investments.
</FN>
</TABLE>
