<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to___________
Commission File Number 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 (972) 349-3200
- ------------------------------------------------ -------------------------------
(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 3, 1997, Registrant had outstanding 11,545,150 shares of Common
Stock, par value $.01 per share.
<PAGE> 2
PMC CAPITAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
---------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 (Unaudited) and December 31, 1996 2
Consolidated Statements of Income (Unaudited)
Nine Months Ended September 30, 1997 and 1996 3
Three Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
<PAGE> 3
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,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net ........................................ $ 131,060 $ 93,354
Cash equivalents ............................................. 10,415 49,677
Investment in unconsolidated subsidiaries .................... 7,965 8,585
Interest-only strip receivable ............................... 3,176 3,143
Restricted investments ....................................... 1,523 1,229
Real property owned .......................................... 382 303
--------- ---------
TOTAL INVESTMENTS .............................................. 154,521 156,291
--------- ---------
OTHER ASSETS:
Receivable for loans sold .................................... 1,493 2,508
Due from unconsolidated subsidiaries ......................... 1,138 1,097
Servicing asset .............................................. 1,672 1,753
Deferred charges, deposits and other assets .................. 1,226 885
Accrued interest receivable .................................. 542 376
Cash ......................................................... 225 340
Property and equipment, net .................................. 244 181
--------- ---------
TOTAL OTHER ASSETS ............................................. 6,540 7,140
--------- ---------
TOTAL ASSETS ................................................... $ 161,061 $ 163,431
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ....................................... $ 41,290 $ 44,570
Notes payable ................................................ 36,000 35,000
Accounts payable ............................................. 1,873 4,145
Dividends payable ............................................ 3,683 3,635
Borrower advances ............................................ 1,509 1,795
Accrued interest payable ..................................... 909 1,442
Due to unconsolidated subsidiaries ........................... 337 1,076
Other liabilities ............................................ 975 1,446
Deferred fee revenue ......................................... 670 419
--------- ---------
TOTAL LIABILITIES .............................................. 87,246 93,528
--------- ---------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY ....................... 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares of $.01 par
value, 11,491,000 and 11,162,000 shares issued
and outstanding at September 30, 1997 and
December 31, 1996, respectively.......................... 115 112
Additional paid-in capital ................................... 66,564 62,125
Undistributed net operating income ........................... 457 1,101
Net unrealized depreciation on investments ................... (321) (435)
--------- ---------
66,815 62,903
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 161,061 $ 163,431
========= =========
NET ASSET VALUE PER COMMON SHARE ............................... $ 5.81 $ 5.64
========= =========
</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
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest ............................................. $ 12,633 $ 13,867
Premium income ....................................... 1,467 1,482
Other investment income, net ......................... 390 373
-------- --------
Total investment income ................................ 14,490 15,722
Equity in income (loss) of unconsolidated subsidiaries . 1,963 (2)
Other income, net ...................................... 1,686 1,715
-------- --------
Total income ........................................... 18,139 17,435
-------- --------
EXPENSES:
Interest ............................................. 4,120 4,288
Salaries and related benefits ........................ 2,490 2,248
General and administrative ........................... 670 577
Profit sharing plan .................................. 115 152
Rent ................................................. 184 157
Legal and accounting ................................. 149 124
Small Business Administration fees ................... 86 74
Directors and shareholders expense ................... 42 36
-------- --------
Total expenses ......................................... 7,856 7,656
-------- --------
Net operating income .................................. 10,283 9,779
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off .................................. (153) (87)
Recoveries on loans written-off .................... -- 35
Change in unrealized appreciation
(depreciation) on investments .................... 114 11
-------- --------
Total realized and unrealized gain (loss)
on investments........................................ (39) (41)
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ........................... $ 10,244 $ 9,738
======== ========
PREFERRED DIVIDENDS .................................... $ 188 $ 188
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ............. 11,345 10,963
======== ========
EARNINGS PER COMMON SHARE .............................. $ 0.89 $ 0.87
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest ............................................. $ 4,478 $ 4,761
Premium income ....................................... 238 484
Other investment income, net ......................... 135 169
-------- --------
Total investment income ................................ 4,851 5,414
Equity in income (loss) of unconsolidated
subsidiaries ......................................... 634 (12)
Other income, net ...................................... 597 649
-------- --------
Total income ........................................... 6,082 6,051
-------- --------
EXPENSES:
Interest ............................................. 1,376 1,444
Salaries and related benefits ........................ 833 788
General and administrative ........................... 227 224
Profit sharing plan .................................. 37 50
Rent ................................................. 62 57
Legal and accounting ................................. 35 27
Small Business Administration fees ................... 33 34
Directors and shareholders expense ................... 8 6
-------- --------
Total expenses ......................................... 2,611 2,630
-------- --------
Net operating income ................................... 3,471 3,421
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off .................................. (82) (87)
Recoveries on loans written-off ..................... -- 6
Change in unrealized appreciation
(depreciation) on investments .................... 62 58
-------- --------
Total realized and unrealized gain (loss)
on investments....................................... (20) (23)
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ........................... $ 3,451 $ 3,398
======== ========
PREFERRED DIVIDENDS .................................... $ 63 $ 63
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ............. 11,452 11,012
======== ========
EARNINGS PER COMMON SHARE .............................. $ 0.30 $ 0.30
======== ========
</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
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss)
on investments ............................................................. $ 10,244 $ 9,738
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 ............................................ (15,725) (18,005)
Proceeds from sale of guaranteed loans ................................. 18,782 15,782
Change in unrealized depreciation on investments and
loans written-off .................................................... 295 41
Unrealized premium income, net ......................................... (188) (7)
Depreciation and amortization .......................................... 1,055 789
Accretion of loan discount and deferred fees ........................... (1,208) (569)
Deferred fees collected ................................................ 740 878
Gain on sale of assets ................................................. (4) --
Equity in (income) loss of unconsolidated subsidiaries, net ............ (1,963) 2
Net change in operating assets and liabilities:
Accrued interest receivable ........................................ (166) 15
Other assets ....................................................... (439) 244
Accrued interest payable ........................................... (533) (450)
Borrower advances .................................................. (286) (134)
Other liabilities .................................................. (2,743) (574)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 7,861 7,750
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ................................................................. (47,525) (39,243)
Principal collected and other adjustments .................................... 6,884 15,142
Proceeds from interest-only strip receivable ................................. 486 --
Purchase of furniture and fixtures and other assets .......................... (133) (52)
Proceeds from sale of assets ................................................. 107 --
Proceeds from partnership distributions ...................................... 2,583 --
Investment in unconsolidated subsidiary ...................................... -- (50)
Release of (investment in) restricted cash ................................... (294) 326
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .......................................... (37,892) (23,877)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ....................................... 3,731 1,574
Proceeds from issuance of SBA debentures ..................................... -- 940
Proceeds from revolving credit facility ...................................... 1,000 --
Payment of dividends on common stock ......................................... (9,826) (8,908)
Payment of dividends on preferred stock ...................................... (190) (188)
Payment of SBA debentures .................................................... (3,280) --
Payment of debt issuance costs ............................................... -- (8)
Advances from (to) unconsolidated subsidiaries, net .......................... (781) 44
-------- --------
NET CASH USED IN FINANCING ACTIVITIES .......................................... (9,346) (6,546)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ...................................... (39,377) (22,673)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 50,017 31,574
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 10,640 $ 8,901
======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ............................................................... $ 4,653 $ 4,739
======== ========
Dividends reinvested ........................................................ $ 711 $ 645
======== ========
Loans receivable acquired in exchange for SBA debentures .................... $ -- $ 158
======== ========
Reclassification from loans receivable to real property owned ............... $ 292 $ 224
======== ========
Loans to facilitate sale of real property owned ............................. $ -- $ 103
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 8
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet of PMC Capital, Inc. ("PMC" or
"PMC Capital") and its wholly-owned regulated investment company subsidiaries
(collectively, the "Company") as of September 30, 1997, the consolidated
statements of income for the three and nine months ended September 30, 1997 and
1996, and the consolidated statements of cash flows for the nine months ended
September 30, 1997 and 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,
1997, the results of operations for the three and nine months ended September
30, 1997 and 1996 and the cash flows for the nine months ended September 30,
1997 and 1996. 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 included in the Company's 1996 Annual Report on
Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
The results for the nine months ended September 30, 1997 are not
necessarily indicative of future financial results.
NOTE 2. RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to current
year presentation.
NOTE 3. BUSINESS:
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 directly or indirectly either the sole shareholder or partner
of PMC Advisers, Ltd. ("PMC Advisers"), PMC Funding Corp. ("PMC Funding"), PMC
Capital Corp. 1996-A ("PMC Capital Corp."), PMC Trust 1996-A and PMC Capital
Limited Partnership (the "Partnership"). PMC has elected to be taxed as a
regulated investment company and consequently distributes substantially all of
its taxable income as dividends to shareholders.
6
<PAGE> 9
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BASIS FOR CONSOLIDATION:
The consolidated financial statements include the accounts of PMC and its
wholly-owned regulated investment company subsidiaries. Intercompany
transactions have been eliminated in consolidation.
The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust
1996-A and the Partnership are accounted for by the equity method of accounting
in conformity with Federal securities laws.
Consolidated Subsidiaries
First Western is a small business lending company ("SBLC") that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration ("SBA") pursuant to its Section 7(a) Program (the "7(a)
Program").
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 and variable-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
from the SBA through the issuance of debentures (which are guaranteed by the SBA
and on which the interest rate was reduced through an SBA subsidy by 3% during
the first five years). The SBA subsidy is no longer provided on new issuances
under the SSBIC program.
Western Financial is a licensed small business investment company ("SBIC")
under the SBIA that provides fixed-rate and variable-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 from the SBA through the
issuance of debentures.
PMC originates loans to borrowers on a non-SBA supported basis using
similar criteria as that used for other loans that are funded under the SBA
programs utilized by the subsidiaries. These loans are made to borrowers who
exceed the eligibility requirements of the 7(a) Program or SBIC programs.
Unconsolidated Subsidiaries
PMC Advisers, was organized in July 1993 to be the investment advisor for
PMC Commercial Trust ("PMC Commercial"), a Texas real estate investment trust
and an affiliate of PMC Capital.
PMC Funding is a Florida corporation that holds assets on behalf of the
Company. PMC Capital is the sole shareholder of PMC Funding.
7
<PAGE> 10
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BASIS FOR CONSOLIDATION: (CONTINUED)
The Partnership was formed as a Delaware limited partnership in November
1996 to act as a special purpose affiliate of the Company. The Partnership was
established to acquire loans from the Company and to issue fixed-rate debt
through a private placement.
PMC Capital Corp. is a Delaware corporation formed in November 1996 to be
the independent trustee of the general partner of the Partnership. PMC Trust
1996-A is a Delaware business trust formed in November 1996 to be the general
partner of the Partnership.
NOTE 5. IMPLEMENTATION OF SFAS 125:
Effective January 1, 1997, the Company prospectively adopted Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides for the accounting and reporting of transfers and servicing of
financial assets based on a financial-components approach.
The transfer of assets that qualifies for sale treatment under SFAS No. 125
is generally accounted for by the seller by: (i) derecognizing all assets sold,
(ii) recognizing all assets obtained and liabilities incurred at their relative
fair value, and (iii) recognizing all assets retained at their allocated
previous carrying amount based on relative fair values. The Company typically
receives cash and retains the right to receive contractual servicing fees and
the right to receive future interest income on loans sold that exceed the
contractually specified servicing fee (the interest-only strip receivable) in
exchange for a portion of the loan, typically the guaranteed portion of an SBA
7(a) loan. The difference between (i) the carrying value of the portion of loans
sold and (ii) the sum of (a) cash received, (b) the relative fair values of the
servicing rights and (c) the interest-only strip receivable retained,
constitutes the gain on sale.
SFAS No. 125 also requires that amounts carried previously as excess
servicing assets be reclassified between a servicing asset and an interest-only
strip receivable, as defined. Accordingly, the Company reclassified its excess
servicing asset (net of an allowance for credit losses on loans sold) of
$4,896,000 at December 31, 1996 to $1,753,000 of a servicing asset and
$3,143,000 of an interest-only strip receivable.
In accordance with SFAS No. 125, the servicing asset is amortized in
proportion to and over the period of estimated net servicing income and is
evaluated for impairment by stratifying the servicing assets by one or more of
the predominant risk characteristics of the underlying financial assets. The
interest-only strip receivable is accounted for as an investment in debt
securities classified as trading under SFAS No. 115. Accordingly, commencing
with the three months ended March 31, 1997 and for each quarter thereafter, the
Company measures the fair value of the interest-only strip receivable based upon
the future anticipated cash flows discounted to reflect the current market
interest rates for investments of this type. Any appreciation or depreciation of
the interest-only strip receivable is reflected on the accompanying consolidated
statements of income as an
8
<PAGE> 11
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. IMPLEMENTATION OF SFAS 125: (CONTINUED)
unrealized gain (loss) on investment. During the three and nine months ended
September 30, 1997, there was no material appreciation or depreciation of the
interest-only strip receivable recognized.
The estimated net servicing income and the investment in the interest-only
strip receivable are based in part upon management's estimate of prepayment
speeds, including default rates. There can be no assurance of the accuracy of
these estimates. If the prepayment speeds occur at a faster rate than
anticipated, the amortization of the servicing asset will be accelerated and the
value of the interest-only strip receivable will decline, accordingly total
income during the period of change and subsequent periods would be reduced. If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and total income during the period of change and subsequent periods
would be enhanced. During the three and nine months ended September 30, 1997 as
compared to the respective periods of the prior year, as a result of increased
prepayment speeds, the amount of amortization of the servicing asset was
increased.
NOTE 6. LONG-TERM DEBT:
During February 1997 and September 1997, the Company repaid $2,480,000 and
$800,000 respectively, in SBA debentures at their maturity.
NOTE 7. DIVIDENDS DECLARED:
During the three and nine months ended September 30, 1997, the Company
declared dividends on its common stock in amounts of $0.315 and $0.930 per
share, respectively.
NOTE 8. PMC LIMITED PARTNERSHIP:
As described in Note 4, the accounts of the Partnership are accounted for
by the equity method of accounting in conformity with Federal securities law.
During the nine months ended September 30, 1997, the Partnership had $3.9
million in total revenues and net operating income of $2.0 million.
NOTE 9. CONDENSED COMBINED FINANCIAL STATEMENTS:
As described in Note 3, the consolidated financial statements include the
accounts of PMC and its wholly-owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding, the Partnership, PMC Capital Corp.
and PMC Trust 1996-A (the "Unconsolidated Entities") are accounted for by the
equity method of accounting in conformity with Federal securities law. The
following are the condensed combined balance sheets as of September 30, 1997 and
December 31, 1996 and the condensed combined statements of income for the three
and nine months ended September 30, 1997 for the Company and the Unconsolidated
Entities.
9
<PAGE> 12
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS (In thousands)
Investments at value:
Loans receivable, net ........................... $ 167,304 $ 135,159
Cash equivalents ................................ 10,770 49,816
Interest-only strip receivable .................. 3,100 3,143
Restricted investments and real property owned... 4,224 6,976
--------- ---------
185,398 195,094
Other assets ...................................... 7,087 7,975
--------- ---------
Total assets .................................... $ 192,485 $ 203,069
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable .......................... $ 41,290 $ 44,570
Notes payable ................................... 67,180 75,183
Other liabilities ............................... 10,200 13,413
--------- ---------
118,670 133,166
--------- ---------
Cumulative preferred stock of subsidiary ........ 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock .................................... 115 112
Additional paid-in capital ...................... 66,564 62,125
Undistributed net operating income .............. 457 1,101
Net unrealized depreciation on investments ...... (321) (435)
--------- ---------
66,815 62,903
--------- ---------
Total liabilities and shareholders' equity ...... $ 192,485 $ 203,069
========= =========
</TABLE>
10
<PAGE> 13
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
-------- -------
(Unaudited, in thousands)
<S> <C> <C>
INCOME:
Investment income ................................. $ 18,335 $ 6,055
Other income, net ................................. 1,792 662
-------- -------
Total income ................................... 20,127 6,717
-------- -------
EXPENSES:
Interest .......................................... 5,903 1,896
Salaries and related benefits ..................... 2,490 833
General and administrative expenses ............... 874 341
Other ............................................. 577 176
-------- -------
Total expense .................................. 9,844 3,246
-------- -------
Net operating income ................................ 10,283 3,471
Realized and unrealized gain (loss) on investments... (39) (20)
-------- -------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ..................... $ 10,244 $ 3,451
======== =======
</TABLE>
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share. SFAS No. 128
is designed to improve the earnings per share information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of PMC's earnings per
share data to that of other similar entities. SFAS No. 128 is effective for
financial statements for periods ending after December 15, 1997. In the opinion
of management, the effect of this pronouncement on the Company's earnings per
share will not be significant.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires certain disclosure about an
entity's capital structure. SFAS No. 129 is effective for financial statements
for periods ending after December 15, 1997. In the opinion of management, the
effect of this pronouncement on the Company's financial position or results of
operations will not be significant.
11
<PAGE> 14
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SUBSEQUENT EVENT
First Western is in the process of pooling approximately $23 million of its
retained portfolio into an asset held for sale (the "Pooled Assets"). It is
anticipated that the sale of the Pooled Assets will be completed during the
quarter ending December 31, 1997. There can be no assurance that the Company
will be able to complete this securitization and sale.
12
<PAGE> 15
PART I
Financial Information
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
GENERAL
The Company's operations include originating and servicing commercial loans
for its own account as well as operating as an investment advisor which
evaluates and services loans under a fee arrangement for PMC Commercial, an
affiliate of the Company. In addition, the Company sells the guaranteed portion
of its loans originated under the 7(a) Program. In November 1996, the Company
securitized a portion of its fixed-rate portfolio as part of a structured
financing (the "Structured Financing") to provide an additional source of
working capital. The Company retains servicing and residual interests in all
loans sold.
The Company's revenue sources include the following:
o Interest earned on loans originated and retained including the effect
of commitment fees collected at the inception of the loan (generally
3% on fixed-rate loans and 1% on variable-rate loans other than 7(a)
Program loans).
o Advisory fee income from the management of PMC Commercial.
o Equity in the income of non-investment company subsidiaries.
o Premiums recognized from the sale of the government guaranteed portion
of 7(a) Program loans.
o Interest earned on temporary (short-term) investments.
o Other fees, including: late fees, prepayment fees, construction
monitoring and site visit fees.
The following table sets forth information relating to the aggregate gross
loans funded by the Company:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS YEARS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
---------------- ------------------ ------------------
1997 1996 1997 1996 1996 1995
----- ------- ------- ------- ------- -------
COMPANY
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PMIC .......................... $ 14.5 $ 17.0 $ 4.3 $ 3.2 $ 19.3 $ 21.2
Western Financial ............. 9.1 4.8 5.8 1.0 7.5 8.0
First Western ................. 22.5 24.0 4.6 7.7 29.2 40.6
PMC Capital ................... 17.1 11.4 6.3 4.2 14.2 7.7
------- ------- ------- ------- ------- -------
Total................. $ 63.2 $ 57.2 $ 21.0 $ 16.1 $ 70.2 $ 77.5
======= ======= ======= ======= ======= =======
</TABLE>
13
<PAGE> 16
In 1993, the Company formed an investment advisor which, pursuant to the
terms of an investment management agreement, acts as the investment advisor for
PMC Commercial. PMC Advisers has been the investment advisor for PMC Commercial
since the completion of PMC Commercial's initial public offering in December
1993. During the three and nine months ended September 30, 1997, PMC Advisers
earned management fees of approximately $412,000 and $1,203,000, respectively,
from PMC Commercial.
The Company also earns income through its equity ownership in its
non-investment company subsidiaries, primarily the Partnership. In November
1996, as part of the Structured Financing, the Partnership completed the private
placement of approximately $40.7 million of notes which were issued at par with
an annual interest rate of 6.725% (the "Notes"). The Notes were originally
collateralized by approximately $45.7 million of loans contributed to the
Partnership by PMC Capital. The net proceeds of the issuance of the Notes,
approximately $37.5 million, were distributed to PMC Capital and are being
utilized to originate additional loans. The differential between the interest
received on the collateralized loans (originally $45.7 million of loans at an
average yield of 11.5%) and the interest paid on the Notes (originally $40.7
million at an interest rate of 6.725%), less any loan losses and amortization of
transaction fees, contributes to the profit of PMC Capital. The Partnership's
net income was $328,000 from November 12, 1996 (inception) to December 31, 1996
and $650,000 and $2,001,000 during the three and nine months ended September 30,
1997, respectively.
In management's opinion, there has been an increasing amount of competitive
lending activity at advance rates and interest rates which are considerably more
aggressive than those offered by the Company. In order to maintain a quality
portfolio, the Company will continue to adhere to its historical underwriting
criteria, and as a result, certain loan origination opportunities will not be
funded by the Company. The Company has instituted the Prime Lending Program, as
described below, to attract those established seasoned small business lending
opportunities which merit lower interest rates. The yield on these loans
(assuming no change in the prime rate) will be lower than the Company has
historically experienced.
Due to the reduction of loan origination opportunities experienced by First
Western over the past several years, the Company has actively sought to increase
other sources of revenues and thereby reduce its reliance on the income
generated by First Western. During this period the Company's other lending
activities have increased and the Company has established other revenue sources
such as investment advisory income.
Late in the fourth quarter of 1996, the Company began marketing a new
variable rate lending program (the "Prime Lending Program") which is separate
from the 7(a) Program of First Western, the Company's other variable rate
lending program. The Prime Lending Program is designed to refinance existing
real estate collateralized commercial loans with borrowers who have proven
timely payment histories and loan-to-value and debt coverage ratios within the
Company's underwriting criteria. It is anticipated that many of the loans
refinanced under the Prime Lending Program will originally have been 7(a)
Program loans and that some of these loan originations may refinance loans
currently in First Western's portfolio. These loans have variable interest rates
based on the Prime Rate (as defined below). At September 30, 1997, approximately
$35 million in principal was outstanding on loans originated under the Prime
Lending Program with a weighted average interest rate of 9.8% at September 30,
1997 which is 1.3% over the Prime Rate.
14
<PAGE> 17
Additionally, the Company was approved in March 1997 as a licensee under
the Rural Economic Development Business and Industry Loan Program sponsored by
the U.S. Department of Agriculture (the "B & I Loan Program"). Under the B & I
Loan Program, loans are to be originated in rural areas (generally areas with a
population of less than 50,000) and are partially guaranteed by the U.S.
Government. The U.S. Government guarantees repayment of an amount in general up
to 80% of the principal amount of loans originated under the B & I Loan Program.
To date, the Company has not funded any loans under the B & I Loan Program and
has several loans in the process of closing.
Substantially all of the First Western loans and the loans originated under
the Prime Lending Program are variable rate which reset quarterly based on a
spread above the prime rate of interest as stated in The Wall Street Journal on
the first day of the applicable period ("Prime Rate"). The spread above the
Prime Rate charged by First Western ranges from 1.0% to 2.75%.
Prime rates utilized for the Company's variable rate loans were as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994
------ ------ ------ -----
<S> <C> <C> <C> <C>
First Quarter 8.25% 8.50% 8.50% 6.00%
Second Quarter 8.50% 8.25% 9.00% 6.25%
Third Quarter 8.50% 8.25% 9.00% 7.25%
Fourth Quarter 8.50% 8.25% 8.75% 7.75%
</TABLE>
Due to the decline in interest rates since the second quarter of 1995 and
the increased availability of either fixed-rate loans or variable-rate loans
with interest rates less than that on the outstanding portfolio of the Company,
prepayments increased during the latter half of 1996 and have continued during
1997.
The Company receives other investment income from various sources including
late fees, prepayment fees, construction monitoring and site visit fees. The
amount earned will vary based on volume funded, the mix of loans (construction
versus non-construction), the rate on loans originated (whether fixed or
floating) as well as the general level of interest rates.
Expenses primarily consist of interest and overhead expenses. Expenses were
43% and 44% of total income during nine month periods ended September 30, 1997
and 1996, respectively. The increase was due to increased salary and overhead to
manage the Company's increased serviced loan portfolio.
Interest expense is primarily derived from: (i) unsecured notes with a
weighted average interest rate of 7.3% and weighted average remaining maturity
of 4.1 years as of September 30, 1997, and (ii) debentures due to the SBA as a
result of borrowings made by the Company's SBIC subsidiaries, with a weighted
average interest rate of 6.9% and weighted average remaining maturity of 5.0
years as of September 30, 1997. At September 30, 1997, the Company had $1.0
million outstanding under its revolving credit facility which bears interest at
the rate of 8%, and had remaining availability of $14 million.
15
<PAGE> 18
Company overhead is comprised of salaries and related benefits, general and
administrative, profit sharing plan, rent, legal and accounting, SBA fees and
directors and shareholders expense. The Company's operations are centralized
from its headquarters in Dallas, Texas. The Company presently has other
marketing offices located in: Hollywood, Florida; Atlanta, Georgia; Phoenix,
Arizona; and Austin, Texas. It is anticipated that overhead expenses will
continue to increase as the Company's portfolio under management increases and
due to an increased marketing effort.
The largest overhead expense is the salaries and related benefits for the
Company's officers and employees who provide the management and portfolio
functions including marketing, servicing, accounting and portfolio analysis.
Salaries and related benefits were 14% and 13% of total income during the nine
months ended September 30, 1997 and 1996, respectively.
General and administrative expenditures consist primarily of the Texas
franchise tax, advertising and promotional expense, telephone services,
corporate printing costs and general office expenses. General and administrative
expenses as a percentage of total income were 4% and 3% during the nine months
ended September 30, 1997 and 1996, respectively. These costs are anticipated to
increase in proportion to the growth of the Company's portfolio under
management. During each of the nine month periods ended September 30, 1997 and
1996, the Company expensed $177,000 relating to the Texas franchise tax.
Other expenses incurred by the Company are profit sharing plan, rent, legal
and accounting, SBA fees and directors and shareholders expense (collectively
the "Other Administrative Costs"). The Other Administrative Costs were 3% of
total income during each of the nine months ended September 30, 1997 and 1996.
CERTAIN ACCOUNTING CONSIDERATIONS
Effective January 1, 1997, the Company adopted as required, SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125 provides for the accounting and reporting of
transfers and servicing of financial assets based on a financial-components
approach. SFAS No. 125 is required to be adopted prospectively.
The transfer of assets that qualifies for sale treatment under SFAS No. 125
is generally accounted for by the seller by: (i) derecognizing all assets sold,
(ii) recognizing all assets obtained and liabilities incurred at their relative
fair value, and (iii) recognizing all assets retained at their allocated
previous carrying amount based on relative fair values. The Company typically
receives cash and retains the right to receive contractual servicing fees and
the right to receive future interest income on loans sold that exceed the
contractually specified servicing fee (the interest-only strip receivable) in
exchange for a portion of the loan, typically the guaranteed portion of an SBA
7(a) loan. The difference between (i) the carrying value of the portion of loans
sold and (ii) the sum of (a) cash received, (b) the relative fair values of the
servicing rights and (c) the interest-only strip receivable retained,
constitutes the gain on sale.
SFAS No. 125 also requires that amounts carried previously as excess
servicing assets be reclassified between a servicing asset and an interest-only
strip receivable, as defined. Accordingly, the Company reclassified its excess
servicing asset (net of an allowance for credit losses on loans sold) of
$4,896,000 at December 31, 1996 to $1,753,000 of a servicing asset and
$3,143,000 of an interest-only strip receivable.
16
<PAGE> 19
In accordance with SFAS No. 125, the servicing asset is amortized in
proportion to and over the period of estimated net servicing income and is
evaluated for impairment by stratifying the servicing assets by one or more of
the predominant risk characteristics of the underlying financial assets. The
interest-only strip receivable is accounted for like an investment in debt
securities classified as trading under SFAS No. 115. Accordingly, commencing
with the three months ended June 30, 1997 and for each quarter thereafter, the
Company measures the fair value of the interest-only strip receivable based upon
the future anticipated cash flows discounted to reflect the current market
interest rates for investments of this type. Any appreciation or depreciation of
the interest-only strip receivable will be reflected on the accompanying
consolidated statements of income as an unrealized gain (loss) on investment.
During the three and nine months ended September 30, 1997, there was no material
appreciation or depreciation of the interest-only strip receivable recognized.
The estimated net servicing income and the investment in the interest-only
strip receivable are based in part upon management's estimate of prepayment
speeds, including default rates. There can be no assurance of the accuracy of
these estimates. If the prepayment speeds occur at a faster rate than
anticipated, the amortization of the servicing asset will be accelerated and the
value of the interest-only strip receivable will decline. If prepayments occur
slower than anticipated, cash flows would exceed estimated amounts and total
income in future periods would be enhanced. During the three and nine months
ended September 30, 1997 as compared to the respective periods of the prior
year, as a result of increased prepayment speeds, the amount of amortization of
the servicing asset was increased.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
Interest income decreased by $1,234,000 (9%), from $13,867,000 for the nine
months ended September 30, 1996 to $12,633,000 for the nine months ended
September 30, 1997. This decrease was primarily attributable to a reduction in
PMC Capital's loan portfolio resulting from the Structured Financing completed
during November 1996. The average retained loan portfolio outstanding decreased
13% from $126.2 million during the nine months ended September 30, 1996 to
$110.4 million during the nine months ended September 30, 1997. This portfolio
reduction was due to the transfer of approximately $46 million of loans to the
Partnership as part of the Structured Financing. Accordingly, interest income
(not including the Partnership) on loans decreased by $1,749,000, or 13%, from
$13,201,000 during the nine months ended September 30, 1996 to $11,452,000
during the nine months ended September 30, 1997. Including the interest earned
by the Partnership of $3,594,000, interest income on loans increased by
$1,845,000 (14%) to $15,046,000 for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996. During the first nine
months of 1997, the Company earned increased interest on short-term investments
due to the funds received from the Structured Financing. As a result, during the
first nine months of 1997, average temporary investments outstanding were $31.1
million, a 65% increase, from $18.9 million during the first nine months of
1996. Accordingly, interest on temporary investments increased by $515,000, or
77%, from $666,000 during the nine months ended September 30, 1996 to $1,181,000
during the nine months ended September 30, 1997.
Premium income decreased by $15,000 (1%), from $1,482,000 for the nine
months ended September 30, 1996 to $1,467,000 for the nine months ended
September 30, 1997. This decrease was primarily attributable to a 5% decrease in
the guaranteed portion of loans held for
17
<PAGE> 20
sale or sold (under the 7(a) Program) from $18.0 million during the nine months
ended September 30, 1996 to $17.1 million during the nine months ended September
30, 1997.
Other investment income, net, increased by $17,000 (5%), from $373,000 for
the nine months ended September 30, 1996 to $390,000 for the nine months ended
September 30, 1997. This increase was primarily attributable to an increase in
prepayment fees received on loans during the nine months ended September 30,
1997 as compared to the nine months ended September 30, 1996.
Equity in income (loss) of unconsolidated subsidiaries increased by
$1,965,000, from a loss of $2,000 during the nine months ended September 30,
1996 to income, net, of $1,963,300 during the nine months ended September 30,
1997. The increase is primarily due to the formation of the Partnership in
November 1996 which had net profits of $2,001,000 during the nine months ended
September 30, 1997. The Partnership profits include all yield generated from the
loans contributed by PMC Capital less the cost of the Notes issued by the
Partnership. Offsetting a portion of the Partnership income were the operations
of PMC Funding which had a decrease in revenues from charter services of its
airplane which resulted in a reduction in profits from a loss of $2,000 during
the nine months ended September 30, 1996 to a loss of $38,000 during the nine
months ended September 30, 1997.
Other income, net, decreased by $29,000 (2%), from $1,715,000 during the
nine months ended September 30, 1996 to $1,686,000 during the nine months ended
September 30, 1997. Other income decreased in the first nine months of 1997 as
compared to the first nine months of 1996 as a result of a $251,000 fee
generated by PMC Advisers during the third quarter of 1996 related to an equity
offering of PMC Commercial. There was no comparable transaction in 1997.
Operating expenses, not including interest, increased by $368,000 (11%),
from $3,368,000 during the nine months ended September 30, 1996 to $3,736,000
during the nine months ended September 30, 1997. This increase was a result of
an increase in salaries and related benefits of $242,000 (11%), from $2,248,000
during the nine months ended September 30, 1996, to $2,490,000 during the nine
months ended September 30, 1997. The increase in salaries and related benefits
was attributable to an increased number of employees (due to the increase in
portfolio under management, the complexity of the financing transactions
undertaken by the Company and an increase in marketing personnel), and a general
increase in the level of salaries for employees during 1996 and 1997. Rent
expense increased by $27,000 (17%) during the nine months ended September 30,
1997 as compared to the nine months ended September 30, 1996 due to the opening
of a new office during 1997 (Phoenix, Arizona and Austin, Texas) and the
expansion of the Company's space occupied and an increase in the base rent at
its headquarters. Legal and accounting increased by $25,000 (20%) during the
nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996 due to the increased cost of the annual audit (primarily
attributable to the formation of the Partnership) and increases in general
corporate legal services. General and administrative costs increased by $93,000
(16%) during the nine months ended September 30, 1997 as compared to the nine
months ended September 30, 1996 primarily as a result of increased marketing
efforts including attendance at trade shows by representatives of the Company.
Interest expense decreased by $168,000 (4%), from $4,288,000 during the
nine months ended September 30, 1996 to $4,120,000 during the nine months ended
September 30, 1997. The decrease was primarily attributable to the repayment at
maturity of approximately $2.5 million in SBA debentures during February 1997.
18
<PAGE> 21
Realized and unrealized gain (loss) on investments changed from a loss of
$41,000 during the nine months ended September 30, 1996 to a loss of $39,000
during the nine months ended September 30, 1997. During both periods, loan
losses were minimal. During the nine months ended September 30, 1996, the
Company recognized $35,000 in recoveries from previously written-off loans which
reduced the net loss during the period. There were no comparable recoveries
during the nine months ended September 30, 1997. During the nine months ended
September 30, 1997, the Company recognized approximately $86,000 in reversal of
reserves on loans that paid in full which previously had reserves or have become
amortizing loans and the likelihood of collection has significantly increased
which reduced the net loss during the period. There were no comparable
adjustments during the nine months ended September 30, 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
Interest income decreased by $283,000 (6%), from $4,761,000 for the three
months ended September 30, 1996 to $4,478,000 for the three months ended
September 30, 1997. This decrease was primarily attributable to a reduction in
PMC Capital's loan portfolio resulting from the Structured Financing completed
during November 1996. The average retained loan portfolio outstanding decreased
9% from $135.1 million during the three months ended September 30, 1996 to
$122.5 million during the three months ended September 30, 1997. This portfolio
reduction was due to the transfer of approximately $46 million of loans to the
Partnership as part of the Structured Financing. Accordingly, interest income
(not including the Partnership) on loans decreased by $401,000, or 9%, from
$4,633,000 during the three months ended September 30, 1996 to $4,232,000 during
the three months ended September 30, 1997. Including the interest earned by the
Partnership, interest income on loans increased by $764,000 (16%) to $5,397,000
for the three months ended September 30, 1997. During the third quarter of 1997,
the Company earned increased interest on short-term investments due to the funds
received from the Structured Financing. As a result, during the third quarter of
1997, average temporary investments outstanding were $18.6 million, a 68%
increase, from $11.1 million during the third quarter of 1996. Accordingly,
interest on temporary investments increased by $118,000, or 92%, from $128,000
during the three months ended September 30, 1996 to $246,000 during the three
months ended September 30, 1997.
Premium income decreased by $246,000 (51%), from $484,000 for the three
months ended September 30, 1996 to $238,000 for the three months ended September
30, 1997. This decrease was primarily attributable to a 53% decrease in the
guaranteed portion of loans held for sale or sold (under the 7(a) Program), from
$6.0 million during the three months ended September 30, 1996 to $2.8 million
during the three months ended September 30, 1997. During the third quarter of
1997, several construction loans in process at First Western were not completed
and accordingly, the gain recognition has been deferred until later periods. It
is anticipated that fundings for First Western for the fourth quarter of 1997
and the amount available for sale will be below prior years comparable period.
Other investment income, net, decreased by $34,000 (20%), from $169,000 for
the three months ended September 30, 1996 to $135,000 for the three months ended
September 30, 1997. This increase was primarily attributable to an decrease in
prepayment fees received on loans.
19
<PAGE> 22
Equity in income (loss) of unconsolidated subsidiaries increased by
$646,000, from a loss of $12,000 during the three months ended September 30,
1996 to net income of $634,000 during the three months ended September 30, 1997.
The increase is primarily due to the formation of the Partnership in November
1996 which had net profits of $650,000 during the three months ended September
30, 1997. The Partnership profits include all yield generated from the loans
contributed by PMC Capital less the cost of the Notes issued by the Partnership.
Offsetting a portion of the Partnership income were the operations of PMC
Funding which had a decrease in revenues from charter services of its airplane
which resulted in a reduction in profits from a loss of $10,000 during the three
months ended September 30, 1996 to a loss of $16,000 during the three months
ended September 30, 1997.
Other income, net, decreased by $52,000 (8%), from $649,000 during the
three months ended September 30, 1996 to $597,000 during the three months ended
September 30, 1997. Other income decreased in the third quarter of 1997 as
compared to the third quarter of 1996 as a result of investment management fees
generated by PMC Advisers. During the three months ended September 30, 1996,
$251,000 of fees was earned under the Investment Management Agreement pursuant
to the public offering of common shares by PMC Commercial. No comparable
transaction occurred during the three months ended September 30, 1997.
Offsetting this decrease in investment management fees was an increase in fees
earned due to an increase in the serviced portfolio of PMC Commercial resulting
in an increase in base fees of $143,000. The increase in total investment
management fees was partially offset by a decrease in construction fee income.
Operating expenses, not including interest, increased by $49,000 (4%), from
$1,186,000 during the three months ended September 30, 1996 to $1,235,000 during
the three months ended September 30, 1997. This increase was a result of an
increase in salaries and related benefits of $45,000 (6%), from $788,000 during
the three months ended September 30, 1996, to $833,000 during the three months
ended September 30, 1997. The increase in salaries and related benefits was
attributable to an increased number of employees (due to the increase in
portfolio under management, the complexity of the financing transactions
undertaken by the Company and an increase in marketing personnel), and a general
increase in the level of salaries for employees during 1996 and 1997. Rent
expense increased by $5,000 (8%) during the three months ended September 30,
1997 as compared to the three months ended September 30, 1996 due to the opening
of a new office during January 1997 (in Phoenix, Arizona), the expansion of the
Company's space occupied and an increase in the base rent at its headquarters.
General and administrative costs increased by $3,000 (1%) during the three
months ended September 30, 1997 as compared to the three months ended September
30, 1996 primarily as a result of increased marketing efforts, including
attendance at trade shows by representatives of the Company, during the third
quarter of 1997.
Interest expense decreased by $68,000 (5%), from $1,444,000 during the
three months ended September 30, 1996 to $1,376,000 during the three months
ended September 30, 1997. The decrease was primarily attributable to the
repayment at maturity of approximately $2.5 million in SBA debentures during
February 1997.
Realized and unrealized gain (loss) on investments changed from a loss of
$23,000 during the three months ended September 30, 1996 to a loss of $20,000
during the three months ended September 30, 1997. During both periods, loan
losses were minimal.
20
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans. The Company
also uses funds to acquire loans from governmental agencies and/or their agents,
for the payment of financing costs, dividends to shareholders, general and
administrative expenses, capital expenditures, advances on loan liquidations and
principal due on borrowing facilities. Approximately $3.5 million of the
Company's SBA debentures were paid in full during 1997. As a regulated
investment company, pursuant to the Internal Revenue Code of 1986, the Company
is required to pay out substantially all of its net investment company taxable
income to the common shareholders. To sustain growth in the size of its
investment portfolio, the Company continually reviews the need for obtaining
additional funds from either: (i) debt offerings and additional credit
facilities, (ii) securitization and sale of a portion of the loan portfolio
and/or (iii) equity offerings. Historically, the Company's primary sources of
capital and liquidity have been debentures issued through programs of the SBA,
private and public issuances of common stock, the issuance of senior unsecured
notes, the securitization and sale of its loan portfolio and the utilization of
its short-term, uncollateralized revolving credit facility.
Loan commitments outstanding at September 30, 1997 to various prospective
small business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $71.2 million. Of these
commitments, $18.6 million were for loans partially guaranteed by the SBA of
which approximately $16.0 million would be sold (if fully funded) into the
secondary market. Such commitments are made in the ordinary course of the
Company's business. Commitments to extend credit are agreements to lend to a
customer provided that the terms established in the contract are met.
Commitments generally have fixed expiration dates and require payment of a fee.
Since some commitments expire without the proposed loan closing, the total
commitment amounts do not necessarily represent future cash requirements.
In order to meet its working capital requirements and increase the size of
its investment portfolio, the Company and the Partnership have completed the
following leverage transactions since the beginning of 1995:
<TABLE>
<CAPTION>
STATED
MATURITY
DATE AMOUNT RATE DATE DESCRIPTION
---- ------ ---- -------- -----------
<S> <C> <C> <C> <C> <C>
April, 1995 $ 5,000,000 8.600% April, 2003 Unsecured note
April, 1995 $ 5,000,000 Libor + 1.300% April, 2004 Unsecured note
May, 1995 $ 2,000,000 4.000% May, 2010 Preferred Stock - PMIC
May, 1995 (1) $ 2,260,000 7.500% to 10.400% Up to December, 2002 SBA Debentures
March, 1995 $ 3,000,000 4.840% (2) March, 2005 SBA Debentures
June, 1995 $ 5,000,000 3.690% (2) June, 2005 SBA Debentures
September, 1995 $ 7,000,000 3.875% (2) September, 2005 SBA Debentures
May, 1996 (1) $ 1,030,000 9.300% June, 2000 SBA Debentures
November, 1996 $40,746,000 6.725% August, 2011 Structured Financing(3)
</TABLE>
(1) Assumed debentures from a non-affiliated SBIC.
(2) Rate increases 3% five years from the date of issuance until maturity.
(3) Fixed rate loan-backed notes issued by the Partnership.
21
<PAGE> 24
PMC has a $15 million uncollateralized revolving credit facility which
expires May 1998. Advances pursuant to the credit facility bear interest at the
Company's option at the lender's prime rate less 50 basis points or LIBOR plus
175 basis points. The credit facility requires the Company to meet certain
covenants, the most restrictive of which includes that the ratio of net
charge-offs to net loans receivable will not exceed 2%, and the ratio of assets
to senior debt (as defined in the note agreement) will not fall below 150%. At
September 30, 1997, the Company had $1.0 million outstanding on this credit
facility with an applicable interest rate of 8%. At September 30, 1997, the
Company was in compliance with all covenants of this facility.
Due to changes in the SBIC program increasing the cost and availability of
SBA debentures and preferred stock, the Company has utilized other sources of
funds to expand its loan portfolio. The cost and terms of these other sources
of funds will not be as favorable as those historically achieved on SBA
debentures and SSBIC preferred stock; however, the Company has been able to
issue debt through private placement of notes and generate working capital
through securitization and sale of a portion of its portfolio. Since additional
funds are required in order to meet the Company's current outstanding
commitments, the Company is in the process of structuring a securitized sale of
the unguaranteed portion of SBA loans. Proceeds from the sale, net of reserve
requirements and costs of the private placement, are expected to be
approximately $20 million and are to be utilized to pay down any amount then
outstanding on the Company's revolving credit facility and to fund future loan
originations. There can be no assurance that the securitization will be
completed or, if completed, will be on the terms described above. If additional
funds are required, the Company will attempt to either issue additional
unsecured notes, privately or publicly raise equity and/or securitize and
structure a sale of a portion of either the unguaranteed portion of SBA loans
or the portfolio of PMC, Western Financial and/or 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.
PMC Capital is in compliance with the requirement 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.
22
<PAGE> 25
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q
This Quarterly Report on 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 and in most instances
are identified through the use of words such as "anticipates," "expects," and
"should." 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
Quarterly Report on 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.
23
<PAGE> 26
PART II
Other Information
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
None.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1997.
24
<PAGE> 27
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Capital, Inc.
Date: 11/12/97 /s/ Lance B. Rosemore
------------- -----------------------------------
Lance B. Rosemore
President
Date: 11/12/97 /s/ Barry N. Berlin
------------- -----------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
25
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FORM 10-Q OF PMC CAPITAL, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 225
<SECURITIES> 10,415
<RECEIVABLES> 133,416<F1>
<ALLOWANCES> (321)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 548
<DEPRECIATION> (304)
<TOTAL-ASSETS> 161,061<F2>
<CURRENT-LIABILITIES> 7,974<F3>
<BONDS> 77,290
4,000<F4>
3,000<F4>
<COMMON> 66,679
<OTHER-SE> 136
<TOTAL-LIABILITY-AND-EQUITY> 161,061<F5>
<SALES> 0
<TOTAL-REVENUES> 18,139<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,736
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 4,120
<INCOME-PRETAX> 10,244
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,244
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,244
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.89
<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) Interest - only strip receivable $ 3,100
(ii) Restricted investments 1,523
(iii) Real property owned 382
(iv) Due from unconsolidated subsidiaries 1,138
(v) Deferred charges, deposits and
other assets, net 1,226
(vi) Investment in unconsolidated subsidiaries 7,965
(vii) Servicing asset 1,748
--------
$ 17,082
========
<F3>Includes the following:
(i) Accrued interest payable $ 909
(ii) Borrower advances 1,509
(iii) Dividends payable 3,683
(iv) Accounts payable 1,873
-------
7,974
=======
<F4>Preferred stock of subsidiary held by SBA. See footnotes to the Company's
Annual Report filed on Form 10-K for the year ended December 31, 1996.
<F5>Includes the following items not included above:
(i) Deferred fee revenue $ 670
(ii) Other liabilities 975
(iii) Due to unconsolidated subsidiaries 337
------
$1,982
======
<F6>Revenues consist primarily of interest, other yield on investments, premium
income and equity in income of unconsolidated subsidiaries.
</FN>
</TABLE>
