<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 March 31, 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) 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 May 1, 1997, Registrant had outstanding 11,323,408 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 -
March 31, 1997 (Unaudited) and December 31, 1996 2
Consolidated Statements of Income (Unaudited) -
Three Months Ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11
PART II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 20
</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>
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . $ 103,333 $ 93,354
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 34,973 49,677
Investment in unconsolidated subsidiaries . . . . . . . . . . . 8,223 8,585
Interest-only strip receivable . . . . . . . . . . . . . . . . . 3,116 3,143
Restricted investments . . . . . . . . . . . . . . . . . . . . . 1,255 1,229
Real property owned . . . . . . . . . . . . . . . . . . . . . . 269 303
--------- ---------
TOTAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 151,169 156,291
--------- ---------
OTHER ASSETS:
Receivable for loans sold . . . . . . . . . . . . . . . . . . . 2,793 2,508
Due from unconsolidated subsidiaries . . . . . . . . . . . . . . 2,012 1,097
Servicing asset . . . . . . . . . . . . . . . . . . . . . . . . 1,774 1,753
Deferred charges, deposits and other assets . . . . . . . . . . 920 885
Accrued interest receivable . . . . . . . . . . . . . . . . . . 416 376
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 340
Property and equipment, net . . . . . . . . . . . . . . . . . . 174 181
--------- ---------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 8,384 7,140
--------- ---------
TOTAL ASSETS... . . . . . . . . . . . . . . . . . . . . . . . . . . $ 159,553 $ 163,431
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable . . . . . . . . . . . . . . . . . . . . . $ 42,090 $ 44,570
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 35,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 3,130 4,145
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . 3,501 3,635
Borrower advances . . . . . . . . . . . . . . . . . . . . . . . 1,913 1,795
Accrued interest payable . . . . . . . . . . . . . . . . . . . . 926 1,442
Due to unconsolidated subsidiaries . . . . . . . . . . . . . . . 396 1,076
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 967 1,446
Deferred fee revenue . . . . . . . . . . . . . . . . . . . . . . 409 419
--------- ---------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 88,332 93,528
--------- ---------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY . . . . . . . . . . . . . 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares of $.01 par value,
11,276,000 and 11,162,000 shares issued and outstanding
at March 31, 1997 and December 31, 1996, respectively . . . . 113 112
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 63,676 62,125
Undistributed net operating income . . . . . . . . . . . . . . . 898 1,101
Net unrealized depreciation on investments . . . . . . . . . . . (466) (435)
--------- ---------
64,221 62,903
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . $ 159,553 $ 163,431
========= =========
NET ASSET VALUE PER COMMON SHARE . . . . . . . . . . . . . . . . . $ 5.70 $ 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 SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,989 $ 4,402
Premium income . . . . . . . . . . . . . . . . . . . . . . . . . 642 491
Other investment income, net . . . . . . . . . . . . . . . . . . 85 67
--------- ---------
Total investment income . . . . . . . . . . . . . . . . . . . . . . 4,716 4,960
Equity in income (loss) of unconsolidated subsidiaries . . . . . . 680 7
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . 558 513
--------- ---------
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,954 5,480
--------- ---------
EXPENSES:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,375 1,424
Salaries and related benefits . . . . . . . . . . . . . . . . . 822 692
General and administrative . . . . . . . . . . . . . . . . . . . 221 175
Profit sharing plan . . . . . . . . . . . . . . . . . . . . . . 41 50
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 46
Legal and accounting . . . . . . . . . . . . . . . . . . . . . . 72 50
Small Business Administration fees . . . . . . . . . . . . . . . 31 22
Directors and shareholders expense . . . . . . . . . . . . . . . 9 9
--------- ---------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,630 2,468
--------- ---------
Net operating income . . . . . . . . . . . . . . . . . . . . . . . 3,324 3,012
--------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off . . . . . . . . . . . . . . . . . . . . . . . (26) --
Recoveries on loans written-off . . . . . . . . . . . . . . . . -- 29
Change in unrealized appreciation
(depreciation) on investments . . . . . . . . . . . . . . . . (31) (46)
--------- ---------
Total realized and unrealized gain (loss) on investments . . . . . (57) (17)
--------- ---------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS . . . . . . . . . . . . . . . . . . . . $ 3,267 $ 2,995
========= =========
PREFERRED DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . $ 62 $ 62
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . 11,233 10,918
========= =========
EARNINGS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . . $ 0.29 $ 0.27
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments . . . . . . . $ 3,267 $ 2,995
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,232) (5,309)
Proceeds from sale of guaranteed loans . . . . . . . . . . . . . . . . . . . . . . . . . 7,015 5,556
Change in unrealized depreciation on investments and loans written-off . . . . . . . . . 57 46
Unrealized premium income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (175)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 304
Accretion of loan discount and deferred fees . . . . . . . . . . . . . . . . . . . . . . (261) (200)
Deferred fees collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 336
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) --
Equity in income of unconsolidated subsidiaries, net . . . . . . . . . . . . . . . . . . (680) (7)
Net change in operating assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (105)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (69) 356
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (517) (472)
Borrower advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 545
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,494) (873)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 517 2,997
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,272) (15,106)
Principal collected and other adjustments . . . . . . . . . . . . . . . . . . . . . . . . 2,824 3,102
Proceeds from interest-only strip receivable . . . . . . . . . . . . . . . . . . . . . . . 246 --
Purchase of furniture and fixtures and other assets . . . . . . . . . . . . . . . . . . . (20) (22)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 --
Proceeds from partnership distributions . . . . . . . . . . . . . . . . . . . . . . . . . 1,042 --
Release of (investment in) restricted cash . . . . . . . . . . . . . . . . . . . . . . . . (26) 100
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,108) (11,926)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . 1,313 547
Payment of dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,336) (3,288)
Payment of dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . (60) (62)
Payment of SBA debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,480) --
Advances from (to) unconsolidated subsidiaries, net . . . . . . . . . . . . . . . . . . . (1,595) (366)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,158) (3,169)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . (14,749) (12,098)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . 50,017 31,574
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,268 $ 19,476
========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,892 $ 1,896
========= =========
Dividends reinvested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 239 $ 245
========= =========
Reclassification from loans receivable to real property owned . . . . . . . . . . . . . . $ 70 $ --
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE> 7
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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") and the consolidated statements of income and cash
flows as of and for the three months ended March 31, 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 March 31, 1997 and the results of operations and cash
flows for the three months ended March 31, 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
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 reporting period.
Actual results could differ from those estimates.
The results for the three months ended March 31, 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.
5
<PAGE> 8
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 collateralized loans to eligible small businesses owned
by "disadvantaged" persons, as defined under the regulations of the SBA. As an
SSBIC, PMIC is eligible to obtain long-term, fixed-rate funding, generally at
below-market rates, from the SBA through the issuance of debentures (which are
guaranteed by the SBA and on which the interest rate was reduced through an SBA
subsidy by 3% during the first five years) and preferred stock. 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 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.
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, 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 Trust ("PMC Commercial" or the "Trust"), 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.
6
<PAGE> 9
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 FASB 125:
Effective January 1, 1997, the Company adopted as required, 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 for transfers and servicing of
financial assets based on a financial-components approach. SFAS No. 125 is
required to the adopted prospectively.
The transfer of assets that qualifies for a sale 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 the carrying value of the portion of loans
sold, and the sum of cash received and the relative fair values of the
servicing rights and 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 (included in "Other assets" on
the accompanying consolidated balance sheets) and an interest-only strip
receivable (included in "Investments" on the accompanying consolidated balance
sheets) as defined. Accordingly, the Company reclassified its excess servicing
asset of $6,429,000 at January 1, 1997 to $1,774,000 of a servicing asset and
$4,655,000 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 like 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
7
<PAGE> 10
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. IMPLEMENTATION OF FASB 125: (CONTINUED)
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 months ended March 31, 1997, there was no appreciation or
depreciation of the interest-only strip receivable.
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 interest-only strip receivable will be repaid faster than originally
estimated. If prepayments occur slower than anticipated, cash flows would
exceed estimated amounts and total income in future periods would be enhanced.
During the three months ended March 31, 1997, 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, the Company repaid a $2,480,000 SBA debenture which had
matured.
NOTE 7. DIVIDENDS PAID AND DECLARED:
During January 1997, the Company paid $0.32 per share in dividends to common
shareholders of record on December 31, 1996 including a special dividend of
$0.02 per common share. During March 1997, the Company declared a $0.305 per
share dividend to common shareholders of record on March 31, 1997 which was
paid on April 14, 1997.
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 three months ended March 31, 1997, the Partnership had $1,356,000 in
total income and net operating income of $691,000.
NOTE 9. 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 March 31, 1997 and
December 31, 1996 and the condensed combined statement of income for the three
months ended March 31, 1997 for the Company and the Unconsolidated Entities.
8
<PAGE> 11
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
Investments at value:
Loans receivable, net ............................ $ 143,945 $ 135,159
Cash equivalents ................................. 35,927 49,816
Interest-only strip receivable ................... 3,116 3,143
Restricted investments and real property owned ... 4,553 6,976
--------- ---------
187,541 195,094
Other assets .......................................... 8,022 7,975
--------- ---------
Total assets ..................................... $ 195,563 $ 203,069
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ........................... $ 42,090 $ 44,570
Notes payable .................................... 70,681 75,183
Other liabilities ................................ 11,571 13,413
--------- ---------
124,342 133,166
--------- ---------
Cumulative preferred stock of subsidiary ......... 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common Stock ..................................... 113 112
Additional paid-in capital ....................... 63,676 62,125
Undistributed net operating income ............... 898 1,101
Net unrealized depreciation on investments ....... (466) (435)
--------- ---------
64,221 62,903
--------- ---------
Total liabilities and shareholders' equity ....... $ 195,563 $ 203,069
========= =========
</TABLE>
9
<PAGE> 12
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1997
--------------
(Unaudited, in
thousands)
<S> <C>
INCOME:
Investment income ........................... $ 6,073
Other income, net ........................... 591
-------
Total income ............................. 6,664
-------
EXPENSES:
Interest .................................... 2,019
Salaries and related benefits ............... 822
General and administrative expenses ......... 287
Other ....................................... 212
-------
Total expense ............................ 3,340
-------
Net operating income ............................. 3,324
Realized and unrealized gain (loss) on investments (57)
-------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............... $ 3,267
=======
</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 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.
10
<PAGE> 13
PART I
Financial Information
ITEM 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
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 who
evaluates and services loans under a fee arrangement for PMC Commercial Trust
("PMC Commercial"), an affiliate of the Company. In addition, the Company sells
the guaranteed portion its loans originated under the SBA 7(a) Loan Program. In
November 1996, the Company securitized a portion of its fixed rate portfolio as
part of a structured financing (the "Structured Financing") as an additional
source of working capital. Historically, the Company has retained 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).
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 sold into the secondary market.
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 concerning the aggregate
gross loans funded for the Company:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------ ------------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
COMPANY FUNDED FUNDED FUNDED FUNDED
------- ---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
PMIC .................... $ 5.0 $ 7.4 $ 19.3 $ 21.2
Western Financial ....... 0.7 2.4 7.5 8.0
First Western ........... 10.3 7.1 29.2 40.6
PMC Capital ............. 4.5 3.5 14.2 7.7
---------- ---------- ---------- ----------
Total .......... $ 20.5 $ 20.4 $ 70.2 $ 77.5
========== ========== ========== ==========
</TABLE>
11
<PAGE> 14
In 1993, the Company formed a registered investment advisor which
pursuant to the terms of an investment management agreement acts as the
investment advisor for PMC Commercial. The Company's subsidiary, PMC Advisers,
has been the investment advisor for PMC Commercial since the completion of PMC
Commercial's public offering in December 1993. During the three months ended
March 31, 1997, and the year ended December 31, 1996, PMC Advisers earned
management fees of approximately $400,000 and $1.6 million from PMC Commercial,
respectively.
The Company also earns income through its equity ownership in its
non-investment company subsidiaries, primarily PMC Limited Partnership (the
"Partnership"). In November 1996 the Partnership completed the private
placement of approximately $40.7 million of notes which were issued at par and
have an 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 $691,000 during the three months ended March 31, 1997.
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 the investment advisory income.
During 1996, the Company initiated a new marketing program and an
additional lending program. Late in the fourth quarter of 1996 the Company
began marketing a 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 this 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 will have variable interest
rates based on the Prime Rate (as defined below).
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 city 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
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.
12
<PAGE> 15
Substantially all of the First Western loans 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 by First Western 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 --* 8.25% 9.00% 6.25%
Third Quarter -- 8.25% 9.00% 7.25%
Fourth Quarter -- 8.25% 8.75% 7.75%
</TABLE>
* effective April 1, 1997, the Prime Rate was increased to 8.50%
Due to the decline in interest rates since 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 First Western, prepayments
increased during the latter half of 1996 and have continued during 1997.
The Company experienced a 9% decrease in loans originated from $77.5
million during the year ended December 31, 1995 to $70.2 million during the
year ended December 31, 1996. During the first quarter of 1997, loan
originations were $20.5 million as compared to $20.4 million during the first
quarter of 1996. The origination reduction from 1996 as compared to 1995 is due
in significant part to increased competition. 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 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.
As a result of its working capital requirements for loan originations
as well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, the Company has temporary short-term
investments. In order to minimize its short-term investment positions, the
Company may enter into a bank warehouse facility and anticipates greater
utilization of its revolving credit facility.
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 expense and company overhead.
Expenses were 44% of total income during the three months ended March 31, 1997
and the year ended December 31, 1996, compared to 45% during the three months
ended March 31, 1996 and the year ended December 31, 1995.
13
<PAGE> 16
Interest expense is primarily derived from: (i) $35.0 million of
unsecured notes with a weighted average interest rate of 7.3% and weighted
average remaining maturity of 4.6 years as of March 31, 1997, and (ii) $42.1
million of 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 5.5 years as of March 31, 1997. At March
31, 1997, the Company had no borrowings outstanding under its revolving credit
facility, and had availability of $15 million. Any borrowings thereunder would
bear interest at a rate based on either the prime rate or LIBOR.
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 and
Phoenix, Arizona. 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 13% of total income
during each of the years ended December 31, 1996 and 1995 and 14% of total
income during the three months ended March 31, 1997. It is anticipated that
overhead expenses will continue to increase as the Company's portfolio under
management increases.
General and administrative expenditures consist primarily of the Texas
franchise and other taxes, 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% during the
three months ended March 31, 1997, and the year ended December 31, 1996 and 5%
during the year ended December 31, 1995. These costs are anticipated to
increase in proportion to the growth of the Company's portfolio under
management. During the three months ended March 31, 1997 and the year ended
December 31, 1996, the Company expensed $51,000 and $197,000, respectively,
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 for each of the years ended December 31, 1996 and 1995
and 4% during the three months ended March 31, 1997. These costs are
anticipated to increase in proportion to the increase in salaries and general
administrative expense as a result of the anticipated growth of the Company's
portfolio under management.
CERTAIN ACCOUNTING CONSIDERATIONS
Effective January 1, 1997, the Company adopted as required, 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 for transfers and servicing of
financial assets based on a financial-components approach. SFAS No. 125 is
required to the adopted prospectively.
The transfer of assets that qualifies for a sale 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
14
<PAGE> 17
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
the carrying value of the portion of loans sold, and the sum of cash received
and the relative fair values of the servicing rights and 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 (included in "Other assets" on
the accompanying consolidated balance sheets) and an interest-only strip
receivable (included in "Investments" on the accompanying consolidated balance
sheets) as defined. Accordingly, the Company reclassified its excess servicing
asset of $6,429,000 at January 1, 1997 to $1,774,000 of a servicing asset and
$4,655,000 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 like 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 will be reflected on the accompanying
consolidated statements of income as an unrealized gain (loss) on investment.
During the three months ended March 31, 1997, there was no appreciation or
depreciation of the interest-only strip receivable.
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 interest-only strip receivable will be repaid faster than originally
estimated. If prepayments occur slower than anticipated, cash flows would
exceed estimated amounts and total income in future periods would be enhanced.
During the three months ended March 31, 1997, as a result of increased
prepayment speeds, the amount of amortization of the servicing asset was
increased.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1996
Interest income decreased by $413,000 (9%), from $4,402,000 for the
three months ended March 31, 1996 to $3,989,000 for the three months ended
March 31, 1997. This decrease was primarily attributable to the Structured
Financing completed during November 1996. The average retained loan portfolio
outstanding during the first quarter of 1997 and 1996 was $99 million and $117
million, respectively, a 16% decrease. 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 $581,000, or 14%, from $4,056,000 during the
three months ended March 31, 1996 to $3,475,000 during the three months ended
March 31, 1997. Including the interest earned by the Partnership, interest
income increased by $874,000 (22%) to $5,276,000 for the three months ended
March 31, 1997. During the
15
<PAGE> 18
first quarter of 1997, the Company earned increased interest on temporary
short-term investments due to the funds received from the Structured Financing.
As a result, during the first quarter of 1997, average temporary investments
outstanding were $43.6 million, a 63% increase from $26.7 million during the
first quarter of 1996. Accordingly, interest on temporary investments increased
by $168,000, or 49%, from $346,000 during the three months ended March 31, 1996
to $514,000 during the three months ended March 31, 1997.
Premium income increased by $151,000 (31%) from $491,000 for the three
months ended March 31, 1996 to $642,000 for the three months ended March 31,
1997. This increase was primarily attributable to a 62% increase in the
guaranteed portion of loans held for sale or sold (under the 7(a) Program) from
$4.5 million during the three months ended March 31, 1996 to $7.3 million
during the three months ended March 31, 1997.
Other investment income, net, increased by $18,000 (27%) from $67,000
for the three months ended March 31, 1996 to $85,000 for the three months ended
March 31, 1997. This increase was primarily attributable to an increase in
prepayment fees received on loans during the three months ended March 31, 1997
as compared to the three months ended March 31, 1996.
Equity in income (loss) of unconsolidated subsidiaries increased by
$673,000, from $7,000 during the three months ended March 31, 1996 to $680,000
during the three months ended March 31, 1997. The increase is primarily due to
the formation of the Partnership in November 1996 which had net profits of
$692,000 during the three months ended March 31, 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. The net income from the
Partnership included $68,000 in fees received on prepaid loans. Offsetting a
portion of the Partnership income was 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 income of $7,000 during the three months ended March
31, 1996 to a loss of $12,000 during the three months ended March 31, 1997.
Other income, net, increased by $45,000 (9%) from $513,000 during the
three months ended March 31, 1996 to $558,000 during the three months ended
March 31, 1997. Other income increased in the first quarter of 1997 as compared
to the first quarter of 1996 as a result of investment management fees
generated by PMC Advisers. This increase was partially offset by a decrease in
construction fee income.
Operating expenses, not including interest, increased by $211,000
(20%) from $1,044,000 during the three months ended March 31, 1996 to
$1,255,000 during the three months ended March 31, 1997. This increase was a
result of an increase in salaries and related benefits of $130,000 (19%) from
$692,000 during the three months ended March 31, 1996, to $822,000 during the
three months ended March 31, 1997. The increase in salaries and related
benefits was attributable to an increased number of employees (due to the
increase in portfolio under management and the complexity of the financing
transactions undertaken by the Company), and a general increase in the level of
salaries for employees during 1996 and 1997. Rent expense increased by $13,000
due to the opening of a new office in Phoenix, AZ, the expansion of the
Companies space occupied and an increase in the base rent at its headquarters.
Legal and accounting increased $22,000 due to the increased cost of the annual
audit (primarily attributable to the formation of the Partnership) and
increases in general
16
<PAGE> 19
corporate legal services. General and administrative costs increased by $46,000
primarily as a result of (i) increased advertising incurred during the first
quarter of 1997 from mail-outs related to the new Prime Lending Program, and
(ii) an increase in travel expense from the increase in attendance at trade
shows by representatives of the Company.
Interest expense decreased by $49,000 (3%) from $1,424,000 during the
three months ended March 31, 1996 to $1,375,000 during the three months ended
March 31, 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 increased from a
loss of $17,000 during the three months ended March 31, 1996 to a loss of
$57,000 during the three months ended March 31, 1997. During both periods, loan
losses were minimal. During the first quarter of 1996, the Company recognized
$29,000 in recoveries which reduced the net loss during the period. There were
no comparable recoveries during the three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans, and from
time to time, the Company may use funds to acquire loans from governmental
agencies and/or their agents. The Company also uses funds for the payment of
financing costs, dividends to shareholders, general and administrative
expenses, capital expenditures, advances on loan liquidations and payments of
principal due on borrowing facilities. Approximately $2.5 million of the
Company's SBA debentures were paid in full in February 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 March 31, 1997 to various prospective
small business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $69.6 million. Of these
commitments, $26.2 million were for loans partially guaranteed by the SBA of
which approximately $21.8 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.
17
<PAGE> 20
In order to meet its working capital requirements and increase the
size of its investment portfolio the Company has recently completed the
following leverage transactions:
<TABLE>
<CAPTION>
STATED
MATURITY
DATE AMOUNT RATE DATE DESCRIPTION
---- ------ ---- -------- -----------
<S> <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.
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 bank'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
March 31, 1997, the Company had no balance outstanding on this credit facility.
At March 31, 1997, the Company was in compliance with all covenants of this
facility.
Due to changes in the SBIC program to 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; however, the Company has been able to issue debt through private
placement of notes and receive working capital through securitization and sale
of a portion of its portfolio. 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.
18
<PAGE> 21
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
earnings per share data. 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 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.
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.
19
<PAGE> 22
PART II
Other Information
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1997.
20
<PAGE> 23
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: 5/14/97 \s\ Lance B. Rosemore
-----------------------------
Lance B. Rosemore
President
Date: 5/14/97 \s\ Barry N. Berlin
------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 295
<SECURITIES> 34,973
<RECEIVABLES> 107,008<F1>
<ALLOWANCES> (466)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 485
<DEPRECIATION> (311)
<TOTAL-ASSETS> 159,553<F2>
<CURRENT-LIABILITIES> 9,470<F3>
<BONDS> 77,090
4,000<F4>
3,000<F4>
<COMMON> 63,789
<OTHER-SE> 432
<TOTAL-LIABILITY-AND-EQUITY> 159,553<F5>
<SALES> 0
<TOTAL-REVENUES> 5,954<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,255
<LOSS-PROVISION> 57
<INTEREST-EXPENSE> 1,375
<INCOME-PRETAX> 3,267
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,267
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<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 $ 3,116
(ii) Restricted investments 1,255
(iii) Real property owned 269
(iv) Due from unconsolidated subsidiaries 2,012
(v) Deferred charges, deposits and
other assets, net 920
(vi) Investment in unconsolidated subsidiaries 8,223
(vii) Servicing asset 1,774
----------
$ 17,569
==========
<F3>Includes the following:
(i) Accrued interest payable $ 926
(ii) Borrower advances 1,913
(iii) Dividends payable 3,501
(iv) Accounts payable 3,130
----------
$ 9,470
==========
<F4>Preferred stock of subsidiary held by SBA. See footnotes to financial
statements.
<F5>Includes the following items not included above
(i) Deferred fee revenue $ 409
(ii) Other liabilities 967
(iii) Due to unconsolidated subsidiaries 396
-------
$ 1,772
=======
<F6>Revenues consist primarily of interest, other yield on investments, premium
income and equity in income of unconsolidated subsidiaries.
</FN>
</TABLE>
