<PAGE> 1
As filed with the Securities and Exchange Commission on December 22, 1997
Registration No. 333-3315
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 1 [X]
(Check appropriate box or boxes)
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PMC CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
17290 PRESTON ROAD
DALLAS, TEXAS 75252
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 349-3200
--------------
LANCE B. ROSEMORE
17290 PRESTON ROAD
DALLAS, TEXAS 75252
(NAME AND ADDRESS OF AGENT FOR SERVICE)
With a Copy to:
KENNETH L. BETTS, ESQ.
WINSTEAD SECHREST & MINICK P.C.
1201 ELM STREET, SUITE 5400
DALLAS, TEXAS 75270
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PMC CAPITAL, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBERS FORM N-2 CAPTION IN PROSPECTUS
<S> <C>
1.,14. Outside Front Cover Page Cover Page
2. Inside Front and Outside Back Cover Page Cover Page
3. Fee Table and Synopsis Fund Expenses; Synopsis
4. Financial Highlights Not Applicable
5. Plan of Distribution Description of the Plan
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8.,16. General Description of the Registrant; Cover Page; Synopsis; Certain
General Information and History Considerations; Market Price of Common
Stock; Business; Investment Objectives
and Policies
9.,18. Management Management
10. Capital Stock, Long-Term Debt, and Other Description of Capital Stock and Long-Term Debt;
Securities Senior Securities; Financial Statements
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13.,15. Table of Contents Table of Contents
17. Investment Objectives and Policies Investment Objectives and Policies
19. Control Persons and Principal Holders of Holdings of Principal Shareholders; Management
Securities
20. Investment Advisory and Other Services Not Applicable
21. Brokerage Allocation and Other Practices Brokerage Allocation and Other Practices
22. Tax Status Tax Status
23. Financial Statements Financial Statements
</TABLE>
(i)
<PAGE> 3
PART I SUBJECT TO COMPLETION, DATED DECEMBER 22, 1997
PROSPECTUS
PMC CAPITAL, INC.
17290 PRESTON ROAD
DALLAS, TEXAS 75252
(972) 349-3200
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Dividend Reinvestment and Cash Purchase Plan (the "Plan") of PMC
Capital, Inc. ("PMC Capital" or the "Company") provides Participants in the Plan
with a simple and convenient method of purchasing shares of common stock without
payment of any brokerage commissions at a two percent (2%) discount from the
trading price of the common stock as discussed below. PMC Capital is a
diversified, closed-end management investment company, that has elected to be
regulated as a business development company ("BDC") under the Investment Company
Act of 1940, as amended (the "Investment Company Act"). PMC Capital is engaged
in the business of originating loans to small businesses, either directly or
through its three principal subsidiaries, primarily under certain programs of
the Small Business Administration (the "SBA").
Investment options offered under the Plan are:
FULL DIVIDEND REINVESTMENT -- Reinvest dividends on all shares of
common stock held. Participants may also make optional payments of not less than
$50 per payment or more than $5,000 in the aggregate per calendar month to
purchase shares of common stock.
PARTIAL DIVIDEND REINVESTMENT -- Reinvest dividends on a portion of
common stock held. Participants may also make optional payments of not less than
$50 per payment or more than $5,000 in the aggregate per calendar month to
purchase shares of common stock.
OPTIONAL PAYMENT ONLY -- Current shareholders may invest by making
optional payments at any time of not less than $50 per payment or more than
$5,000 in the aggregate per calendar month to purchase shares of common stock.
The price of shares purchased by Participants either with reinvested
dividends or optional payments will be ninety-eight (98%) percent of the average
of the mean of the high and low prices of the common stock, as published in The
Wall Street Journal - American Stock Exchange listings, for the five days in
which trading of such shares takes place, immediately prior to the applicable
investment date.
This Prospectus relates to shares of the common stock of PMC Capital
registered for purchase under the Plan, which shares, at the option of PMC
Capital, will be newly issued shares, shares repurchased in the open market,
treasury shares or any combination thereof. No commissions or underwriters fees
or discounts are to be paid in connection with this offering. This Prospectus
sets forth the information an investor should know about the Company before
investing. Please read this Prospectus carefully and retain it for future
reference.
--------------------
THE SHARES BEING OFFERED HEREBY ARE SUBJECT TO CERTAIN RISKS WHICH SHOULD BE
CAREFULLY CONSIDERED BY POTENTIAL INVESTORS. (SEE "CERTAIN CONSIDERATIONS.")
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is December ___, 1997.
<PAGE> 4
TABLE OF CONTENTS
Page
SYNOPSIS ................................................................. 3
FUND EXPENSES............................................................. 4
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 6
SENIOR SECURITIES......................................................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 10
DESCRIPTION OF THE PLAN................................................... 22
USE OF PROCEEDS........................................................... 31
CERTAIN CONSIDERATIONS.................................................... 31
MARKET PRICE OF COMMON STOCK.............................................. 36
BUSINESS ................................................................. 38
INVESTMENT OBJECTIVES AND POLICIES........................................ 46
TAX CONSIDERATIONS........................................................ 49
MANAGEMENT................................................................ 50
REMUNERATION OF OFFICERS AND DIRECTORS.................................... 53
HOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT......................... 55
DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT........................... 57
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 61
AVAILABLE INFORMATION..................................................... 62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-2
-2-
<PAGE> 5
SYNOPSIS
This Prospectus relates to 1,000,000 shares of the common stock, $.01
par value per share ("Common Stock"), of PMC Capital being offered for sale
through PMC Capital, Inc.'s Dividend Reinvestment and Cash Purchase Plan (the
"Plan"). The minimum cash payment for the purchase of shares through the Plan
shall be $100.00. The Common Stock is traded on the American Stock Exchange
("AMEX"). On September 30, 1997, the closing price of the Common Stock on the
AMEX was $14.69.
PMC Capital, Inc. ("PMC Capital" or "PMC" and, together with its wholly
owned regulated investment company subsidiaries, the "Company") is a
diversified, closed-end management investment company, that has elected to be
regulated as a business development company ("BDC") under the Investment Company
Act. The Company 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 Investment Company Act as
diversified closed-end management investment companies. In addition, PMC Capital
is either directly or indirectly 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 Advisers is an investment advisor who
evaluates and services loans pursuant to a fee arrangement. First Western,
Western Financial and PMIC originate loans under loan guarantee and funding
programs sponsored by the Small Business Administration (the "SBA").
Additionally, PMC has originated non-SBA loans to small business concerns and
has sold operating equipment to small business concerns and individuals. The
Company's investment objective is to maximize earnings for distribution to
shareholders from interest income, loan servicing and other fees generated by
loans which it originates. PMC Capital has elected to be taxed as a regulated
investment company and distributes substantially all its taxable income as
dividends to its shareholders, thereby incurring no Federal income tax liability
on such income.
During the five years ended December 31, 1996, the Company originated
loans in the aggregate principal amount of approximately $353 million and sold
approximately $162 million aggregate principal amount of loans originated under
the SBA's 7(a) lending program ("SBA 7(a) Program Loans") into the secondary
market and approximately $25 million through a structured sale in 1994 and $46
million through a structured financing in 1996. For the three months ended March
31, 1997, the Company originated loans in the aggregate principal amount of
approximate $20.5 million and sold approximately $7.0 million of its SBA 7(a)
Program Loans in the secondary market. The Company has historically serviced
substantially all the loans that it originated and at March 31, 1997 had a
serviced loan portfolio outstanding of approximately $283 million. During the
same five year period, the Company's average annual loan losses have been
approximately 0.35% of its average loan portfolio.
-3-
<PAGE> 6
FUND EXPENSES(1)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load (as a percentage of offering price).................................. None
Dividend Reinvestment and Cash Purchase Plan Fees(2)............................ None
ANNUAL EXPENSES
(as a percentage of net assets attributable to common shares)(3)
Management Fee(4)............................................................... 4.44%
Interest Payments on Borrowed Funds (5)......................................... 8.66%
All Other Expenses.............................................................. 2.76%
Total Annual Expenses(6)........................................................ 15.86%
</TABLE>
EXAMPLE
You would pay the following expenses over the indicated period on a hypothetical
$1,000 investment, assuming a 5% annual return on total assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$ 167 $ 483 $ 759 $ 1,304
</TABLE>
- ---------------------
(1) The purpose of the above table, including the example, is to assist
investors in understanding various costs and expenses that investors in the
Company may bear directly or indirectly. See "Selected Consolidated
Financial Data" and "Management." The table and the example are based on
the Company's fiscal year ended December 31, 1996. THE HYPOTHETICAL
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN IN THE
TABLE AND THE EXAMPLE.
(2) All costs of the Plan are borne by the Company and are included in the fees
paid to the transfer agent for the monthly services provided thereby. Such
expenses are reflected in "All Other Expenses" above.
(3) Net assets attributable to common shares equals net assets (i.e., total
assets less total liabilities and redeemable preferred stock outstanding)
as of December 31, 1996.
(4) The Company is internally managed and does not have an investment advisor.
Accordingly, the Company directly incurs all costs with respect to the
selection, research and supervision of all investments. For purposes of
this Fund Expenses table, the Company has done an internal valuation of its
expenses allocable to the research, selection and supervision of its
investments. Management's good faith estimate of such costs is
approximately $2.9 million, representing 4.44% of net assets attributable
to common shares.
-4-
<PAGE> 7
(5) The Company had outstanding borrowings of $79.6 million at December 31,
1996.
(6) Total Annual Expenses as a percentage of consolidated net assets
attributable to common shares are higher than most closed-end management
investment companies due to the Company's consolidated outstanding
borrowings of $79.6 million and consolidated preferred stock of $7.0
million at December 31, 1996, which significantly reduce the consolidated
net assets attributable to common shares on which the Annual Expenses
percentage is calculated. If the total annual expenses were calculated as a
percentage of total assets, such percentage would be 6.34%.
-5-
<PAGE> 8
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto and "Management's Discussion and Analysis of the Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus. The
selected financial data below provides information about the Company's financial
history and is derived from the audited financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(in thousands except ratios and per share information)
<S> <C> <C> <C> <C> <C>
Operating:
Operating income ............... $ 23,821 $ 21,262 $ 16,450 $ 15,670 $ 11,780
Operating expenses ............. $ (10,454) $ (9,541) $ (7,578) $ (5,933) $ (4,705)
Realized and unrealized
gain (loss) on
investments .................. $ (147) $ (359) $ 3,151 $ (404) $ (263)
Net operating income
and realized and
unrealized gain (loss)
on investments ............... $ 13,220 $ 11,362 $ 12,023 $ 9,333 $ 6,812
Dividends declared,
common ....................... $ 12,853 $ 11,600 $ 11,244 $ 9,367 $ 6,349
Earnings per common
share ........................ $ 1.18 $ 1.03 $ 1.12 $ 0.87 $ 0.79
Dividends per common
share ........................ $ 1.16 $ 1.08 $ 1.06 $ 0.89 $ 0.69
Weighted average
common shares
outstanding .................. 11,002 10,768 10,650 10,579 8,557
Loans funded ................... $ 70,154 $ 77,567 $ 75,349 $ 74,091 $ 55,975
At end of period:
Loans receivable, net .......... $ 93,354 $ 110,499 $ 75,264 $ 71,528 $ 54,059
Total assets ................... $ 164,964 $ 159,002 $ 125,416 $ 112,515 $ 85,933
SBA debentures payable ......... $ 44,570 $ 43,540 $ 26,280 $ 20,280 $ 22,280
Notes payable .................. $ 35,000 $ 35,001 $ 25,001 $ 25,001 $ 1
Preferred stock of
consolidated
subsidiary ................... $ 7,000 $ 7,000 $ 5,000 $ 3,000 $ 3,000
Common shareholders'
equity ....................... $ 62,903 $ 59,088 $ 57,371 $ 55,524 $ 54,839
Number of common
shares outstanding ........... 11,162 10,871 10,684 10,603 10,542
Ratios:
Return on average assets ....... 8.3% 8.0% 10.3% 9.4% 9.6%
Return on average
common shareholders'
equity ....................... 21.3% 19.2% 21.2% 16.8% 17.1%
</TABLE>
-6-
<PAGE> 9
SENIOR SECURITIES
(At End of Fiscal Year, Consolidated)
<TABLE>
<CAPTION>
Total Amount
Outstanding Involuntary
Exclusive of Asset Liquidating Average
Treasury Coverage Per Preference Per Market Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
---------------- ---------------- ---------- -------------- -------------
SENIOR NOTES
<S> <C> <C> <C> <C>
December 31, 1987 ................... $ -- $ -- -- N/A
December 31, 1988 ................... -- -- -- N/A
December 31, 1989 ................... -- -- -- N/A
December 31, 1990 ................... -- -- -- N/A
December 31, 1991 ................... -- -- -- N/A
December 31, 1992 ................... -- -- -- N/A
December 31, 1993 ................... 25,000,000 2,292 -- N/A
December 31, 1994 ................... 25,000,000 2,216 -- N/A
December 31, 1995 ................... 35,000,000 1,841 -- N/A
December 31, 1996 ................... 35,000,000 1,878 -- N/A
BANK LOAN
(revolving line of credit)
December 31, 1987 ................... $ 500,000 $ 1,742 -- N/A
December 31, 1988 ................... -- -- -- N/A
December 31, 1989 ................... 3,000,000 1,711 -- N/A
December 31, 1990 ................... 2,891,500 1,759 -- N/A
December 31, 1991 ................... 4,251,000 1,987 -- N/A
December 31, 1992 ................... 1,000 3,596 -- N/A
December 31, 1993 ................... 1,000 2,292 -- N/A
December 31, 1994 ................... 1,000 2,216 -- N/A
December 31, 1995 ................... 1,000 1,841 -- N/A
December 31, 1996 ................... -- -- -- N/A
</TABLE>
-7-
<PAGE> 10
<TABLE>
<CAPTION>
Total Amount
Outstanding Involuntary
Exclusive of Asset Liquidating Average
Treasury Coverage Per Preference Per Market Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
---------------- ---------------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
SBA DEBENTURES(5)
December 31, 1987 .................... $11,640,000 $1,742 -- N/A
December 31, 1988 .................... 14,140,000 1,752 -- N/A
December 31, 1989 .................... 16,640,000 1,711 -- N/A
December 31, 1990 .................... 23,140,000 1,759 -- N/A
December 31, 1991 .................... 23,140,000 1,987 -- N/A
December 31, 1992 .................... 22,280,000 3,596 -- N/A
December 31, 1993 .................... 20,280,000 2,292 -- N/A
December 31, 1994 .................... 26,280,000 2,216 -- N/A
December 31, 1995 .................... 43,540,000 1,841 -- N/A
December 31, 1996 .................... 44,570,000 1,878 -- N/A
NON-REDEEMABLE
CUMULATIVE PREFERRED
STOCK(5)
December 31, 1987 .................... $ 1,000,000 $ 161 $100 N/A
December 31, 1988 .................... 1,000,000 164 100 N/A
December 31, 1989 .................... 3,000,000 148 100 N/A
December 31, 1990 .................... 3,000,000 158 100 N/A
December 31, 1991 .................... 3,000,000 179 100 N/A
December 31, 1992 .................... 3,000,000 317 100 N/A
December 31, 1993 .................... 3,000,000 215 100 N/A
December 31, 1994 .................... 3,000,000 202 100 N/A
December 31, 1995 .................... 3,000,000 169 100 N/A
December 31, 1996 .................... 3,000,000 173 100 N/A
</TABLE>
-8-
<PAGE> 11
<TABLE>
<CAPTION>
Total Amount
Outstanding Involuntary
Exclusive of Asset Liquidating Average
Treasury Coverage Per Preference Per Market Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
---------------- ---------------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
REDEEMABLE
CUMULATIVE PREFERRED
STOCK(5)
December 31, 1987 .................... $ -- $ -- $ -- N/A
December 31, 1988 .................... -- -- -- N/A
December 31, 1989 .................... -- -- -- N/A
December 31, 1990 .................... -- -- -- N/A
December 31, 1991 .................... -- -- -- N/A
December 31, 1992 .................... -- -- -- N/A
December 31, 1993 .................... -- -- -- N/A
December 31, 1994 .................... 2,000,000 202 100 N/A
December 31, 1995 .................... 4,000,000 169 100 N/A
December 31, 1996 .................... 4,000,000 173 100 N/A
</TABLE>
(1) Total amount of each class of senior securities outstanding at the end
of the year presented.
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as the Company's consolidated total assets
less all liabilities and indebtedness not represented by senior
securities, divided by senior securities representing indebtedness.
This asset coverage ratio is multiplied by $1,000 to determine the
Asset Coverage Per Unit. The asset coverage ratio for a class of
senior securities that is preferred stock is calculated as the
Company's consolidated total assets less all liabilities and
indebtedness not represented by senior securities, divided by senior
securities representing indebtedness, plus the involuntary liquidation
preference of the preferred stock (see footnote 3). The Asset Coverage
Per Unit is expressed in terms of dollar amounts per share.
(3) The amount to which such class of senior security would be entitled
upon the voluntary liquidation of the issuer in preference to any
security junior to it.
(4) Not applicable, as senior securities are not registered for public
trading.
(5) Issued by the Company's small business investment company subsidiaries
to the U. S. Small Business Administration. These categories of senior
securities are not subject to the asset coverage requirements of the
Investment Company Act.
-9-
<PAGE> 12
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 who evaluates and services loans under a fee arrangement for PMC
Commercial Trust ("PMC Commercial"), a Texas real estate investment trust and an
affiliate of PMC Capital. In addition, the Company sells the guaranteed portion
of its loans originated under the SBA's Section 7(a) Program (the "7(a)
Program") and in November 1996 securitized a portion of its fixed rate portfolio
as part of a structured financing (the "Structured Financing") as an additional
source of working capital. See "Business--Non Investment Company Subsidiaries."
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.
In order to generate revenues, PMC originates commercial loans. The
following table sets forth information concerning the aggregate gross loans
funded for the Company and the respective changes from previous years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ----------------------
(In millions)
Increase Increase Increase
Company Funded (Decrease) Funded (Decrease) Funded (Decrease)
------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
PMIC .............. $ 19.3 (9%) $ 21.2 108% $ 10.2 209%
Western
Financial ....... 7.5 (6%) 8.0 11% 7.2 500%
First Western ..... 29.2 (28%) 40.6 (2%) 41.6 (22%)
PMC Capital ....... 14.2 84% 7.7 (53%) 16.4 1%
------- ------- -------
Total ............. $ 70.2 (9%) $ 77.5 3% $ 75.4 2%
======= ======= =======
</TABLE>
-10-
<PAGE> 13
In 1993, the Company formed a registered investment advisor, PMC
Advisers, 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 (see footnote 14
to the accompanying consolidated financial statements). During 1996 PMC Advisers
earned management fees of $1.6 million from PMC Commercial.
The Company also earns income through its equity ownership in its
non-investment company subsidiaries, primarily the Partnership. In November 1996
the Partnership completed a private placement of approximately $40.7 million of
its Loan-Backed Fixed Rate Notes, Series 1996-A (the "Notes") which were issued
at par and have an interest rate of 6.725%. 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 at an average
yield of 11.5%) and the interest paid on the Notes (originally $40.7 million at
6.725%), less any loan losses and amortization of transaction fees, will
contribute to the profit of PMC Capital.
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.
The Company has initiated a new marketing program and positioned itself
to add 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 secured 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 has been approved 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.
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
-11-
<PAGE> 14
of the applicable period ("Prime Rate"). The spread over 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>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
First Quarter 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>
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
have increased.
The Company experienced a 9% decrease in loans originated from $77.6
million during the year ended December 31, 1995 to $70.2 million during the year
ended December 31, 1996. This origination reduction is due in significant part
to increased competition. In management's opinion, there has been an increasing
amount of competitor 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 net amount of other investment income earned during 1996 was $608,000.
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 year ended December 31, 1996
compared to 45% during the year ended December 31, 1995.
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<PAGE> 15
Interest expense was $5.7 million during 1996. Interest expense is
primarily derived from (i) $35 million of unsecured notes with a weighted
average interest rate of 7.3% and weighted average remaining maturity of 4.8
years as of December 31, 1996, and (ii) $44,570,000 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 5.7 years as of December 31, 1996. At December 31, 1996, the Company had no
borrowings outstanding pursuant to 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 was $4.7 million in 1996 and 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 which consist of salaries for the Company's
officers and employees who provide for all of the Company's 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. It is anticipated that overhead 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 were 4% of total income during the year ended December
31, 1996 compared to 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. The largest component of general and administrative expense,
the Texas franchise tax, is currently being reviewed by the Texas legislature
with significant modifications being considered. During the year ended December
31, 1996, the Company expensed $197,000 relating to the Texas franchise tax.
Profit sharing plan, rent, legal and accounting, SBA fees and directors
and shareholders expense (collectively the "Other Administrative Costs")
aggregated $723,000 for the year ended December 31, 1996. The Other
Administrative Costs were 3% of total income for each of the years ended
December 31, 1996 and 1995. 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.
In 1994, PMIC filed a registration statement with the Securities and
Exchange Commission to register shares of its common stock. The Company incurred
approximately $136,000 in costs in connection with the filing of this
registration statement. PMIC, a licensed specialized small business investment
company, uses long-term funds provided by the SBA through the issuance of
debentures (which are guaranteed by the SBA and on which the interest rate is
reduced through a SBA subsidy by 3% during the first five years). Based on the
lack of availability of SBA subsidized debentures or preferred stock the
registration was suspended.
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<PAGE> 16
Accordingly, during the year ended December 31, 1995, the Company expensed the
costs of registration.
CERTAIN ACCOUNTING CONSIDERATIONS
In accordance with its business and financing strategy, the Company
sells the guaranteed portions of its SBA loans while retaining servicing rights.
A portion of the Company's revenue is recognized from the premium on the sale of
loans, which principally represents either cash received or an excess servicing
spread. The excess servicing spread is calculated as the present value of the
difference between the interest rate charged by the Company to a borrower and
the interest rate paid to the investors who purchased the loan (adjusted for
prepayment assumptions) to the extent that this difference exceeds the normal
loan servicing fees (the "Excess Servicing Spread"). At the time of sale, the
value of the Excess Servicing Spread is reported as income and concurrently
recorded as a corresponding asset on the Company's consolidated balance sheet
(the "Excess Servicing Asset").
During the first quarter of 1995, the Company completed a reassessment
of the method used to amortize the Excess Servicing Asset. Historically, the
Company had amortized the Excess Servicing Asset based upon the estimated life
for each loan at the time of sale, expectation of prepayments and other
considerations. When a loan was paid in full, the remaining unamortized Excess
Servicing Asset, if any, was charged against income. Considering the above
factors and the Company's historical portfolio performance, the Company extended
to the expected remaining life of the related loans, on a pooled basis, the
period over which the remaining Excess Servicing Asset would be amortized for
loans originated and sold prior to January 1, 1995. The Excess Servicing Asset
is amortized on an accelerated method over the estimated remaining lives of the
related assets. There can be no assurance of the accuracy of management's
prepayment estimates. If prepayments occur at a faster rate than expected, the
amortization of the Excess Servicing Asset will be accelerated as a charge to
earnings. If actual prepayments occur at a slower rate than estimated, cash
flows from the Excess Servicing Spread would exceed previously expected amounts
and total income in future periods would be enhanced. Management will evaluate
on an ongoing basis the future benefit anticipated from the Excess Servicing
Asset. If it is determined the future benefit is impaired, the Company will
reflect the impairment as a charge to earnings during the period evaluated. To
the extent future Excess Servicing Spread exceeds the estimated amortization of
the Excess Servicing Asset pertaining to these loans, additional revenues will
be recognized.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Interest income increased by $2,241,000 (14%) from $16,330,000 for the
year ended December 31, 1995, to $18,571,000 for the year ended December 31,
1996. This increase was primarily attributable to the growth in the Company's
portfolio. The average loan portfolio outstanding during the year ended December
31, 1996 was $124.9 million, a 33% increase from $94.1 million in the comparable
period of 1995. Accordingly, interest income on loans increased by $3,076,000
(21%) from $14,428,000 during the year ended December 31, 1995, to
$17,504,000 during the year ended December 31, 1996. Average temporary
investments
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<PAGE> 17
outstanding during the year ended December 31, 1996 were $21.3 million, a 34%
decrease from $32.4 million for the year ended December 31, 1995. Accordingly,
interest income on temporary investments decreased by $835,000 (44%) from
$1,902,000 during the year ended December 31, 1995 to $1,067,000 during the year
ended December 31, 1996.
Premium income decreased by $905,000 (32%) from $2,847,000 for the year
ended December 31, 1995, to $1,942,000 for the year ended December 31, 1996.
This decrease was primarily attributable to a 33% decrease in the guaranteed
portion of loans held for sale or sold (under the 7(a) Program) during the year
ended December 31, 1996 ($20.0 million) as compared to the year ended December
31, 1995 ($29.9 million).
Other investment income, net, increased by $240,000 (65%) from $368,000
for the year ended December 31, 1995, to $608,000 for the year ended December
31, 1996. This increase was primarily attributable to an increase of $200,000 in
fees received on loans which prepaid during the year ended December 31, 1996 as
compared to the year ended December 31, 1995. The Company experienced a greater
number of loan prepayments in 1996 as compared to 1995 because of the general
decline in interest rates and the increased competition for financing in the
lodging industry.
Equity in income (loss) of unconsolidated subsidiaries increased by
$447,000, from a loss of $78,000 during the year ended December 31, 1995 to
income of $369,000 during the year ended December 31, 1996. The increase is
primarily due to the formation of the Partnership in November 1996 which had net
profits of $328,000. 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 $80,000 in fees
received on prepaid loans. In addition, PMC Funding realized an increase in
revenues from charter services of its airplane which resulted in a change in
profits from a loss of $78,000 during the year ended December 31, 1995 to a
profit of $41,000 during the year ended December 31, 1996.
Other income, net, increased by $536,000 (30%) from $1,795,000 during
the year ended December 31, 1995, to $2,331,000 during the year ended December
31, 1996. This increase was primarily a result of investment management fees
generated by PMC Advisers which increased by approximately $400,000 (33%) from
$1.2 million during the year ended December 31, 1995 to $1.6 million during the
year ended December 31, 1996.
Operating expenses, excluding interest, increased by $255,000 (6%) from
$4,492,000 during the year ended December 31, 1995, to $4,747,000 during the
year ended December 31, 1996. This increase was a result of an increase in
salaries and related benefits of $402,000 (15%) from $2,778,000 during the year
ended December 31, 1995, to $3,180,000 during the year ended December 31, 1996.
The increase in salaries and related benefits was a result of 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. This
increase was offset partially by a $210,000 decrease in administrative and
general costs. During the third quarter of 1995, the Company expensed
approximately $106,000 of costs pertaining to its decision not to pursue an
offering of common
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<PAGE> 18
stock of PMIC. Also, the Company had reductions in advertising, telephone and
travel expenses when comparing the year ended December 31, 1996 to the year
ended December 31, 1995. Advertising reductions were due to fewer newspaper ad
placements, telephone reductions were due to a change in long distance carriers
and travel reductions were due to increased use of PMC Funding's airplane.
Interest expense increased by $659,000 (13%) from $5,049,000 during the
year ended December 31, 1995 to $5,708,000 during the year ended December 31,
1996. The increase was primarily attributable to: (i) the interest expense on
approximately $17.3 million of SBA debentures which were issued or assumed
during the year ended December 31, 1995 by PMIC and Western Financial, (ii) the
assumption of $1,030,000 of SBA debentures in June 1996, (iii) the scheduled
increase in the interest rate of $2.0 million of PMIC's SBA debentures during
June 1995 and (iv) the issuance of $10.0 million of unsecured notes by PMC
Capital in April 1995.
Realized and unrealized gain (loss) on investments changed from a loss
of $359,000 during the year ended December 31, 1995 to a loss of $147,000 during
the year ended December 31, 1996. The decrease in the aggregate losses on a
dollar amount and a percentage basis was due to continued steady performance of
the lodging portion of the portfolio. In addition, to the extent loans were
deemed non-performing or were liquidated or foreclosed upon, the percentage
recovery has generally been substantial due to the high concentration of real
estate collateral on such loans. Realized and unrealized gain (loss) on
investments as a percentage of average loans receivable for the years ended
December 31, 1996 and 1995 were 0.12% and 0.38%, respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Interest income increased by $4,378,000 (37%) from $11,952,000 for the
year ended December 31, 1994, to $16.3 million for the year ended December 31,
1995. This increase was primarily attributable to: (i) the growth in the
Company's portfolio from $75.3 million at December 31, 1994 to $110.5 million at
December 31, 1995, (ii) the increased yield on First Western's loan portfolio as
a result of an increase in the Prime Rate and (iii) the increased interest
earned on temporary investments from funds received on the securitization and
structured sale of assets during December 1994 which were placed in short-term
investments until loans were funded.
Premium income increased by $119,000 (4%) from $2,728,000 for the year
ended December 31, 1994, to $2.8 million for the year ended December 31, 1995.
The premium income increased even though the volume of loans sold decreased by
$2.7 million, or 8%, from $33.0 million during the year ended December 31, 1994
to $30.3 million during the year ended December 31, 1995. This increase in
premium income was primarily attributable to the increased demand for these SBA
loan products by the secondary market. The increased demand was a result of
stabilized interest rates and the decrease in the prime rate in July 1995.
Accordingly, the premium on individual loans sold increased. The premium derived
from the secondary market is directly related to the term of the loan.
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<PAGE> 19
Other investment income, net, increased by $65,000 (21%) from $303,000
for the year ended December 31, 1994, to $368,000 for the year ended December
31, 1995. This increase was primarily attributable to forfeited deposits and
prepayment penalties.
Other income, net, increased by $328,000 (22%) from $1,467,000 during
the year ended December 31, 1994, to $1,795,000 during the year ended December
31, 1995. This increase was primarily attributable to the investment management
fees generated by PMC Advisers.
Operating expenses, not including interest, increased by $529,000 (13%)
from $3,963,000 during the year ended December 31, 1994, to $4,492,000 during
the year ended December 31, 1995. Included in operating expenses for the year
ended December 31, 1995, are $136,000 pertaining to the aggregate of costs of
the PMIC registration statement. This increase was also primarily attributable
to: (i) increased staff and general overhead necessary to manage the increased
portfolio of the Company, (ii) the operations of PMC Advisers and (iii)
increases in state franchise tax expense.
Interest expense increased by $1,434,000 (40%) from $3,615,000 during
the year ended December 31, 1994, to $5,049,000 during the year ended December
31, 1995. This increase was primarily attributable to: (i) the interest expense
on $23,260,000 in SBA debentures issued or assumed between September 1994 and
September 1995 by PMIC and Western Financial, (ii) the scheduled increase in
interest rate on $5,000,000 of PMIC's SBA debentures during the first half of
1995 and (iii) the issuance of $10,000,000 of senior notes by PMC Capital on
April 19, 1995.
Due to First Western's securitization and structured sale of assets,
during the year ended December 31, 1994, the Company recognized a $3,346,000
gain. This gain represented the difference between the proceeds from the sale of
these assets plus the present value of the difference between the interest
charged to the borrowers and the interest paid to the purchasers less the
carrying value of the assets (including discounts from the application of
Financial Accounting Standards Board ("FASB") Emerging Issues Task Force 88-11)
and an allowance for credit losses. During the year ended December 31, 1995 the
Company did not complete any securitization and structured sale, and did not
have any comparable gain recognized. Not including the aforementioned gain,
realized and unrealized gain (loss) on investments has increased by $163,000
(83%) from a loss of $196,000 for the year ended December 31, 1994, to a loss of
$359,000 during the year ended December 31, 1995. This increase in loss is
attributable primarily to a greater number of loans presently in the process of
liquidation during 1995. Based on updated area demographics, appraisals and the
condition of the collateral properties, valuation reserves were increased.
However, loan losses for the year ended December 31, 1995 continued at an
annualized rate of approximately 0.39% of average outstanding loans receivable,
primarily attributable to: (i) minimal losses incurred in the Company's largest
industry concentration (the lodging industry), (ii) continued monitoring
efforts, (iii) the strong economy and (iv) the low interest rates over the
previous several years.
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<PAGE> 20
CASH FLOW ANALYSIS
The Company generated $14.1 million and $12.9 million from operating
activities during the years ended December 31, 1996 and 1995, respectively. The
increase of $1.2 million (9.0%) was primarily attributable to the increase in
net income from $11.4 million during 1995 to $13.2 million during 1996. Included
in cash flows from operating activities is the lending activity of First Western
relating to the government guaranteed portion of loans originated which are sold
into the secondary market ("Government Guaranteed Lending"). During the years
ended December 31, 1996 and 1995, the Company used net cash of $1,927,000 and
$169,000, respectively, from Government Guaranteed Lending activities.
The Company used $25.9 million and $31.9 million from investing
activities during the years ended December 31, 1996 and 1995, respectively. The
Company increased its use of funds for loans originated by $800,000 from $47.1
million during the year ended December 31, 1995 to $48.2 million during the year
ended December 31, 1996. During the year ended December 31, 1996 principal
collected was $22.6 million as compared to $10.7 million during the year ended
December 31, 1995. This increase of $11.8 million (110%) was primarily due to an
increase in prepayments on larger principal balance fixed rate loans during 1996
primarily in the portfolios of PMC Capital and PMIC and increased prepayment
activity on the variable rate portfolio of First Western (which loans have no
prepayment fees). Also included as proceeds from investing activity are the
proceeds from maturities of government securities ($8.9 million) and purchases
of $3.9 million during the year ended December 31, 1995 for which there were no
comparable transactions during the year ended December 31, 1996.
The Company generated $30.4 million from financing activities during
the year ended December 31, 1996 as compared to $16.9 million during the year
ended December 31, 1995. The source of funds in 1995 were primarily from the
issuance of $25 million in debt, $2 million in preferred stock of PMIC and $1.4
million from the issuance of Common Stock pursuant to the Company's Dividend
Reinvestment plan ("DRP Stock Issuance"). The source of funds in 1996 was
primarily the net proceeds from the issuance of Notes by the Partnership ($37.5
million) which were distributed to PMC Capital and $2.8 million from DRP Stock
Issuances. Dividends paid during the year ended December 31, 1996 were $11.9
million as compared to $11.2 million during the year ended December 31, 1995, an
increase of $700,000 (6.0%).
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 became payable in February 1997 and were paid in full. 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
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<PAGE> 21
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, uncollaterialized revolving credit facility.
Loan commitments outstanding at December 31, 1996 to various
prospective small business companies, including the unfunded portion of projects
in the construction phase, amounted to approximately $45.9 million. Of these
commitments, $6.6 million were for loans partially guaranteed by the SBA of
which approximately $5.0 million will be sold into the secondary market. Such
commitments are made in the ordinary course of the Company's business.
Commitments to extend credit are agreements to lend to a customer provided that
the terms established in the contract are met. Commitments generally have fixed
expiration dates and require payment of a fee. Since some commitments expire
without the proposed loan closing, the total commitment amounts do not
necessarily represent future cash requirements.
In order to meet its working capital requirements and increase the size
of its investment portfolio, during the years ended December 31, 1995 and 1996,
the Company has completed the following leverage transactions:
<TABLE>
<CAPTION>
STATED
MATURITY
DATE AMOUNT RATE DATE DESCRIPTION
<S> <C> <C> <C> <C>
March 1995 $3,000,000 4.840% (1) March 2005 SBA Debentures
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 (2) $2,260,000 7.500% to 10.400% Up to December 2002 SBA Debentures
June 1995 $5,000,000 3.690% (1) June 2005 SBA Debentures
September 1995 $7,000,000 3.875% (1) September 2005 SBA Debentures
May 1996 (2) $1,030,000 9.300% June 2000 SBA Debentures
November 1996 $40,746,000 6.725% November 2005 Structured Financing
</TABLE>
(1) Rate increases 3% five years from the date of issuance until maturity.
(2) Assumed debentures from a non-affiliated SBIC (see footnote 6 to the
accompanying consolidated financial statements).
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<PAGE> 22
(3) Fixed rate loan-backed notes issued by the Partnership (see footnote 15
to the accompanying consolidated financial statements).
PMC has a $15 million uncollaterialized 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 the London
Interbank Offering Rate (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 December 31, 1996, the Company had no
balance outstanding on this credit facility. At December 31, 1996, 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 (see "Business -- Overview of SBA Regulations"),
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 the 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 would attempt to either issue
additional unsecured notes, privately or publicly raise equity and/or securities
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 meets 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 Investment
Company Act as modified by exemptive orders obtained by the Company from the
Securities and Exchange Commission.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 122 "Accounting for
Mortgage Servicing Rights," an amendment of SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," to require that an entity recognize as
separate assets rights to service mortgage loans for others, regardless of how
such servicing is acquired. SFAS No. 122 is effective for fiscal years
beginning after December 15, 1995. The effects on operations and financial
condition of implementing SFAS No. 122, in management's opinion, is not
considered significant.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities." Those
standards have been established to provide a consistent application of
accounting based on a financial-components approach which distinguishes the
transfer of financial assets that are sales from those that are secured
borrowings. This approach is based upon control of the related assets, whereby
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes financial assets when control has been surrendered
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<PAGE> 23
and liabilities are extinguished. SFAS No. 125 is
effective for transfer and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and may only be applied
prospectively.
In February 1997, the 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 is not
considered 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
operation is not considered significant.
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<PAGE> 24
DESCRIPTION OF THE PLAN
The following is a description of the provisions of the Dividend
Reinvestment and Cash Purchase Plan of PMC Capital in question and answer
format:
PURPOSE
1. What is the purpose of the Plan?
The Plan offers participants ("Participants") a convenient and economical
way to purchase PMC Capital's common stock, par value $.01 per share (the
"Common Stock"). Once a Participant is enrolled in the Plan, cash dividends
will be used to purchase shares of Common Stock (both whole and fractional
shares). Participants pay no brokerage commissions for purchases made under the
Plan. Purchases of shares of Common Stock under the Plan will provide the
Company with funds to be applied toward general corporate purposes.
ADVANTAGES
2. What are the advantages of the Plan?
Shareholders may participate in the Plan by having cash dividends on all,
or a portion of their shares of Common Stock automatically reinvested.
Participants are not required to pay any brokerage commissions in connection
with purchases made under the Plan and shares acquired under the Plan are
purchased at a 2% discount from the market price. A full investment of funds is
possible under the Plan because fractions of shares of Common Stock, as well as
full shares of Common Stock, will be credited to Participants' Plan accounts
including dividends on these shares. Participants will avoid the cumbersome
safekeeping of certificates for shares of Common Stock credited to their Plan
accounts as the shares of Common Stock are held in custody for Participants by
American Stock Transfer & Trust Company ("American Stock Transfer"). Statements
of Participants' Plan accounts will be provided monthly.
ADMINISTRATION
3. Who administers the Plan?
PMC Capital is the Plan Administrator. American Stock Transfer is the
agent for the Company and acts as custodian for the shares held in the Plan and
purchases shares of Common Stock as the Participants' agent. American Stock
Transfer will keep a record of each Participant's participation and will send
monthly statements of each Participant's Plan account. Shares of Common Stock
purchased under the Plan will be registered in the name of American Stock
Transfer, as agent for Participants in the Plan, and not in the name of the
Participant. If American Stock Transfer ceases to serve as agent, its success
will be designated by PMC
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<PAGE> 25
Capital. At the option of the Company, the shares of
Common Stock purchased under the Plan on behalf of Participant will be newly
issued by PMC Capital, issued from treasury stock or purchased in the open
market by American Stock Transfer as agent for the Participant.
4. Who interprets and regulates the Plan?
PMC Capital reserves the right to interpret and regulate the Plan as
deemed desirable or necessary. PMC Capital, American Stock Transfer or an agent
administering the Plan, will not be liable for any act done in good faith or
for any omission to act in good faith, including, without limitation, any claim
of liability arising out of a failure to terminate a Participant's account upon
the Participant's death prior to receipt of written notice of the death (unless
the Company is deemed to be an underwriter for purposes of the federal
securities laws, in which case the Company cannot be so excluded from
liability). Such exclusion of liability to American Stock Transfer or any other
agent of PMC Capital does not affect any liability of PMC Capital.
Participants should recognize that PMC Capital cannot assure them of a
profit or protect them against a loss on the shares of Common Stock purchased
under the Plan.
5. May the Plan be modified or discontinued?
PMC Capital reserves the right to suspend, modify or terminate the Plan at
any time. Any suspension, major modification or termination of the Plan will be
announced by PMC Capital to all Plan Participants.
PARTICIPATION
6. Who is eligible to participate in the Plan?
Subject to the limitations designated below, all shareholders of record
are eligible to join the Plan. In order to be eligible to participate,
beneficial owners of Common Stock whose shares are registered in names other
than their own (e.g., in the name of a broker or a bank nominee) must become
shareholders of record by having their shares of Common Stock transferred into
their names. Beneficial owners may request the record holders of their shares
of Common Stock to participate on their behalf in the dividend reinvestment
feature of the Plan; however, only holders of record may participate in the
optional cash payment feature of the Plan. In the event a Participant's account
shall have fewer than 15 shares of Common Stock, PMC Capital shall have the
option, but not the obligation, to terminate the Participant's account. In the
event a Participant's account is terminated by PMC Capital, a certificate for
whole shares of Common Stock shall be delivered to the Participant and the
Participant's fractional shares of Common Stock shall be sold (see Question
Nos. 21, 22 and 23).
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<PAGE> 26
PARTICIPATION BY SHAREHOLDERS
7. How does a shareholder of record participate?
Shareholders of record may join the Plan at any time by completing the
Authorization Form and returning it to American Stock Transfer. Authorization
Forms will be furnished to shareholders at any time upon request made to
American Stock Transfer (1-800-278-4353).
8. When will dividends be invested?
If the Authorization Form is received by American Stock Transfer on or
before the dividend record date, then the dividend will be used to purchase
additional shares of Common Stock for a Participant on the dividend payment
date. The dividend declaration date is the date on which the Board of Directors
of PMC Capital decides whether a dividend should be paid and in what amount. If
the Authorization Form is received after the record date, a Participant's
purchase will not start until the next quarterly dividend payment date. The
dividend record dates are generally on the last business day of each calendar
quarter in which the AMEX is open for trading. Quarterly dividends are paid
approximately two weeks following the dividend record date.
9. How are optional cash payments made and invested?
Optional cash payments are invested on the fifth business day of each
month. Optional cash payments should be sent so that they are received by
American Stock Transfer at least five business days before a purchase date. Any
optional cash payments received later than a purchase date will be held by
American Stock Transfer and applied to the next purchase date, unless the
shareholder requests, in writing, to American Stock Transfer the return of such
payment.
Participants do not receive any interest on the amounts held by
American Stock Transfer pending investment.
Participants may not send less than $50 per payment nor more than
$5,000 per calendar month, provided that if a Participant sends less than $50 or
more than $5,000, American Stock Transfer will refund the entire amount to him
or her.
10. Are shareholders enrolled in the Plan required to send in a new
Authorization Form annually?
No. Shareholders are enrolled in the Plan without further action on
their part, unless the Participant gives notice to the Plan Administrator in
writing that he or she wishes to terminate participation (see Question Nos. 21
and 22 for information concerning termination of participation in the Plan). A
shareholder may also submit a new Authorization Form to change the portion of
cash dividends that are to be issued in the form of Common Stock, provided that
such an election must be submitted to the Plan Administrator prior to a dividend
record date in order to be effective for the corresponding dividend payment date
(presently quarterly).
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<PAGE> 27
11. What does the Authorization Form provide?
The Authorization Form allows a Participant to decide the extent to
which such Participant wants to participate in the Plan. By checking the
appropriate box on the Authorization Form, a Participant may indicate whether he
wants to:
(a) Reinvest dividends paid on all shares of Common Stock
registered in a Participant's name;
(b) Reinvest dividends paid on a portion of Common Stock
registered in a Participant's name; or
(c) Invest amounts exceeding $50 by making optional payments
at any time up to an aggregate of FIVE THOUSAND AND NO/100 DOLLARS ($5,000) per
calendar month.
PURCHASES
12. How many shares of Common Stock will be purchased for Participants?
The number of shares of Common Stock to be purchased depends on the
amount of the Participant's dividends credited to the Participant's account
under the Plan or the amount of any optional payments and the purchase price of
the shares of Common Stock. Each Participant's account will be credited with
that number of shares, including fractions computed to four decimal places,
equal to the total amount to be invested divided by the applicable purchase
price.
13. What is the price of the new shares of Common Stock?
The price of shares of Common Stock bought with cash dividends or
optional payments will be ninety-eight (98%) percent of the average for the mean
of the high and low prices of Common Stock, as published in the Wall Street
Journal - American Stock Exchange listings, for the five days in which trading
of shares of Common Stock takes place immediately prior to the applicable
purchase date (the related dividend payment date).
14. Are any fees or expenses incurred by Participants?
Participants will pay no brokerage commissions for purchases made under
the Plan. Certain charges (see Question 22) may be incurred by Participants if
they withdraw from the Plan or if the Plan is terminated by the Company.
-25-
<PAGE> 28
REPORTS TO PARTICIPANTS
15. How will Participants be advised of their purchases of shares of
Common Stock?
As soon as practicable, Participants will receive monthly statements of
their purchases and accounts. These statements are Participants' continuing
records of the cost of their purchases and should be retained for tax purposes.
In addition, Participants will receive copies of the same communications sent to
other shareholders, including PMC Capital's annual report, interim reports,
notice of annual meeting and proxy statement, and income tax information.
Participants should notify American Stock Transfer (attn: Dividend
Reinvestment) of any change in address or duplicate mailings, so that American
Stock Transfer can consolidate their accounts and simplify their tax reporting.
DIVIDENDS
16. Will Participants be credited with dividends on shares of Common
Stock held in their accounts under the Plan?
Yes. The Company pays dividends, as declared, to the record holders of
its shares of Common Stock. As the record holder for Participants, American
Stock Transfer, as agent, will receive dividends for all Plan shares held on the
record date. It will credit these dividends to Participants on the basis of full
and fractional shares of Common Stock held in their accounts, and will reinvest
these dividends in additional shares of Common Stock.
CERTIFICATES
17. Will stock certificates be issued for shares of Common Stock
purchased?
Normally, certificates for shares of Common Stock purchased under the
Plan will not be issued to Participants. The number of shares of Common Stock
credited to accounts under the Plan will be shown on Participants' monthly
statements. This additional service protects against loss, theft or destruction
of stock certificates. The shares of Common Stock will be owned for record
purposes by American Stock Transfer until certificates are issued to a
Participant upon a Participant's written request.
Certificates for any number of whole shares of Common Stock up to the
full number of shares of Common Stock credited to Participants' Plan accounts
will be issued upon written request to American Stock Transfer (see Question
22). Any remaining full shares of Common Stock and fractional shares of Common
Stock will continue to be credited to Participants' accounts.
-26-
<PAGE> 29
Shares of Common Stock credited to the accounts of Participants under
the Plan may not be pledged. Participants who wish to pledge such shares of
Common Stock must request that certificates for such shares of Common Stock be
issued in their names. Certificates for fractional shares of Common Stock will
not be issued under any circumstances.
18. In whose name will accounts be maintained and certificates
registered when issued?
Accounts for Participants will be maintained in the Participants' names
as shown on PMC Capital's shareholder records at the time the Participants join
the Plan. Certificates for whole shares of Common Stock will be so registered
when issued, except in instances such as death. Upon written request,
certificates can also be registered and issued in names other than the account
name, subject to compliance with any applicable laws and the payment by the
Participants of any applicable taxes, provided that the request bears the
signatures of the Participants and the signatures are guaranteed by a commercial
bank or member firm of AMEX.
CHANGING INVESTMENT OPTIONS
19. How do Participants change their investment option?
Participants may change their investment option at any time by
completing a new Authorization Form. New Authorization Forms may be obtained by
submitting a written request to American Stock Transfer. A Participant's request
will become effective as soon as practicable after the Authorization Form is
received by American Stock Transfer.
20. May PMC Capital elect not to issue shares of Common Stock under the
Plan?
PMC Capital reserves the right to terminate or modify the Plan at any
time (see Question 29) or direct the Agent not to acquire shares of Common Stock
under the Plan. Moreover, if at any time the value of the shares to be issued
(taking into account the 2% discount) is less than the current net asset value
of Common Stock (which net asset value shall be determined within forty-eight
hours, excluding Sundays and holidays next preceding the time of such
determination), then that dividend will be paid in cash.
WITHDRAWING FROM THE PLAN
21. May Participants withdraw all or a portion of their shares of
Common Stock from the Plan?
Yes. The Plan is entirely voluntary and Participants may withdraw at
any time, by completing the account correspondence stub attached to the monthly
statement, or by forwarding a written request to American Stock Transfer for a
full or partial withdrawal. Withdrawing
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<PAGE> 30
Participants may request either that their shares of Common Stock be
sold and the cash proceeds forwarded to them or request that certificates be
issued to them.
22. How do Participants withdraw all or a portion of their shares of
Common Stock from the Plan?
In order to withdraw from the Plan, Participants must notify American
Stock Transfer in writing that they wish to withdraw. Written notice should be
addressed to American Stock Transfer. Written notice may also be provided by
completing the reverse side of the account correspondence stub of the monthly
statement and returning it to American Stock Transfer.
If a Participant requests a partial withdrawal, he must specify that
American Stock Transfer either sell the full shares of Common Stock designated
or issue a certificate for any number of whole shares of Common Stock credited
to his Plan account.
If a Participant requests a full withdrawal, he must specify that
American Stock Transfer sell all of his shares of Common Stock or issue a
certificate for any number of whole shares credited to his Plan account.
If a Participant requests his shares of Common Stock to be sold,
American Stock Transfer will place a market order to sell as soon as practicable
after receipt of his request. The Participant will receive the proceeds of the
sale less any brokerage commission and any transfer tax. This will include cash
proceeds for any fraction of a share of Common Stock.
If a Participant's request for withdrawal or sale of shares of Common
Stock is received by American Stock Transfer prior to the fifth business day
after the record date, the amount of the dividend which would otherwise have
been invested on the next investment date will be paid in cash as soon as
practicable to the withdrawing Participant. If such request is received by
American Stock Transfer on or after the fifth business day after the record
date, then it will be processed as soon as practicable after the dividend
payment date. Thereafter, all dividends will be paid in cash. Any eligible
shareholder may elect to re-enroll in the Plan at any time.
23. What happens to fractions of shares of Common Stock when
Participants withdraw from the Plan?
When Participants withdraw from the Plan, cash payments representing
any fractions of shares of Common Stock will be mailed directly to the
Participants. The cash payment price will be based on the current market price
of the Common Stock less any brokerage commission and transfer tax on the date
the withdrawal notice is received by American Stock Transfer. If that date is
not a trading day, the next previous trading day will be substituted (see
Questions 21 and 22).
-28-
<PAGE> 31
OTHER INFORMATION
24. What happens when Participants sell or transfer all of the shares
of Common Stock registered in their names?
If Participants dispose of all shares of Common Stock registered in
their names, PMC Capital will, unless otherwise instructed by the Participants,
continue to reinvest the dividends on the shares of Common Stock credited to
their Plan accounts.
25. What happens if PMC Capital issues a stock dividend, declares a
stock split, or has a rights offering?
Any shares of Common Stock distributed by PMC Capital as a stock
dividend on shares of Common Stock credited to Participants' Plan accounts, or
on any split of their shares of Common Stock, will be credited to their Plan
accounts. In a rights offering, Participants' entitlements will be based on
their total holdings, including those credited to their Plan accounts. Rights
applicable to shares of Common Stock credited to their Plan accounts, however,
will be sold by American Stock Transfer. The proceeds will be credited to
Participants' Plan accounts and applied to purchase shares of Common Stock on
the next investment date.
26. What happens if PMC Capital makes the right to purchase additional
shares of Common Stock or other securities available to its shareholders?
In the event that PMC Capital makes available to its shareholders (1)
rights to purchase additional shares of Common Stock or (2) any securities of
any other class of PMC Capital, then the Plan Administrator will afford to
Participants the opportunity to exercise any such rights or warrants accruing to
the whole shares of Common Stock credited to the Participants' Plan accounts.
27. How will Participant's shares of Common Stock be voted at meetings
of shareholders?
The Participants will receive proxy cards covering the total number of
whole shares of Common Stock credited to the Participants' Plan accounts. The
Plan Administrator will vote any whole shares of Common Stock that it holds for
Participants in accordance with the proxies returned by the Participants to PMC
Capital. If a proxy card is returned properly signed, but without indicating
instructions as to the manner shares are to be voted with respect to any item
thereon, the shares of Common Stock covered will be voted in accordance with the
recommendations of PMC Capital's management. If a proxy card is not returned, or
it is returned unexecuted or improperly executed, the shares of Common Stock
covered will not be voted unless the Participant or the Participant's duly
appointed representative votes in person at the meeting. Participants will
continue to receive separate proxy cards for any other whole shares of Common
Stock registered in the Participants' names.
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<PAGE> 32
28. What are the responsibilities of the Plan Administrator under the
Plan?
The Plan Administrator shall not be liable under the Plan for any act
done in good faith, or for any good faith omission to act, including, without
limitation, any claim of liability (1) arising out of any such act or omission
to act which occurs prior to the termination of participation and (2) with
respect to the prices at which shares of Common Stock are issued to
Participants' accounts. Participants should recognize that neither PMC Capital
nor the Plan Administrator can assure Participants of profits, or protect
Participants against losses, on shares issued and/or held under the Plan.
29. May the Plan be changed or discontinued?
PMC Capital reserves the right to modify, amend, suspend or terminate
the Plan at any time. Notice of any such modification shall be furnished to
Participants at least fifteen (15) days prior to the dividend record date for
which the amendment shall be effective. In such event, PMC Capital as Plan
Administrator will follow the procedures for termination set forth in Question
21.
30. Where should correspondence regarding the Plan be sent?
Any notice, instruction, request or election which by any provision of
the Plan is required or permitted to be given or made by the Participants to the
Plan Administrator shall be in writing, signed by the Participants and addressed
to:
American Stock Transfer & Trust Company
Dividend Reinvestment
40 Wall Street, 46th Floor
New York, N.Y. 10005
Telephone No.: (800) 278-4353
or such other address as the Plan Administrator shall furnish to the
Participants, and such notice, instruction, request or election shall be deemed
to have been sufficiently given or made when received by the Plan Administrator.
Participants should mention their account numbers on all such
correspondence.
31. What is sufficient notice to Participants?
Any notice or certificate which any provision of the Plan requires the
Plan Administrator to give to the Participants shall be in writing and shall be
deemed to have been sufficiently given for all purposes by being deposited
postage prepaid in a post office letter box addressed to the Participants at
their address as it shall last appear on the Plan Administrator's records.
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<PAGE> 33
32. Can successor Plan Administrator(s) be named?
PMC Capital may, from time to time, designate a bank or trust company
as successor Plan Administrator under the Plan.
33. What law governs the Plan?
The terms and conditions of the Plan and its operation are governed by
the laws of the State of Florida.
USE OF PROCEEDS
The net proceeds from the sale of shares of Common Stock purchased from
PMC Capital from time to time will be used for general corporate purposes, which
may include lending such proceeds in accordance with the Company's underwriting
criteria.
CERTAIN CONSIDERATIONS
GENERAL
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered in evaluating an investment in
the Common Stock.
Credit Risks of Loans and Portfolio Diversification. The Company's
lending business is subject to various risks, including, but not limited to, the
risk that borrowers will not satisfy their debt service obligations and the risk
that the value of the collateral securing a liquidated loan is less than the
principal amount of such loan. In addition, since the Company's borrowers are
small businesses with more limited financial resources than larger, more
established companies, the Company may assume a greater risk of loss than might
otherwise be the case if it had focused on lending to larger companies. The
Company attempts to reduce its risk of loss by evaluating each borrower's
creditworthiness and the value of the collateral securing each loan; by limiting
the maximum amount loaned to any single borrower; by taking security interests
in assets, including real property, of the borrower and, in certain cases,
parties related to the borrower; and by obtaining personal guarantees.
The Company has relatively high levels of loans to the lodging industry
(approximately 44% of the Company's total assets as of December 31, 1996).
Pursuant to a change in the emphasis of the Company's investment strategy, the
Company's investments in the lodging industry have increased while the
percentage of its investments in the health care field have decreased. In
consideration of the Company's efforts to decrease their investments in the
health care field, the Company, through a shareholder vote at the annual
shareholders' meeting held June 19, 1993, amended its fundamental policies to
allow for concentration in only the lodging industry. The Company will invest
the proceeds of any sales of shares pursuant to the Plan in a manner the ensures
that it is in compliance with its current fundamental policies.
-31-
<PAGE> 34
In the event of a downturn in the lodging industry, the ability of such
borrowers to satisfy their debt service obligations to the Company could be
adversely affected. In addition, approximately 38%, 13% and 11% of the Company's
total assets as of December 31, 1996 consisted of loans to borrowers located in
Texas, Florida and Georgia, respectively. A significant economic downturn in
either of these regions could adversely affect the value of collateral located
in these regions.
Interest Rate and Prepayment Risk. The Company's income is materially
dependent upon the "spread" between the rate at which it borrows funds and the
rate at which it loans these funds. Western Financial and PMIC have historically
borrowed funds from the SBA for terms of 10 years and have made fixed rate loans
for terms of four to 25 years. PMC has borrowed funds through private placements
of senior unsecured notes with maturities ranging from 6 to 10 years and have
made fixed rate loans for terms of 5 to 20 years. If interest rates decline,
Western Financial, PMIC and PMC may experience significant prepayments, and such
prepayments, as well as scheduled repayments, are likely to be reloaned at lower
rates, which may have a material adverse effect on the Company. Western
Financial, PMIC and PMC attempt to protect against declining interest rates by
generally requiring prepayment penalties and by making loans at initial spreads
which reflect this risk. First Western has less prepayment risk because it makes
variable rate loans which periodically adjust with changing market conditions.
If the yield on loans originated by the Company with funds obtained
from borrowings or the issuance of preferred stock fails to cover the cost of
such funds, the Company's cash flow will be reduced. During periods of changing
interest rates, interest rate mismatches could negatively impact the Company's
net income, dividend yield and the market price of the Common Stock. Most of the
fixed rate loans that the Company originates have prepayment penalties. If
interest rates decline, the Company may experience significant prepayments. Such
prepayments, as well as scheduled repayments, are likely to be reloaned or
invested at lower rates, which may have an adverse effect on the Company's
ability to maintain distributions at existing levels.
In connection with First Western's sale of the guaranteed portion of
the loans it originates, 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) Program 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 the sale. In
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (adopted by the Company
effective January 1, 1997), 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, 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
-32-
<PAGE> 35
interest rates for investments of this type. 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.
Dependence on SBA Programs. The Company funds a substantial portion of
the loans that it originates through certain SBA programs. Approximately $43
million of the Company's loans outstanding at December 31, 1996 were funded
under the specialized small business company ("SSBIC") and small business
investment company ("SBIC") programs of the SBA which allow for PMIC and Western
Financial to borrow funds at below market rates. Discontinuation, elimination or
a significant reduction of these SBA programs would have a material adverse
effect on the Company. There have been attempts in previous years by the federal
government to eliminate the SBA or to curtail its activities or funding. Any
significant change in the SBA programs could have a material adverse effect on
further periods of operation.
Dependence on Key Personnel. The Company is dependent upon the efforts
and abilities of Dr. Fredric M. Rosemore, its Chairman of the Board, Lance B.
Rosemore, its President and Chief Executive Officer, and Dr. Andrew S.
Rosemore, its Executive Vice President and Chief Operating Officer. Although
the Company believes that it has a capable management group, the loss or
interruption of the services of these persons could have a material adverse
effect on the Company. The Company has entered into employment agreements with
Dr. Fredric M. Rosemore, Lance B. Rosemore and Dr. Andrew S. Rosemore, which
agreements expire in June 2000.
The Company has not purchased policies insuring the lives of Dr.
Fredric M. Rosemore, Lance B. Rosemore or Dr. Andrew S. Rosemore. All of the
executive officers are required to spend all of their business time on Company
business, including the management of PMC Advisers in connection with advisory
services to be provided by PMC Advisers to affiliates of the Company in the
future. See "Remuneration of Directors and Officers" and "Management." See also
"Certain Affiliated Transactions and Other Matters" for important information
concerning the management of the Company.
Availability of Funding Sources. The Company has a continuing need for
capital to finance its lending activities and has generally funded its loan
origination activities by borrowings 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 credit facility. Accordingly, reductions in the
availability of funds from these sources could have a material adverse effect on
the Company. In addition, since the Company distributes as dividends to its
shareholders all its investment company taxable income, such earnings are not
available to fund loan originations.
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<PAGE> 36
Environmental Liabilities. The Company has acquired, and may in the
future acquire, through foreclosure, properties that secured defaulted loans.
While the Company performs extensive due diligence investigations into
properties both prior to originating the loan secured by such properties and
prior to foreclosing thereon, there is a risk that hazardous substances or
wastes, contaminants, pollutants or sources thereof could be discovered on
properties acquired by the Company or with respect to which the Company is
deemed to be an owner or operator under applicable environmental laws. In such
event, the Company could be required under certain environmental laws to remove
such substances and clean up the affected property at its sole cost and expense
or to contribute to the cost of such remediation or clean up , which could have
a material adverse effect on the Company. In addition, the Company could be
required to pay fines and/or penalties imposed by governmental agencies. The
Company requires environmental site assessments of commercial real estate
securing loans it makes as a condition to making such loans; however, there can
be no assurance that such assessments would reveal any or all potential
environmental liabilities.
Competition. PMC Capital's primary competition comes from banks,
financial institutions, franchise loan programs and other companies operating
under SBA sponsored programs. Some of these competitors have greater financial
and larger managerial resources than the Company. Competition has increased as
the financial strength of the banking and thrift industries improved. PMC
Capital believes that it competes effectively with such entities on the basis of
the interest rates, maturities and payment schedules, the quality of its
service, its reputation as a lender, the timely credit analysis and decision
making processes, and the renewal options available to borrowers. In addition,
to the extent that the investment opportunities reviewed by PMC Advisers conform
to the investment criteria of PMC Commercial, and PMC Commercial has funds
available to make these investments, such investments will be made by PMC
Commercial.
See "Business -- Competition."
Leverage. The Company has borrowed funds and issued shares of preferred
stock, and intends to borrow additional funds through advances on its revolving
credit facility and through the issuance of notes payable or SBA debentures, if
available. As a result, the Company is leveraged. The SBA and private lenders
have fixed dollar claims on the Company's assets superior to the claims of the
holders of Common Stock. Any increase in the interest rate earned by the Company
on investments in excess of the interest rate or dividend payable on the funds
obtained from either borrowings or the issuance of preferred stock would cause
its net income and earnings per share to increase more than they would without
the leverage, while any decrease in the interest rate earned by the Company on
investments would cause net income and earnings per share to decline by a
greater amount than they would without the leverage. Leverage is thus generally
considered a speculative investment technique. In order for the Company to repay
indebtedness or meet its obligations in respect of any outstanding preferred
stock on a timely basis, the Company may be required to dispose of assets at a
time which it would not otherwise do so and at prices which may be below the net
book value of such assets. Dispositions of assets may adversely impact the
Company's results of operations.
Decline in Net Asset Value. If the net asset value of the Company's
assets were to decline, PMC Capital's ability to pay dividends on the Common
Stock may be adversely effected.
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<PAGE> 37
Such inability to pay dividends may cause PMC Capital to
lose its status as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code").
Additionally, such reduction may require the Company to dispose of assets at a
time at which it would not otherwise do so and at prices which may be below the
net book value of the assets.
Shares Eligible for Future Sale. As of March 31, 1997 the Company's
executive officers and directors ("Management Shareholders") owned an aggregate
of 2,977,599 shares of Common Stock (approximately 26.4% of total shares of
Common Stock outstanding at that time). In addition, certain other persons have
purchased shares of Common Stock in reliance upon certain exemptions from
registration under the Securities Act of 1933, as amended (the "Securities
Act"). Sales of the shares of Common Stock owned by the Management Shareholders
or such other shareholders may not be made in a public distribution unless
registered under the Securities Act or sold pursuant to Rule 144 thereunder.
Sales of substantial amounts of Common Stock in the public market subsequent,
and the possibility that such sales may be made, could adversely affect the
prevailing market price of the Common Stock and could impair the Company's
ability to raise additional capital through the sale of its equity securities.
EFFECTS OF LEVERAGE
(1) For a schedule of the annual rate of interest or dividend payments on
senior securities, see "Description of Capital Stock and Long-Term
Debt--Long-Term Debt."
(2) The following table is included to assist the investor in understanding
the effects of leverage. The figures appearing in the able are
hypothetical and actual return may be greater or less than that
reflected in table.
Leverage Effect Table
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assumed return on -15% -10% -5% 0% 5% 10% 15%
portfolio (net of
expenses)
- --------------------------------------------------------------------------------------------------------------------------
Corresponding return to (48.41%) (35.30%) (22.19%) (9.07%) 4.04% 17.15% 30.26%
common shareholder
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 38
MARKET PRICE OF COMMON STOCK
The Common Stock is traded on the AMEX. The following table sets forth
the high and low sales prices on the AMEX for the Common Stock for the periods
indicated. On September 30, 1997 the closing price of the Common Stock on the
AMEX was $14.69 per share and on June 30, 1997 the net asset value was $5.76.
The Common Stock has historically traded at a premium to net asset value.
<TABLE>
<CAPTION>
1995
----------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Market Price:
High.................................................... $ 13.50 $ 12.13 $ 12.00 $ 13.25
Low..................................................... $ 11.13 $ 10.75 $ 10.88 $ 11.38
Net Asset Value (1)...................................... $ 5.39 $ 5.40 $ 5.44 $ 5.44
(Discount) or Premium to Net Asset Value................. 106% 99% 100% 109%
Average weekly trading volume............................ 33,400 38,400 41,900 33,000
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Market Price:
High.................................................... $ 13.63 $ 13.38 $ 14.25 $ 14.75
Low..................................................... $ 11.88 $ 12.38 $ 11.75 $ 12.88
Net Asset Value (1)...................................... $ 5.47 $ 5.51 $ 5.57 $ 5.64
(Discount) or Premium to Net Asset Value................. 117% 125% 111% 128%
Average weekly trading volume............................ 32,100 22,000 27,500 28,400
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
1ST 2ND
QUARTER QUARTER
<S> <C> <C>
Market Price:
High.................................................... $ 14.50 $ 14.13
Low..................................................... $ 13.38 $ 12.50
Net Asset Value (1)...................................... $ 5.70 $ 5.76
(Discount) or Premium to Net Asset Value................. 135% 117%
Average weekly trading volume............................ 28,900 38,500
</TABLE>
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<PAGE> 39
- ------------------
(1) Average value during period, calculated based on average net assets during
the period divided by the weighted average number of common shares
outstanding. Securities for which market values are available are valued at
market, all other assets are valued at fair value as determined by the
Board of Directors. The Board of Directors has determined that the fair
value of the Company's loans is the principal amount of the loan less any
discounts, deferred fees, net of related costs and loan loss reserves.
SHARE REPURCHASES
The Company is a closed-end investment company designed for long-term
investment and investors should not consider it to be trading vehicle. In
connection with the Plan and in recognition that the Company's shares, which
historically have traded at a premium to net asset value, might trade at a
discount to net asset value or at any value that is less than the desired value
as determined by the Board of Directors of the Company (the "Board"), the Board
contemplates that the Company may from time to time repurchase its shares in the
open market pursuant to Section 23(c)(1) of the Investment Company Act.
The Company anticipates that the market price of its shares will remain
at a premium to net asset value but may vary. The market price of the Company's
shares will be determined by, among other things, the relative demand for and
supply of such shares in the market, the Company's investment performance, the
Company's dividends and yield and investor perception of the Company's overall
attractiveness. Although the Board believes that share repurchases generally
would have a favorable effect on the market price of the Company shares, it
should be recognized that the acquisition of shares by the Company in the open
market will decrease total assets and consequently have the effect of increasing
the Company's expense ratio. Due to the nature of the Company's investment
objectives, policies and portfolio, under current market conditions the Company
anticipates that repurchases generally should not have a material adverse effect
on the Company's investment performance; however, this may not always be the
case.
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BUSINESS
GENERAL
PMC Capital is a diversified closed-end management investment company
that operates as a BDC under the Investment Company Act. The Company engages in
the business of originating loans to small businesses either directly or
indirectly or through its three principal subsidiaries: First Western, PMIC and
Western Financial. First Western, PMIC and Western Financial are registered
under the Investment Company Act as diversified closed-end management investment
companies. In addition, PMC Capital is either directly or indirectly the sole
shareholder or partner of PMC Advisers, PMC Funding, PMC Capital Corp., PMC
Trust 1996-A and the Partnership. PMC Advisers is an investment advisor who
evaluates and services loans pursuant to a fee arrangement. PMC Capital has
elected to be taxed as a regulated investment company and distributes
substantially all its taxable income as dividends to its shareholders, thereby
incurring no Federal income tax liability on such income.
The Company primarily originates loans to individuals and small
business concerns in the lodging industry. The Company also targets the medical,
food service, service, retail and commercial real estate industries. The Company
primarily lends to businesses in the Southwest and Southeast regions of the
United States. A majority of the Company's loans in the lodging industry are to
owner-operated facilities generally operating under national franchises. The
Company believes that franchise operations offer attractive lending
opportunities because such businesses employ proven business concepts, have
consistent product quality, are screened and monitored by franchisors and
generally have a higher rate of success as compared to other independently
operated businesses. In addition, management believes that the franchise lodging
industry and the other industry segments upon which it focuses are underserved
by traditional lending sources.
PMC Capital, incorporated in Florida under the name of Pro-Med Capital,
Inc. in June 1983, became the successor by merger to Western Capital Corporation
(founded in 1979) in December 1983 and changed its name to "PMC Capital, Inc."
in March 1991. The principal executive offices of the Company are located at
17290 Preston Road, Third Floor, Dallas, Texas 75252.
Earnings per share on a quarterly basis since 1988 were as follows:
<TABLE>
<CAPTION>
Per Share Earnings
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $0.27 $0.23 $0.19 $0.18 $0.18 $0.15 $0.13 $0.09 $0.09
Second Quarter 0.30 0.25 0.23 0.23 0.23 0.15 0.12 0.11 0.09
Third Quarter 0.30 0.27 0.26 0.25 0.19 0.18 0.13 0.10 0.10
Fourth Quarter 0.31 0.28 0.44* 0.21 0.19 0.16 0.14 0.11 0.09
----- ----- ----- ----- ----- ----- ----- ----- -----
$1.18 $1.03 $1.12 $0.87 $0.79 $0.64 $0.52 $0.41 $0.37
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
* Includes $0.24 from a structured sale of a portion of the loan portfolio.
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LENDING PROGRAMS
FIRST WESTERN
First Western is a small business lending company ("SBLC") that originates
variable-rate loans which are partially guaranteed by the SBA pursuant to the
7(a) Program. While the eligibility requirements of the 7(a) Program vary by
the industry of the borrower and other factors, the general eligibility
requirements are that: (i) gross sales of the borrower cannot exceed $5.0
million (other than with respect to certain industries where eligibility is
determined based on a number of employees), (ii) liquid assets or real estate
equity of the borrower (and certain affiliates) cannot exceed certain limits
and (iii) the maximum aggregate SBA loan guarantees to a borrower cannot exceed
$750,000.
The interest rate environment and legislative changes have affected the
secondary market for the 7(a) Program guaranteed portion of loans originated by
First Western. 7(a) Program lenders are required to pay a fee of between 40
basis points and 50 basis points ("SBA Servicing Fees") per annum on the
outstanding principal balance of any loans sold in the secondary market
depending upon when the loan was sold. At present, a 50 basis point fee is in
effect for loans originated after October 1995. The value of the guaranteed
portion of loans decreased as a result of this fee. Additionally, as interest
rates fluctuated during 1994, the secondary market demand for the guaranteed
portion of the 7(a) Program loans decreased and the premiums declined. The
secondary market demand increased in late 1994, continued the increase during
1995 and stabilized during 1996, partially offsetting the negative effect of
the SBA Servicing Fees established in 1993.
Effective October 1995, the fees charged to the borrower by the SBA for
the SBA's guaranty of a loan to the lender increased, are now based on the size
of the originated loan and range from 2% to 3.875% of the guaranteed portion of
the loan. The fees had been 2% of the guaranteed portion of the loan. First
Western had a decrease in loan origination volume during 1996 partially as a
result of these increased fees and an increase in competition. Due to the
decrease in loan origination volume, the premiums recognized from the sale of
the government guaranteed portion of 7(a) Program loans sold in the secondary
market decreased from $2.8 million in 1995 to $1.9 million during 1996.
Effective March 1, 1996, certain eligibility requirements of the 7(a)
Program were amended. As a result of these amendments and other factors
described above, First Western has experienced a reduction in loan origination
opportunities within the 7(a) Program. Set forth below are the qualifications
to the program. When the total amount of the proposed financing:
(1) Is $250,000 or less, each 20 percent owner of the applicant must
contribute to the business personal liquid assets per the SBA rules and
regulations ("Personal Liquid Assets") in excess of two times the total
financing or $100,000, whichever is greater;
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(2) Is between $250,001 and $500,000, each 20 percent owner of the
applicant must contribute Personal Liquid Assets to the business in excess of
one and one-half times the total financing or $500,000, whichever is greater;
and
(3) Exceeds $500,000, each 20 percent owner of the applicant must
contribute to the business Personal Liquid Assets in excess of one times the
total financing or $750,000, whichever is greater.
Continued program and market changes may have an adverse effect on future
periods of operations. The future profitability of the Company's 7(a) Program
lending activities will be impacted by a number of factors including: (i) the
more efficient capital structure achieved by First Western's 1994
securitizations, (ii) volume of lending, (iii) length of loans, (iv) structure
of sales to the secondary market, (v) interest rates charged and related terms,
(vi) quality of portfolio, (vii) prepayment experience and (viii) legislative
and/or regulatory changes.
Any other aspect of SBA programs under which the Company participates
could be modified by legislation or agency policy changes. PMC Capital
continues to evaluate alternative lending strategies and would pursue such
strategies should the SBA programs under which any of its subsidiaries operates
be eliminated or significantly curtailed.
At December 31, 1996 and 1995, First Western had outstanding loans
receivable, net, in an aggregate amount of $26.3 million and $20.8 million,
respectively. During the years ended December 31, 1996 and 1995, First Western
originated $29.2 million and $40.6 million, respectively, in loans and sold
$20.0 million and $30.3 million, respectively, of the guaranteed portion of its
loans into the secondary market (without recourse to the Company). At December
31, 1996 and 1995, First Western had loans receivable with aggregate balances
of approximately $412,000 and $659,000 (1.6% and 3.2%, respectively, of First
Western's outstanding loans receivable, net) greater than 60 days past due.
Realized and unrealized losses on First Western's investments were $56,000 and
$238,000 during the years ended December 31, 1996 and 1995, respectively.
PMIC
PMIC is a licensed specialized 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 SBIC (as defined
below), PMIC is eligible to obtain long-term, fixed-rate funding from the SBA
through the issuance of debentures which are guaranteed by the SBA. For any
debentures issued by PMIC prior to 1996, the interest rate has been reduced
through an SBA subsidy by 3% during the first five years. As an SSBIC, prior to
1996 PMIC was eligible to issue preferred stock to the SBA with either a 3% or
4% per annum cumulative dividend rate. Issuance of debentures and preferred
stock is subject to SBA approval and availability. See "Overview of SBA
Regulations."
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<PAGE> 43
At December 31, 1996 and 1995, PMIC had loans receivable, net, in an
aggregate amount of $28.6 million and $36.7 million, respectively. During the
years ended December 31, 1996 and 1995, PMIC originated $19.3 million and $21.2
million, respectively, in loans and during the year ended December 31, 1996
transferred $24.8 million in loans to PMC Capital in conjunction with the
Structured Financing. At December 31, 1996 and 1995, PMIC had loans receivable
with aggregate balances of approximately $160,000 and $707,000 (0.8% and 2.0%,
respectively, of PMIC's loans receivable, net) greater than 60 days past due.
Realized and unrealized losses on PMIC's investments were $27,000 during each
of the years ended December 31, 1996 and 1995.
WESTERN FINANCIAL
Western Financial is a licensed small business investment company ("SBIC")
under the SBIA that provides fixed-rate loans to small business concerns and
persons 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. Issuance of debentures is subject to SBA
approval and availability. See "Overview of SBA Regulations."
At December 31, 1996 and 1995, Western Financial had loans receivable,
net, in an aggregate amount of $14.4 million and $25.1 million, respectively.
During the years ended December 31, 1996 and 1995, Western Financial originated
$7.5 million and $8.0 million, respectively, in loans and during the year ended
December 31, 1996 transferred $10.0 million in loans to PMC Capital in
conjunction with the Structured Financing. At December 31, 1996 and 1995,
Western Financial had loans receivable with aggregate principal balances of
approximately $215,000 and $436,000 (1.5% and 1.7%, respectively, of Western
Financial's loans receivable, net) greater than 60 days past due. Realized and
unrealized losses on Western Financial's investments were $64,000 and $94,000,
respectively, during the years ended December 31, 1996 and 1995.
PMC CAPITAL
PMC Capital has originated loans to borrowers on a non-SBA supported basis
using criteria similar to that utilized by its three principal investment
company subsidiaries whose loans are funded under the SBA programs. These loans
are: (i) to borrowers who exceed the eligibility requirements of the 7(a)
Program or SBIC programs, (ii) payable in monthly installments of principal and
interest based upon four to 25 year amortization tables, with the balance due
at maturity (typically four to 20 years), (iii) primarily collateralized by
real estate and (iv) generally guaranteed by the principals of the borrowers.
The funding for this lending program is limited to the extent of leverage
available to the Company. However, the Company expects that most non-SBA
supported loans will be made by PMC Commercial in the future and that such
loans will be made by the Company only to the extent that PMC Commercial does
not have available funds.
At December 31, 1996 and 1995, PMC Capital had loans receivable, net, in
an aggregate amount of $24.1 million and $27.9 million, respectively. During
the years ended December 31, 1996 and 1995, PMC Capital originated $14.2
million and $7.7 million in loans, respectively, and
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during the year ended December 31, 1996 contributed $45.6 million in loans to
the Partnership (including the $34.8 million in loans transferred from PMIC and
Western Financial to PMC Capital) in conjunction with the Structured Financing.
At December 31, 1996 and 1995, PMC Capital had no loans receivable greater than
60 days past due. PMC Capital had no realized or unrealized losses during the
years ended December 31, 1996 and 1995.
NON-INVESTMENT COMPANY SUBSIDIARIES
The accompanying consolidated financial statements include the accounts of
PMC and its wholly owned regulated investment company subsidiaries. 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 the requirements of the Federal securities laws.
PMC ADVISERS
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. PMC Advisers provides investment advisory services to PMC
Commercial pursuant to an investment management agreement (the "Investment
Management Agreement") entered into between PMC Capital, PMC Advisers and PMC
Commercial. As the investment advisor for PMC Commercial, PMC Advisers has
earned $1,562,000, $1,189,000 and $429,000 in advisory fees during the years
ended December 31, 1996, 1995 and 1994, respectively.
PMC CAPITAL CORP., PMC TRUST 1996-A AND THE PARTNERSHIP
The Partnership was formed as a special purpose affiliate of the Company.
On November 13, 1996, the Partnership, a Delaware limited partnership,
completed the Structured Financing through a private placement (the "Private
Placement") of approximately $40.7 million of its Notes. The Notes, issued at
par, which have a stated maturity in 2011 and bear interest at the rate of
6.725% per annum, were originally collateralized by approximately $45.7 million
of loans (the "Initial Loan Contribution") contributed by PMC Capital to the
Partnership. The net book value of the Initial Loan Contribution after deferred
commitment fees, discounts and accrued interest receivable on the date of
transfer was approximately $45.5 million. In connection with the Private
Placement, the Notes were given a rating of "Aa2" by Moody's Investors Service.
The Partnership has the exclusive obligation for repayment of the Notes, and
the holders of the Notes have no recourse to PMC Capital or its other
subsidiaries or their assets in the event of nonpayment of the underlying loans
receivable. The net proceeds from the issuance of the Notes (approximately
$37.5 million before giving effect to payment of issuance costs of
approximately $396,000 and after giving effect to the funding of a $2.04
million reserve fund held by the trustee as collateral) were distributed to PMC
Capital. PMC Capital Corp. was formed in November 1996 to act as the
independent trustee of PMC Trust 1996-A which is the general partner of the
Partnership and owns a 1% general partnership interest in the Partnership, PMC
Capital owns a 99% limited partnership interest in the Partnership. PMC is the
servicer for all loans held by the Partnership.
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<PAGE> 45
PMC FUNDING
PMC Funding is a Florida corporation that holds assets on behalf of the
Company. PMC Capital is the sole shareholder of PMC Funding. Operations from
PMC Funding consist of income generated from the operation of properties held
and charter revenue derived from use by third parties of PMC Funding's
airplane.
ELECTION TO BE A BUSINESS DEVELOPMENT COMPANY
In 1980, the Investment Company Act was amended to permit closed-end
investment companies which make certain types of investments ("Qualifying
Assets") to elect to become business development companies rather than
registered investment companies. Under this amendment (the "1980 Amendment"),
BDCs must register their shares under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and become subject to the Exchange Act's periodic
reporting requirements rather than the Investment Company Act's reporting
requirements. During 1994, PMC Capital elected to operate as a BDC. Companies
having securities registered under the Exchange Act, such as PMC Capital, must
file quarterly rather than semi-annual financial reports. The 1980 Amendment
provides BDCs with greater operating flexibility relating to capital structure,
portfolio diversification, transactions with downstream affiliates, executive
stock options and the frequency with which they may make distributions from
capital gains, that may be greater than that available to registered investment
companies.
Under the 1980 Amendment, a BDC such as PMC Capital may only acquire
Qualifying Assets unless, at the time of their acquisition, Qualifying Assets
represent at least 70% of the value of the BDC's total assets. The principal
categories of Qualifying Assets relevant to the business of PMC Capital are the
following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible portfolio
company. An eligible portfolio company is defined in the 1980 Amendment as any
issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company other than an SBIC wholly-owned by
the BDC (PMC Capital's investments in and advances to PMIC, Western
Financial and First Western are Qualifying Assets ); and
(c) does not have any class of securities with respect to which a
broker or dealer may extend margin credit.
(2) Securities received in exchange for or distributed on or with respect
to securities described in (1) above, or pursuant to the exercise of options,
warrants or rights relating to such securities.
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<PAGE> 46
(3) Cash, cash items, Government securities or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal place
of business) in the United States for the purpose of making investments in the
type of securities described in (1) above and, in order to classify the
securities as Qualifying Assets for purposes of the 70% test, the BDC must make
available to the issuer of the securities significant managerial assistance
which means, among other things:
(1) Any arrangement whereby the BDC, through its directors, officers or
employees, offers to provide, and, if accepted, does so provide, significant
guidance and council concerning the management, operations or business
objectives and policies of a portfolio company; or
(2) In the case of an SBIC, making loans to a portfolio company.
Under the 1980 Amendment, now that PMC Capital has elected to be regulated
as a BDC, it may not change the nature of its business so as to cease to be, or
withdraw its election as, a BDC unless authorized by the vote of a majority of
the shares of Common Stock.
COMPETITION
PMC Capital's primary competition comes from banks, financial
institutions, franchise loan programs and other companies operating under SBA
sponsored programs. Some of these competitors have greater financial and larger
managerial resources than the Company. Competition has increased as the
financial strength of the banking and thrift industries improved. PMC Capital
believes that it competes effectively with such entities on the basis of the
interest rates, maturities and payment schedules, the quality of its service,
its reputation as a lender, the timely credit analysis and decision making
processes, and the renewal options available to borrowers. In addition, to the
extent that the investment opportunities reviewed by PMC Advisers conform to
the investment criteria of PMC Commercial, and PMC Commercial has funds
available to make these investments, such investments will be made by PMC
Commercial.
During December 1995, in addition to being a "Certified SBA lender" in
Miami, Florida and "Preferred SBA lender" in Dallas, Texas, First Western was
granted the designation of a "preferred lender" in over 50 additional districts
of the SBA. Under the 7(a) Program, in order to have SBA guarantee, the lender
must have some level of SBA approval. Within the 7(a) Program, the different
status levels for SBA approvals are (i) guaranteed lender, (ii) certified
lender and (iii) preferred lender. Approval of loans under the guaranteed
lender program requires the greatest amount of review time by the SBA while the
preferred lender program requires the least. The granting of preferred lender
status to First Western assists the Company in competing for loan origination
opportunities due to the reduction in approval time.
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EMPLOYEES
At December 31, 1996, the Company had 56 employees. Management of the
Company believes its relationship with its employees is good.
OVERVIEW OF SBA REGULATIONS
The lending operations of First Western, PMIC and Western Financial are
regulated by the SBA establishing, among other things, maximum interest rates
that borrowers may be charged (which currently may not exceed the greater of
19% per annum or 11% above the Company's cost of funds from the SBA) and
minimum and maximum maturities for the Company's loans (which generally range
from four to 25 years). Borrowers must satisfy certain criteria established by
the SBA to qualify for loans originated by the Company under SBA sponsored
programs, including limitations on the net worth and net income of potential
borrowers or alternative criteria that focus upon the number of employees of
the borrower and its gross revenues. In addition, the SBA generally limits the
aggregate amount of guaranties that can be provided to any single borrower and
restricts the use to which the loan proceeds can be employed by the borrower.
As part of the omnibus funding bill signed into legislation by Congress in
October 1996, the SBIC program was authorized to issue a minimum of $256
million in SBA debentures in the SBA's fiscal year ending September 30, 1997.
This is significantly above amounts available in 1996; however, there are
increased costs for new SBA debentures. A flat 3% "draw-down" fee will replace
the 2% commitment fee and there will be an increase of 100 basis points in the
interest rates to be charged. The interest rates previously charged on SBA
debentures were approximately 70 basis points over the 10 year Treasury Note.
As adjusted, the new rates would be approximately 170 basis points over the 10
year Treasury Note. As part of this legislation, the availability of 3%
subsidized debentures and the right of the SBA to purchase preferred stock of
an SSBIC was repealed. This will have no effect on previously issued debentures
or preferred stock of SSBICs including PMIC.
PROPERTIES
The Company's headquarters are located at 17290 Preston Road, Dallas,
Texas 75252 where its facilities comprise approximately 12,400 square feet of
space pursuant to leases with a corporation, a majority of whose shareholders
are officers and/or directors of the Company. In addition the Company also
leases office space in Hollywood, Florida, Atlanta, Georgia and Phoenix,
Arizona. The aggregate annual lease payments for the year ended December 31,
1996 were approximately $213,000.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation incidental
to its business. The Company does not believe that the current proceedings will
have a material adverse effect on the results of operations or financial
condition of the Company.
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INVESTMENT OBJECTIVES AND POLICIES
PMC CAPITAL
PMC Capital's investment objective is to maximize earnings for
distribution to shareholders from interest income, loan servicing and other fees
generated by loans which it originates. Except for the fundamental policies
described below, PMC Capital's investment objectives may be changed by a
majority vote of the PMC Capital Board of Directors.
The Company places its liquid funds not invested in loans in short-term
monetary instruments. These liquid funds are maintained in such instruments
pending application to long-term portfolio investments. No dollar limit has been
established for short-term investments as a whole or for any type of short-term
instrument.
Each subsidiary of PMC Capital also sets its own investment policies.
FIRST WESTERN
The following policies of First Western may be modified or terminated
by a majority vote of its Board of Directors.
The investment objective of First Western is to receive interest,
premiums, and servicing fees to fund current operations, meet contingencies as
they arise, and provide earnings for the payment of dividends to PMC. In seeking
to achieve this objective, management may expand First Western's investments
through borrowings.
WESTERN FINANCIAL
The following policies of Western Financial may be modified or
terminated by a majority vote of its Board of Directors.
The investment objective of Western Financial is to receive interest
and fees to fund current operations, meet contingencies as they arise and
provide earnings for the payment of dividends to PMC.
Except for certain SBA restrictions which prohibit Western Financial
from making loans to any single borrower in excess of 20% of its regulatory
stated capital and capital surplus, Western Financial has not established any
more restrictive limit on the dollar amount or percentage of its total assets
that may be invested in any particular company or any group of companies than
that imposed by SBA regulations.
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PMIC
The following policies of PMIC may be modified or terminated by a
majority vote of its Board of Directors, except that its policy to make loans to
"socially or economically disadvantaged" small business entrepreneurs may be
changed only as described below in "Fundamental Policies".
The investment objective of PMIC is to receive interest and fees to
fund current operations, meet contingencies as they arise and provide earnings
for the payment of dividends to PMC. PMIC has an overall policy of making loans
to "socially or economically disadvantaged" small business entrepreneurs
pursuant to the SBIA.
SBA restrictions prohibit PMIC from making loans to any single borrower
in excess of 25% of its regulatory stated capital and capital surplus. PMIC has
not established any more restrictive limit on the dollar amount or percentage of
its total assets that may be invested in any particular company or any group of
companies than that imposed by SBA regulations.
FUNDAMENTAL POLICIES
The following investment policies of PMC Capital and its subsidiaries
are fundamental policies and may not be changed without the approval of the
lesser of (i) more than 50% of PMC Capital's outstanding voting securities or
(ii) 67% or more of PMC Capital's voting securities present at a meeting of
security holders at which a quorum is present. All other investment policies of
PMC Capital may be changed by PMC Capital's Board of Directors at any time.
1. The Company will not purchase or sell commodities or commodity
contracts.
2. The Company will not engage in short sales, purchase securities on
margin or trade in contracts commonly called puts or calls or in combinations
thereof, except that it may acquire warrants, options or other rights to
subscribe to or sell securities in furtherance of its investment objectives.
3. The Company will not underwrite securities of other issuers, except
that it may acquire portfolio securities under circumstances where, if sold, the
Company might be deemed an underwriter for purposes of the Securities Act. The
Company may purchase "restricted securities" as to which there are substantial
restrictions on resale under the Securities Act.
4. The Company will not purchase any securities of a company if any of
the directors or officers of the Company owns more than 0.5% of such company and
such persons owning more than 0.5% together own 5% or more of the shares of such
company (as such terms are defined in the Investment Company Act).
5. The Company may issue senior securities in the form of debentures,
reverse repurchase agreements and preferred stock and may borrow monies from
banks and other lenders,
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all on an unsecured basis. The Investment Company Act limits the Company to the
issuance of one class of senior debt securities and one class of senior equity
securities.
6. The Company will not invest 25% or more of its total assets in any
one industry except in the lodging industry which may constitute 100% of the
Company's portfolio. The Company will invest at least 25% of its total assets in
the lodging industry.
7. The Company may invest in real estate development companies, may
make real estate acquisitions and improvement loans and may further make other
loans secured by real estate.
8. The Company may make loans and purchase debt securities in
furtherance of its investment objectives. The Company will not make loans to its
officers, directors or other affiliated persons.
9. PMIC will perform the functions and conduct the activities
contemplated under the SBIA, and will provide assistance solely to small
business concerns which will contribute to a well-balanced national economy by
facilitating ownership of such concerns by persons whose participation in the
free enterprise system is hampered because of social or economic disadvantages.
These fundamental policies of PMIC may not be changed without shareholder
approval and without the prior written consent of the SBA.
As stated above, the Company has a fundamental policy regarding
investment in the lodging industry. At December 31, 1996 and 1995, loans to
businesses in the lodging industry comprised 44% and 55% of its total assets,
respectively.
There can be no assurance that the Company will continue to experience
the positive results it has historically achieved from lending to the lodging
industry or that market conditions will enable the Company to maintain or
increase its level of loan concentration in this industry. Any economic factors
that negatively impact this industry could have a material adverse effect on the
business of the Company. Additionally, at December 31, 1996, loans to businesses
located in Texas, Florida and Georgia comprised approximately 38%, 13% and 11%
of the Company's outstanding loan portfolio, respectively. A decline in economic
conditions in any of these states may adversely affect the Company.
PORTFOLIO TURNOVER
The Company's portfolio turnover rate was 16% for the year ended
December 31, 1996 primarily as a result of First Western's sales of loans in the
secondary market.
INVESTMENT ADVISOR
The Company is advised internally by its executive officers under the
supervision of its Board.
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TAX CONSIDERATIONS
The following discussion is a general summary of the material Federal
tax considerations applicable to PMC Capital and to an investment in the Common
Stock and does not purport to be a complete description of the tax
considerations applicable to such an investment. Prospective investors should
consult their own tax advisors with respect to the tax considerations which
pertain to their purchase of the Common Stock. This summary does not discuss all
aspects of Federal income taxation relevant to holders of the Common Stock
("Holders") in light of their personal circumstances, or to certain types of
Holders subject to special treatment under federal income tax laws, including
foreign taxpayers. This summary does not discuss any aspects of foreign, state,
or local tax laws.
GENERAL
PMC Capital and each of its subsidiaries (with the exception of PMC
Funding and PMC Advisers) has qualified and intends to continue to qualify to be
treated as "regulated investment companies" under the Code. To be so treated,
the Company must (i) be registered under the Investment Company Act at all times
during the taxable year, (ii) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
certain other passive income, (iii) derive less than 30% of its gross income in
each taxable year from the sale or other disposition within three months of
their acquisition by the Company of stock, securities, or certain other
investments that are not directly related to the Company's principal business of
investing in stock or securities, and (iv) diversify its holdings to meet
certain requirements set forth in the Code. The Company has treated, and intends
to continue to treat, all amounts received on the sale of loans in excess of a
normal servicing fee, as qualifying income for purposes of meeting the test in
clause (ii).
The Company intends to make timely distributions of its investment
company taxable income, net capital gains and capital gain net income so that
the Company will not be subject to federal income or excise taxes. For Federal
income and excise tax purposes, dividends declared in October, November or
December of any calendar year and payable to Holders of record on a specified
date in such a month are deemed to have been received by each Holder, and to
have been paid by the Company, on December 31 of such calendar year, provided
that such dividend is actually paid during January of the following year.
DISTRIBUTIONS
Distributions to Holders of the Company's dividend and interest income
and of any net short-term capital gain in any year will generally be taxable as
dividend income to Holders to the extent of the Company's earnings and profits.
Distributions which constitute dividends for Federal income tax purposes will
not generally be eligible for the dividends-received deduction
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<PAGE> 52
for corporations. To the extent that such distributions to a United States
Holder in any year exceed the Company's earnings and profits, they will be
treated as a nontaxable return of capital and will reduce the United States
Holder's basis in his shares. The amount of such distributions, if any, in
excess of the Holder's basis in his shares, will be treated as a gain from the
sale of shares, as discussed below. Distributions of the Company's net capital
gains (which will be designated as capital gain dividends by the Company) will
be taxable to United States Holders as long-term capital gain, regardless of
the length of time the Holder has held his shares.
SALES
A Holder may recognize taxable gain or loss if the Holder sells shares
of the Company. Any gain or loss arising from such sale will generally be
capital gain or loss and will be long-term capital gain or loss if such Holder
has held such shares for more than one year at the time of the sale; otherwise
it will be short-term capital gain or loss. However, any capital loss arising
from the sale of shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends received by
the Holder.
REPORTING AND BACK-UP WITHHOLDING
PMC Capital will inform Holders each year of the amount and nature of
any income or gain distributed to them. Certain Holders may be subject to a 31%
Federal back-up withholding tax on distributions if they fail to provide PMC
Capital with their correct taxpayer identification number and certification that
they are not subject to backup withholding.
MANAGEMENT
PMC Capital has no formal advisory board but is advised by its
executive officers under the direction of its Board of Directors. PMC Capital's
Loan Committee, comprised primarily of senior management, including but not
limited to Mr. Lance B. Rosemore, Dr. Andrew S. Rosemore, Ms. Mary J.
Brownmiller and Mr. Jan F. Salit, is primarily responsible for the day-to-day
management of the Company's loan portfolio. PMC Capital's Board of Directors is
divided into three classes with staggered three year terms. No more than one
class of directors is elected at any annual meeting. All officers and directors
hold office until their respective successors are elected and qualified or until
their earlier resignation or removal.
The Audit Committee of PMC Capital's Board of Directors is currently
comprised of Mr. Thomas Hamill and Mr. Barry A. Imber. The principal functions
of the Audit Committee are to oversee the financial reporting policies,
accounting issues, portfolio valuation and the entire audit function of the
Company. The Audit Committee reports their activities to PMC Capital's Board of
Directors. There are no compensation or nomination committees; however, PMC
Capital's Board of Directors as a whole performs these functions. PMC Capital
has appointed an Independent Directors Committee consisting of Dr. Irvin
Borish, Mr. Robert Diamond, Mr. Hamill, Mr. Imber and Mr. Lee Ruwitch, each of
whom is otherwise unaffiliated with the
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<PAGE> 53
Company. The Independent Directors Committee, which held one meeting during
1996, reviews all proposed affiliated transactions to ensure that such
transactions do not violate the appropriate provisions of the Investment
Company Act.
The following table set forth certain information about the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND ADDRESS(1) OFFICES WITH THE COMPANY
------------------- ------------------------
<S> <C>
Dr. Fredric M. Rosemore(2) Chairman of the Board and Treasurer
Mr. Lance B. Rosemore(2) President, Chief Executive Officer,
Secretary, and Director
Dr. Andrew S. Rosemore(2) Executive Vice President,
Chief Operating Officer, and Director
Mr. Jan F. Salit Executive Vice President, Chief Investment
Officer and Assistant Secretary
Mr. Barry N. Berlin Chief Financial Officer
Ms. Cheryl T. Murray General Counsel
Ms. Mary J. Brownmiller Senior Vice President
Dr. Irvin M. Borish Director
Mr. Robert Diamond Director
Dr. Martha R. Greenberg(2) Director
Mr. Thomas Hamill Director
Mr. Barry A. Imber Director
Mr. Lee Ruwitch Director
</TABLE>
- ---------------------
(1) The address for each of Dr. Fredric M. Rosemore, Dr. Irvin Borish, Mr.
Robert Diamond, Mr. Thomas Hamill, Mr. Lee Ruwitch and Mr. Barry Imber
is c/o the Company, 4000 Hollywood Blvd., Suite 435 South, Hollywood,
Florida 33021. The address for Mr. Lance B. Rosemore and Dr. Andrew S.
Rosemore is c/o the Company, 17290 Preston Road, 3rd Floor, Dallas,
Texas 75252. The address for Dr. Martha R. Greenberg is P.O. Box 1177,
Russellville, Alabama 35653.
(2) Mr. Lance B. Rosemore and Dr. Andrew S. Rosemore are the sons, and Dr.
Martha R. Greenberg is the daughter, of Dr. Fredric M. Rosemore and
Mrs. Marion Rosemore. Dr. Fredric M. Rosemore, Mrs. Marion Rosemore and
Dr. Andrew S. Rosemore each own in excess of 5% of the shares of the
Company. Consequently, all these family members are "interested
persons" as defined under the Investment Company Act.
Information concerning the executive officers and directors of the Company is as
follows:
DR. FREDRIC M. ROSEMORE--Dr. Rosemore, 73, has been the Chairman of the
Board of the Company since 1983. From 1990 to 1992, Dr. Rosemore was Vice
President of the Company and from 1979 to 1990, Dr. Rosemore was the President
of the Company. For many years he was engaged in diverse businesses, including
the construction of apartment complexes, factory
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<PAGE> 54
buildings, and numerous commercial retail establishments. From 1948 to 1980, Dr.
Rosemore practiced optometry. He has been a director of the Company since 1983.
MR. LANCE B. ROSEMORE--Mr. Rosemore, 48, has been Chief Executive Officer
of the Company since May 1992, President of the Company since 1990 and
Secretary since 1983. From 1990 to May 1992, Mr. Rosemore was Chief Operating
Officer of the Company. Previously, Mr. Rosemore owned his own consumer finance
company and was employed by C.I.T. Financial and United Carolina Bank Shares.
He has been a director of the Company since 1983.
DR. ANDREW S. ROSEMORE--Dr. Rosemore, 50, has been Chief Operating Officer
of the Company since May 1992 and Executive Vice President of the Company since
1990. From 1988 to May 1990, Dr. Rosemore was Vice President of the Company.
From 1973 to 1988, Dr. Rosemore owned and managed commercial rental properties,
apartment complexes and factory buildings. Since 1972, Dr. Rosemore has been a
licensed physician in Alabama. He has been a director of the Company since
1988.
MR. JAN F. SALIT--Mr. Salit, 47, has been Executive Vice President of the
Company since May 1993 and Chief Investment Officer and Assistant Secretary of
the Company since March 1994. From 1979 to 1992, Mr. Salit was employed by
Glenfed Financial Corporation and its predecessor company Armco Financial
Corporation, holding various positions including Executive Vice President and
Chief Financial Officer.
MR. BARRY N. BERLIN--Mr. Berlin, 37, has been Chief Financial Officer of
the Company since November of 1992. From August 1986 to November 1992, he was
an audit manager with Imber and Company Certified Public Accountants. Imber and
Company served as the Company's independent accountants from March 1988 until
September 1992. Mr. Berlin is a Certified Public Accountant.
MS. MARY J. BROWNMILLER--Ms. Brownmiller, 43, has been Senior Vice
President of the Company since 1992, and Vice President of the Company since
November 1989. From 1987 to 1989, she was Vice President for Independence
Mortgage, Inc., an SBA lender. From 1976 to 1987, Ms. Brownmiller was employed
by the SBA, holding various positions including senior loan officer. Ms.
Brownmiller is a Certified Public Accountant.
MS. CHERYL T. MURRAY--Ms. Murray, 31, has been General Counsel of the
Company since March 1994. From 1992 to 1994 she was associated with the law
firm of Johnson & Gibbs, P.C. and practiced in the financial services
department. Ms. Murray earned her law degree from Northwestern University
School of Law.
DR. IRVIN M. BORISH--Dr. Borish, 84, served as Benedict (Distinguished)
Professor of Optometry at the University of Houston after retiring from Indiana
University, where he holds the status of Professor Emeritus. He operated a
private practice of optometry for over thirty years. He is the author of the
major text in his field and holds five patents in contact lenses. He has been a
director of the Company since 1989.
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<PAGE> 55
DR. MARTHA R. GREENBERG--Dr. Greenberg, 45, has practiced optometry for 22
years in Russellville, Alabama and currently serves on the Board of Trustees of
Southern College of Optometry. She has been a director of the Company since
1984.
MR. THOMAS HAMILL--Mr. Hamill, 43, is vice president of Jardine Sayer &
Company, Inc., the U.S. reinsurance intermediary subsidiary of Jardine Lloyd
Thompson plc. From 1989 through 1996, Mr. Hamill was president of Caliban
Holdings Ltd. ("Caliban") and its subsidiaries, including Belvedere Insurance
Co., Ltd. ("Belvedere"). From September 1986 to December 1989, Mr. Hamill was
vice president of Belvedere Corporation. Mr. Hamill is a non-executive director
and Chairman of the Board of Caliban, Belevedere and Midlands Management
Corporation. Mr. Hamill has been a director of the Company since 1992, when he
was elected pursuant to an agreement between the Company and Belvedere in April
1991 whereby the directors of the Company agreed at that time to support a
representative of Caliban Holdings in his candidacy for director in exchange
for Belvedere's purchase of 185,000 shares of Common Stock.
MR. LEE RUWITCH--Mr. Ruwitch, 83, is currently the owner of a ministorage
facility, Regency Storage, Inc., which is located in Palm Beach, Florida. Mr.
Ruwitch has been involved with the daily management of personal investments
since he sold a major legal printing business in 1986. He is the president of
LFR Corporation and has been a partner in TCA Joint Venture in Miami since
1992. He is involved with the Francien and Lee Ruwitch Charitable Fundation in
Miami, Florida. He was a director of the Company from 1984 to December 1993 and
rejoined the board in September 1994.
MR. BARRY A. IMBER--Mr. Imber, 50, has been a principal of Imber and
Company, Certified Public Accountants, or its predecessor, since 1982. Imber
and Company was the independent certified public accountant for PMC and its
subsidiaries for the years ended December 31, 1988 through December 31, 1991.
Mr. Imber has been a director of the Company since March 1995.
MR. ROBERT DIAMOND--Mr. Diamond, 65, has been an attorney for 40 years. He
is currently of counsel to the law firm of Diamond & Diamond, P.A., Millburn,
New Jersey. He served as a director of the Company from 1982 to 1992 and
rejoined the Board of Directors in January 1994. He served as a member of the
Board of Directors of Allstate Financial Corporation from 1991 to 1993. He has
managed personal investments since 1991.
REMUNERATION OF OFFICERS AND DIRECTORS
The PMC Capital Board of Directors had four regular (including video
conferences) meetings, and conducted four special meetings via telephonic
conference, during 1996. Non-employee directors were compensated $500 per
meeting for each meeting they attended. PMC Capital pays for the travel
expenses incurred by directors in connection with such meetings.
The following table sets forth the aggregate amount of compensation paid
by PMC Capital during 1996 to each of the three highest compensated officers of
the Company and to all executive officers and directors as a group during
fiscal year 1996.
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<PAGE> 56
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Profit Sharing Total Profit Compensation
Capacities in Which Contribution Sharing Benefits Paid
Remuneration Aggregate Accrued During Accrued by Company
Name of Person Received Compensation (1) Last Fiscal Year (2) to Date to Directors
-------------- -------- ---------------- -------------------- ------- ------------
<S> <C> <C> <C> <C> <C>
Dr. Fredric M. Rosemore Chairman of Board $ 213,610 $ 14,970 $ 177,534
Mr. Lance B. Rosemore President, Chief 369,887 18,662 184,372
Executive Officer
Dr. Andrew S. Rosemore Executive Vice 329,481 18,662 149,113
President, Chief
Operating Officer
Dr. Irvin M. Borish Director $ 1,500
Mr. Thomas Hamill Director 1,500
Mr. Barry A. Imber Director 2,500
Dr. Martha R. Greenberg Director 2,000
Mr. Robert Diamond Director 2,000
Mr. Lee Ruwitch Director 1,500
</TABLE>
- -------------------
(1) The Company has determined that the amount of perquisites and other
personal benefits paid to each of the executive officers listed in the
compensation table does not exceed the lesser of $50,000 or 10% of each
such person's annual salary and bonus reported in such table and that the
aggregate amount of perquisites and other personal benefits paid to all
executive officers and directors as a group does not exceed the lesser of
10% of all such person's annual salary and bonus or $650,000 ( $50,000
multiplied by 13, the number of executive officers and directors).
Accordingly, none of such perquisites and other personal benefits is
included in the above table.
(2) The participants in the Company's profit sharing plan (the "Plan")
consist of all employees who are at least 20-1/2 years old, have been
employed by the Company for six months and are employed at the end of each
fiscal year or have died, become totally disabled or retired after age 65
during such fiscal year. The Plan is intended to qualify under Section
401(a) of the Internal Revenue Code of 1986, as amended. A required
distribution of $19,597 was paid to Dr. Fredric M. Rosemore. No monies
were withdrawn from the Plan during 1995 for the benefit of Mr. Lance B.
Rosemore or Dr. Andrew S. Rosemore. Mr. Lance B. Rosemore and Dr. Fredric
M. Rosemore are co-administrators of the Plan.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Fredric M. Rosemore,
Lance B. Rosemore, Andrew S. Rosemore, Mary J. Brownmiller, Jan F. Salit, Barry
N. Berlin and Cheryl T. Murray. Each of these employment agreements provides
for at least annual reviews by the Board of Directors of the salaries contained
therein, with a mandatory minimum increase based on percentage increases to the
cost of living index. In addition, the Board of Directors may determine, in its
discretion, to award bonuses to each of the foregoing persons based on the
Company's performance. Each of the employment agreements also provides that if
a new board of directors of the Company is put in place, as a result of the
acquisition of the Common Stock by an outside party or otherwise, and such new
board requests the covered executive to resign or substantially modifies the
duties or working conditions of the executive, the executive could resign and
be entitled to be paid by the Company an amount equal to 2.99 times the average
compensation paid to the executive over the last five years.
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<PAGE> 57
OTHER EXPENSES
In addition to compensating its management members as discussed above,
the Company incurs various other expenses in its operations, such as custody and
transfer agent fees, brokerage commissions, professional fees, expenses of board
and shareholder meetings, fees and expenses relating to registration of its
shares, taxes and governmental fees, fees and expenses of the directors, costs
of obtaining insurance, expenses of printing and distributing shareholder
materials, organizational expenses, including costs or losses related to any
litigation.
HOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
On September 30, 1997, the Company had outstanding 11,491,076 shares of
Common Stock. The table below lists, as of the same date, certain information
regarding the beneficial ownership of the Company's Common Stock by all persons
who are known by the Company to be the beneficial owners of more than 5% of the
Common Stock, the directors, the executive officers and by all executive
officers and directors as a group.
<TABLE>
<CAPTION>
Names and Addresses Amount and Nature of Percent of
of Beneficial Owners Beneficial Ownership Ownership
-------------------- --------------------- ----------
<S> <C> <C>
Dr. Irvin M. Borish (1) 135,000 1.2%
4000 Hollywood Blvd.
Suite 435 South
Hollywood, Florida 33021
Mr. Robert Diamond (2) 353,935 3.1%
4000 Hollywood Blvd.
Suite 435 South
Hollywood, Florida 33021
Dr. Martha R. Greenberg *(3) 518,057 4.5%
P.O. Box 1177
Russellville, Alabama 35653
Mr. Thomas Hamill (4) 5,000 **
4000 Hollywood Blvd.
Suite 435 South
Hollywood, Florida 33021
Mr. Barry A. Imber - **
4000 Hollywood Blvd.
Suite 435 South
Hollywood, Florida 33021
Dr. Andrew S. Rosemore *(5) 773,417 6.8%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
Names and Addresses Amount and Nature of Percent of
of Beneficial Owners Beneficial Ownership Ownership
-------------------- --------------------- ----------
<S> <C> <C>
Dr. Fredric Rosemore *(6) 565,637 5.0%
4000 Hollywood Blvd.
Suite 435 South
Hollywood, Florida 33021
Mrs. Marion Rosemore (7) 565,637 5.0%
4000 Hollywood Blvd.
Suite 435 South
Hollywood, Florida 33021
Mr. Lance B. Rosemore *(8) 221,957 2.0%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Lee Ruwitch (9) 401,401 3.5%
4000 Hollywood Blvd.
Suite 435 South
Hollywood, Florida 33021
Mr. Jan F. Salit (10) 658 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Barry N. Berlin 227 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Ms. Mary J. Brownmiller 2,110 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Ms. Cheryl T. Murray 200 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Directors and executive officers 2,977,599 26.1%
as a group (13 persons)
</TABLE>
- ----------------------
(1) Includes 44,500 shares held jointly with his wife and 90,500 shares
held in the Irvin B. Borish Revocable Trust.
(2) Includes 179,691 shares held in an individual retirement rollover
account.
(3) Includes 15,730 shares in which her children have a beneficial
interest, 31,400 shares held in an individual retirement account,
127,500 shares held jointly with her husband and 126,767 shares held in
a pension trust. Does not include 225,660 shares owned by her husband,
as to which shares she disclaims any beneficial interest.
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<PAGE> 59
(4) Does not include 321,000 shares held by two companies of which Mr.
Hamill is a director, as to which shares he disclaims any beneficial
interest.
(5) Includes 368,332 shares held by a partnership of which Dr. Rosemore and
his wife are general partners, 17,550 shares held as custodian for his
children, 353,550 shares held in individual retirement accounts, 24,785
shares held in trust for the benefit of Dr. Rosemore and his children
and 9,200 shares held by a partnership for the benefit of Dr. Rosemore
and his children.
(6) Represents shares of Common Stock held by a partnership of which Dr.
Fredric M. Rosemore is a general partner.
(7) Represents shares of Common Stock held by a partnership of which Mrs.
Marion Rosemore is a general partner.
(8) Includes 2,537 shares in which his minor children have beneficial
interest, 142,989 shares held jointly with his wife, 10,756 shares held
in an individual retirement account, 26,095 shares held in trust for
the benefit of Mr. Rosemore and his children, 6,600 shares held by a
partnership for the benefit of Mr. Rosemore and his children and 3,560
shares owned individually by Mr. Lance B. Rosemore's wife.
(9) Includes 5,625 shares held in the name of his wife, 114,567 shares held
in trust for the benefit of Mr. Ruwitch and 45,452 shares held by a
corporation controlled by Mr. Ruwitch and a pension plan thereof. Does
not include shares owned individually by other members of his family,
as to which shares he disclaims any beneficial interest.
(10) Consists of 658 shares held in an individual retirement account.
* Mr. Lance B. Rosemore and Dr. Andrew S. Rosemore are the sons, and
Dr. Martha R. Greenberg is the daughter, of Dr. Fredric M. Rosemore
and Mrs. Marion Rosemore. Dr. Fredric M. Rosemore, Mrs. Marion
Rosemore and Dr. Andrew S. Rosemore each own in excess of 5% of the
shares of the Company. Consequently, all such persons may be deemed
to be "interested persons" as defined under the Investment Company
Act.
** Less than 1.0%
DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT
CAPITAL STOCK OF THE COMPANY
General. The authorized share capital of PMC Capital consists of
30,000,000 shares of Common Stock. As of September 30, 1997, PMC Capital had
11,491,076 shares of Common Stock issued and outstanding. In addition, PMC
Capital has reserved for issuance 1,000,000 shares under the Plan. The following
summary is qualified by reference to the Company's Articles of Incorporation, as
amended (the "Articles"), a copy of which has been incorporated by reference
herein.
Voting Rights. Each holder of Common Stock is entitled to one vote per
share on all matters submitted to a vote of shareholders. Holders of Common
Stock do not have cumulative voting rights.
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<PAGE> 60
Dividend Rights. Holders of Common Stock are entitled to receive dividends
out of funds legally available therefor when, as and if declared by the Board
of Directors. The Company's dividend history and policy is described under
"Dividends".
Liquidation and Other Provisions. All shares of Common Stock have equal
rights to receive pro rata, the net assets of the Company upon liquidation or
dissolution after payments to creditors and the prior payment of any
preferential amounts payable to holders of preferred stock. The Common Stock is
not redeemable and has no preemptive or conversion rights. All outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be, when issued, fully paid and non-assessable.
Liability and Indemnification of Directors. Florida law limits the
liability of a director of a Florida corporation if the director discharges his
duties in accordance with standards specified by statute. Florida law and the
Company's bylaws also authorize the Company to indemnify the Company's
directors, officers, employees and agents. Additionally, each of the Company's
directors has entered into an agreement with the Company which provides for
such director's indemnification in certain circumstances.
PREFERRED STOCK OF PMIC
PMIC has outstanding 30,000 shares of $100 par value, 3% cumulative
preferred stock (the "3% Preferred Stock") and 40,000 shares of $100 par vale,
4% cumulative preferred stock (the "4% Preferred Stock"). The 3% Preferred
Stock and the 4% Preferred Stock (collectively the "Preferred Stock") are held
by the SBA pursuant to the SBIA.
PMIC is entitled to redeem, in whole or in part, the 3% Preferred Stock by
paying 35% of the par value of these securities plus dividends accumulated and
unpaid on the date of redemption. While the 3% Preferred Stock may be redeemed,
redemption is not mandatory. Dividends of approximately $90,000 on the 3%
Preferred Stock were recognized during the years ended December 31, 1996 and
1995, respectively.
The 4% Preferred Stock was issued during September 1994 ( $2,000,000) and
May 1995 ( $2,000,000), and must be redeemed at par no later than 15 years from
the date of issuance. Dividends of approximately $160,000 and $132,000 were
recognized during the years ended December 31, 1996 and 1995, respectively.
Neither series of Preferred Stock has any preemptive or conversion rights.
The Preferred Stock provides for a liquidation preference in the amount of $100
per share plus accrued and unpaid dividends.
LONG-TERM DEBT
PMC Capital has a $15 million uncollateralized revolving credit facility
which, as extended, expires in May 1998. Advances pursuant to the credit
facility bear interest at PMC Capital's option at the lender's prime rate less
50 basis points or the London Interbank Offering
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<PAGE> 61
Rate (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 2.0%, and the ratio
of assets to senior debt (as defined in the credit facility) will not fall
below 150%. At December 31, 1996, the Company had no outstanding borrowings
under this credit facility. At December 31, 1996, the Company was in compliance
with all covenants of this facility.
PMC Capital has consummated $35 million in private placements of
uncollateralized senior notes. These borrowings have been utilized to fund
commitments of the Company's non-SBA lending program. The notes require the
Company to meet certain covenants, the most restrictive of which require; (i)
that net loans receivable (as defined in the note agreement) exceed 150% of
senior funded debt, (ii) the increase in the Company's loan valuation reserve
for any 12 month period must not exceed 3% of net loans receivable, and (iii)
the Company's consolidated earnings plus interest expense must exceed 150% of
interest expense. At December 31, 1996, the Company was in compliance with all
of the covenants of these notes. At December 31, 1996 outstanding
uncollateralized senior notes were as follows:
<TABLE>
<CAPTION>
Interest Final
Date Rate Amount Maturity
---- ---- ------ --------
<S> <C> <C> <C>
July 19, 1993 7.20% $20,000,000(2) July 19, 2001
December 15, 1993 6.97% 5,000,000 December 15, 2002
April 19, 1995 8.60% 5,000,000 April 19, 2003
April 19, 1995 LIBOR + 1.3%(1) 5,000,000 April 19, 2004
-----------
$35,000,000
===========
</TABLE>
- -------------------
(1) Reset quarterly, 7.01% at September 30, 1997.
(2) Payable in three equal annual installments commencing July 19, 1999.
Principal payments required on the senior notes at September 30, 1997
are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
<S> <C>
1999.............................................. $ 6,666,667
2000.............................................. 6,666,667
2001.............................................. 6,666,666
2002.............................................. 5,000,000
2003.............................................. 5,000,000
2004.............................................. 5,000,000
---------------
$ 35,000,000
===============
</TABLE>
Western Financial and PMIC have issued debentures to the SBA to
partially fund their lending activities. These debentures require semi-annual
interest payments, with the entire principal amount due at maturity. The
debentures are not convertible, have no sinking fund provisions, impose
restrictions on the ability of Western Financial and PMIC to repurchase their
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<PAGE> 62
securities, to make distributions to PMC other than out of retained earnings
and to increase the aggregate amount of salaries or other compensation of
officers, directors, or employees in excess of the amount previously approved
by the SBA. See "Capitalization" and Note 6 to the Consolidated Financial
Statements as of and for the period ending December 31, 1996.
At June 30, 1997, the maturities, interest rates and principal outstanding
on the SBA debentures were as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Amount
------------- ------------- ------
<S> <C> <C>
September 1, 1997............................... 10.350% (1) $ 800,000
February 1, 1998................................ 8.850% 1,500,000
August 18, 1999................................. 8.125% 1,000,000
September 1, 1999............................... 8.800% 2,500,000
December 1, 1999................................ 8.600% (1) 650,000
January 2, 2000................................. 7.875% 3,000,000
March 1, 2000................................... 9.350% 1,000,000
June 1, 2000.................................... 9.300% 2,000,000
June 1, 2000.................................... 9.300% (1) 300,000
June 1, 2000.................................... 9.300% (3) 1,030,000
September 1, 2000............................... 9.600% 4,310,000
December 1, 2002................................ 7.510% (1) 510,000
September 1, 2004............................... 5.200% (2) 3,000,000
September 1, 2004............................... 8.200% 3,000,000
March 1, 2005................................... 4.840% (4) 3,000,000
June 1, 2005.................................... 3.690% (5) 5,000,000
September 1, 2005............................... 3.875% (6) 7,000,000
September 1, 2006............................... 7.590% 2,490,000
------------
$ 42,090,000
============
</TABLE>
- -----------------
(1) During April 1995, the Company assumed $2,260,000 in SBA debentures
from a non-affiliated small business investment corporation in
exchange for loans receivable of $2,109,062 and cash of $150,938. The
loans acquired were initially originated by the Company and a portion
sold to the non-affiliated SBIC. All of these loans were purchased at
par and were performing according to their terms at the time of
reacquisition.
(2) The interest rate will increase to 8.200% in September 1999 until
maturity.
(3) During May 1996, the Company assumed $1,030,000 in SBA debentures
from a non-affiliated SBIC in exchange for loans receivable of
approximately $200,000 and cash of approximately $900,000. The loans
were initially originated by the Company and a portion sold to the
non-affiliated SBIC. All of these loans were purchased at par and
were performing according to their terms at the time of reacquisition.
(4) The interest rate will increase to 7.840% in March 2000 until
maturity.
(5) The interest rate will increase to 6.690% in June 2000 until maturity.
(6) The interest rate will increase to 6.875% in September 2000 until
maturity.
-60-
<PAGE> 63
OUTSTANDING SECURITIES
The following chart indicates the Common Stock and Cumulative
Preferred Stock of PMIC outstanding as of June 30, 1997:
<TABLE>
<CAPTION>
Amount Outstanding
Amount held by Exclusive of Amount
Amount the Company or Held by the Company
Title of Class Authorized for its Account for its Account
-------------- ---------- --------------- -------------------
(Rounded to the nearest thousand)
<S> <C> <C> <C>
Common Stock 30,000,000 - 11,384,000
Class A Cumulative 30,000 - 30,000
Preferred Stock of
PMIC
Class B Cumulative 40,000 - 40,000
Preferred Stock of PMIC
</TABLE>
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
The Company retains custody of its securities (which consist
principally of loan documentation) and, therefore, is subject to the additional
record keeping and examination requirements of Rule 17f-2 under the Investment
Company Act.
The Company's transfer and dividend-paying agent is American Stock &
Trust Company, 40 Wall Street, 46th Floor, New York, N.Y. 10005.
FLORIDA LAW
The Company has elected not to be subject to the Florida Control Share
Act which generally provides that shares acquired in excess of certain specified
thresholds will not possess any voting rights unless such voting rights are
approved by a majority vote of the corporation's disinterested shareholders. The
Florida Control Share Act may deter an attempt to acquire control of the
Company.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Company generally does not pay brokerage fees on the securities in
its portfolio. Although the Company may pay such fees in the future in
connection with the purchase of short-term investments, there is no arrangement
to allocate brokerage expenses.
The Company has no obligation to deal with any broker, dealer or group
of brokers or dealers in purchasing or selling portfolio securities, and orders
for such transactions may be placed with a number of brokers and dealers.
-61-
<PAGE> 64
In purchasing and selling portfolio securities, the Company selects
brokers and dealers on the basis of the price of the security, commission rates
and other factors. Where practicable, the Company will survey a number of
brokers and dealers in connection with a proposed portfolio transaction and
select the broker or dealer that offers the Company the best price and execution
or other services. At least annually the Company evaluates the overall
reasonableness of the brokerage commissions it has paid, if any.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and the Investment Company Act, and in accordance therewith files
reports and other information with the SEC. The Registration Statement,
including the exhibits thereto, as well as any reports, proxy statements and
other information filed with the SEC can be examined without charge at, or
copies obtained upon payment of prescribed fees from, the SEC's public reference
room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the SEC located at 13th Floor, 7 World
Trade Center, New York, New York 10048; and Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, reports and
other information concerning the Company may be examined without charge, or
copies obtained upon payment of prescribed fees, at the American Stock Exchange,
Inc., 86 Trinity Place, New York, New York 10006. Copies of the Registration
Statement and the exhibits thereto may also be obtained at the SEC's Internet
address at http:\\www.sec.gov.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be
passed upon for the Company by Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
The consolidated balance sheets as of December 31, 1996 and 1995 and
the consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996 of PMC Capital,
Inc. and subsidiaries and the statement of assets, liabilities and partners'
capital as of December 31, 1996 and the related statements of income, partners'
capital and cash flows from November 8, 1996 (inception) to December 31, 1996,
included in this registration statement, have been included herein in reliance
on the reports of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing.
-62-
<PAGE> 65
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT PUBLIC ACCOUNTANTS
For Inclusion in Post-Effective Amendment No. 1 to Form N-2
Filed with the
Securities and Exchange Commission
<PAGE> 66
PMC CAPITAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PMC CAPITAL, INC. AND SUBSIDIARIES
- ----------------------------------
Summary of Selected Financial Information ........................... F-2
Quarterly Statistics ................................................ F-3
Report of Independent Accountants ................................... F-4
Consolidated Financial Statements:
Financial Highlights ............................................. F-5
Consolidated Balance Sheets as of December 31, 1996 and 1995 ..... F-6
Consolidated Schedule of Investments as of December 31, 1996 ..... F-7
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 ............................... F-9
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 ................... F-10
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 ............................... F-11
Notes to Consolidated Financial Statements ....................... F-12
Consolidating Financial Statements:
Consolidating Balance Sheet as of December 31, 1996 .............. F-31
Consolidating Statement of Income for the
Year Ended December 31, 1996 ................................... F-32
Consolidating Statement of Shareholders' Equity for
the Year Ended December 31, 1996 ............................... F-33
Consolidating Statement of Cash Flows for the Year
Ended December 31, 1996 ........................................ F-34
PMC CAPITAL LIMITED PARTNERSHIP
- -------------------------------
Report of Independent Accountants ................................... F-35
Statement of Assets, Liabilities and Partners' Capital
as of December 31, 1996 ........................................... F-36
Statement of Income for the Period From
November 8, 1996 (Inception) to December 31, 1996 ................ F-37
Statement of Partners' Capital for the Period From
November 8, 1996 (Inception) to December 31, 1996 ................ F-38
Statement of Cash Flows for the Period From
November 8, 1996 (Inception) to December 31, 1996 ................ F-39
Notes to Financial Statements ....................................... F-40
</TABLE>
F-1
<PAGE> 67
- --------------------------------------------------------------------------------
PMC CAPITAL, INC. AND SUBSIDIARIES
SUMMARY OF SELECTED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING:
Operating income ............................. $ 23,821 $ 21,262 $ 16,450 $ 15,670 $ 11,780
Operating expenses ........................... (10,454) (9,541) (7,578) (5,933) (4,705)
Realized and unrealized gain (loss)
on investments ............................. (147) (359) 3,151 (404) (263)
---------- ---------- ---------- ---------- ----------
Net operating income and realized
and unrealized gain (loss) on
investments ................................ $ 13,220 $ 11,362 $ 12,023 $ 9,333 $ 6,812
========== ========== ========== ========== ==========
Dividends declared, common ................... $ 12,853 $ 11,600 $ 11,244 $ 9,367 $ 6,349
========== ========== ========== ========== ==========
Earnings per common share .................... $ 1.18 $ 1.03 $ 1.12 $ 0.87 $ 0.79
========== ========== ========== ========== ==========
Dividends per common share ................... $ 1.16 $ 1.08 $ 1.06 $ 0.89 $ 0.69
========== ========== ========== ========== ==========
Weighted average common shares
outstanding ................................ 11,002 10,768 10,650 10,579 8,557
========== ========== ========== ========== ==========
Loans funded ................................. $ 70,154 $ 77,567 $ 75,349 $ 74,091 $ 55,975
========== ========== ========== ========== ==========
AT END OF PERIOD:
Loans receivable, net ........................ $ 93,354 $ 110,499 $ 75,264 $ 71,528 $ 54,059
========== ========== ========== ========== ==========
Total assets ................................. $ 164,964 $ 159,002 $ 125,416 $ 112,515 $ 85,933
========== ========== ========== ========== ==========
SBA debentures payable ....................... $ 44,570 $ 43,540 $ 26,280 $ 20,280 $ 22,280
========== ========== ========== ========== ==========
Notes payable ................................ $ 35,000 $ 35,001 $ 25,001 $ 25,001 $ 1
========== ========== ========== ========== ==========
Preferred stock of consolidated subsidiary ... $ 7,000 $ 7,000 $ 5,000 $ 3,000 $ 3,000
========== ========== ========== ========== ==========
Common shareholders' equity .................. $ 62,903 $ 59,088 $ 57,371 $ 55,524 $ 54,839
========== ========== ========== ========== ==========
Number of common shares outstanding .......... 11,162 10,871 10,684 10,603 10,542
========== ========== ========== ========== ==========
RATIOS:
Return on average assets ..................... 8.3% 8.0% 10.3% 9.4% 9.6%
========== ========== ========== ========== ==========
Return on average common shareholders'
equity ..................................... 21.3% 19.2% 21.2% 16.8% 17.1%
========== ========== ========== ========== ==========
</TABLE>
F-2
<PAGE> 68
- --------------------------------------------------------------------------------
PMC CAPITAL, INC. AND SUBSIDIARIES
QUARTERLY STATISTICS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
(UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................. $ 5,480 $ 5,904 $ 6,051 $ 6,386 $23,821
NET OPERATING INCOME ............. $ 3,012 $ 3,346 $ 3,421 $ 3,588 $13,367
NET GAIN (LOSS) ON INVESTMENTS ... $ (17) $ (1) $ (23) $ (106) $ (147)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 2,995 $ 3,345 $ 3,398 $ 3,482 $13,220
<CAPTION>
- ----------------------------------------------------------------------------------------
PER SHARE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................. $ 0.502 $ 0.539 $ 0.550 $ 0.574 $ 2.165
NET OPERATING INCOME ............. $ 0.276 $ 0.305 $ 0.311 $ 0.323 $ 1.215
NET GAIN (LOSS) ON INVESTMENTS ... $(0.002) -- $(0.002) $(0.010) $(0.014)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 0.274 $ 0.305 $ 0.309 $ 0.313 $ 1.201
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
(UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................. $ 4,694 $ 5,327 $ 5,634 $ 5,607 $21,262
NET OPERATING INCOME ............. $ 2,520 $ 2,883 $ 3,154 $ 3,164 $11,721
NET GAIN (LOSS) ON INVESTMENTS ... $ (11) $ (77) $ (188) $ (83) $ (359)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 2,509 $ 2,806 $ 2,966 $ 3,081 $11,362
<CAPTION>
- ----------------------------------------------------------------------------------------
PER SHARE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................. $ 0.438 $ 0.496 $ 0.523 $ 0.517 $ 1.974
NET OPERATING INCOME ............. $ 0.235 $ 0.268 $ 0.293 $ 0.292 $ 1.088
NET GAIN (LOSS) ON INVESTMENTS ... $(0.001) $(0.007) $(0.017) $(0.008) $(0.033)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 0.234 $ 0.261 $ 0.276 $ 0.284 $ 1.055
</TABLE>
F-3
<PAGE> 69
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
PMC Capital, Inc.:
We have audited the accompanying consolidated balance sheets of PMC
Capital, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996 and the
financial highlights for each of the five years in the period ended December
31, 1996. We have also audited the accompanying consolidated schedule of
investments as of December 31, 1996. These financial statements and the
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included the examination or
confirmation of securities owned as of December 31, 1996 and 1995. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements and financial
highlights referred to above present fairly, in all material respects, the
consolidated financial position of PMC Capital, Inc. and subsidiaries as of
December 31, 1996 and 1995, the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, and the financial highlights for each of the five years in the period
ended December 31, 1996, and the consolidated schedule of investments as of
December 31, 1996, in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The supplementary
consolidating balance sheet and the related consolidating statements of
income, cash flows, and shareholders' equity are presented for purposes of
additional analysis rather than to present the financial position, results of
operations, and cash flows of the individual companies, and are not a
required part of the consolidated financial statements. The supplementary
consolidating information has been subjected to the auditing procedures
applied in the audit of the consolidated financial statements and, in our
opinion, is fairly stated, in all material respects, in relation to the
consolidated financial statements taken as a whole.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 5, 1997
F-4
<PAGE> 70
- --------------------------------------------------------------------------------
PMC CAPITAL, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights of the Company should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere on this Form 10-K. The financial highlights below provide
information about the Company's financial history. It uses the Company's fiscal
year (which ends December 31) and expresses the per share operating performance
in terms of a single share outstanding throughout each fiscal period. The
information is derived from the audited consolidated financial statements. The
financial highlights have been audited by Coopers & Lybrand L.L.P., independent
accountants.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE (1):
Net asset value, beginning of period ................. $ 5.44 $ 5.37 $ 5.24 $ 5.20 $ 3.38
-------- -------- -------- -------- --------
Net operating income ................................. 1.21 1.09 0.83 0.92 0.83
Net gains or losses on securities
realized and unrealized (2) ........................ 0.17 0.08 0.37 0.02 1.69
-------- -------- -------- -------- --------
Total from investment operations ................. 1.38 1.17 1.20 0.94 2.52
-------- -------- -------- -------- --------
Less distributions:
Preferred shareholder of consolidated subsidiary ... 0.02 0.02 0.01 0.01 0.01
Common shareholders ................................ 1.16 1.08 1.06 0.89 0.69
-------- -------- -------- -------- --------
Total distributions .............................. 1.18 1.10 1.07 0.90 0.70
-------- -------- -------- -------- --------
Net asset value, end of period ....................... $ 5.64 $ 5.44 $ 5.37 $ 5.24 $ 5.20
======== ======== ======== ======== ========
Per share market value, end of period ................ $ 14.00 $ 12.63 $ 13.50 $ 14.50 $ 13.25
======== ======== ======== ======== ========
Total investment return .............................. 20% 2% 0% 16% 43%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ............. $ 62,903 $ 59,088 $ 57,371 $ 55,524 $ 54,839
======== ======== ======== ======== ========
Ratio of expenses to average net assets .............. 17% 16% 13% 11% 12%
======== ======== ======== ======== ========
Ratio of operating income to average net assets ...... 22% 20% 16% 18% 18%
======== ======== ======== ======== ========
Ratio of net operating income and realized and
unrealized gain (loss) on investments to
average net assets ................................. 22% 20% 21% 17% 17%
======== ======== ======== ======== ========
Portfolio turnover (3) ............................... 16% 30% 65% 54% 77%
======== ======== ======== ======== ========
</TABLE>
FOOTNOTES:
(1) The per share changes during the year are based on the weighted average
number of shares outstanding of the Company during the year presented.
(2) The per share net gains or losses on securities (realized and unrealized)
includes the effect of stock issuances and other changes in per share
amounts during the year presented.
(3) Included in the computation of the portfolio turnover rate are the sales
of loans through the secondary market or private placement.
F-5
<PAGE> 71
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net ............................ $ 93,354 $110,499
Cash equivalents ................................. 49,677 31,135
Investment in subsidiaries ....................... 8,585 27
Excess servicing asset, net ...................... 6,429 7,514
Restricted investments ........................... 1,229 1,785
Real property owned .............................. 303 5
-------- --------
TOTAL INVESTMENTS .................................. 159,577 150,965
-------- --------
OTHER ASSETS:
Receivable for loans sold ........................ 2,508 4,371
Due from unconsolidated subsidiaries ............. 1,097 1,135
Deferred charges, deposits and other assets ...... 885 1,170
Accrued interest receivable ...................... 376 723
Cash ............................................. 340 439
Property and equipment, net ...................... 181 199
-------- --------
TOTAL OTHER ASSETS ................................. 5,387 8,037
-------- --------
TOTAL ASSETS ....................................... $164,964 $159,002
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ........................... $ 44,570 $ 43,540
Notes payable .................................... 35,000 35,001
Accounts payable ................................. 4,145 2,500
Dividends payable ................................ 3,635 3,596
Allowance for credit losses on loans sold ........ 1,533 2,523
Borrower advances ................................ 1,795 2,260
Accrued interest payable ......................... 1,442 1,434
Due to unconsolidated subsidiaries ............... 1,076 --
Deferred fee revenue ............................. 419 779
Other liabilities ................................ 1,446 1,281
-------- --------
TOTAL LIABILITIES .................................. 95,061 92,914
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 8)
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY ........... 7,000 7,000
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares
of $.01 par value, 11,162,000 and 10,871,000
shares issued and outstanding at
December 31, 1996 and 1995, respectively ....... 112 109
Additional paid-in capital ....................... 62,125 58,429
Undistributed net operating income ............... 1,101 1,017
Net unrealized depreciation on investments ....... (435) (467)
-------- --------
62,903 59,088
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $164,964 $159,002
======== ========
NET ASSET VALUE PER COMMON SHARE ................... $ 5.64 $ 5.44
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 72
PMC CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED LOANS SERVICED LOANS (2)
------------------------------------------- -------------------------
NUMBER NUMBER
OF OF
CATEGORY/ISSUER (1) LOANS VALUE % COST % LOANS COST %
------------------- ------ ------- ----- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS TO SMALL BUSINESS CONCERNS (3):
SMALL BUSINESS LENDING COMPANY LOANS:
FIRST WESTERN SBLC, INC. AND SUBSIDIARY
Hotels and motels ............. 159 $20,280 21.7% $ 21,652 22.4% 159 $109,943 39.7%
Gasoline / service stations ... 20 576 0.6% 635 0.7% 20 5,776 2.1%
Restaurants ................... 83 2,166 2.3% 2,358 2.4% 83 15,387 5.6%
Laundromats ................... 14 126 0.1% 135 0.1% 14 1,320 0.5%
Retail, other ................. 72 754 0.8% 818 0.9% 72 7,268 2.6%
Health care ................... 10 37 -- 40 -- 10 679 0.2%
Food and grocery stores ....... 16 244 0.3% 263 0.3% 16 4,326 1.6%
Services ...................... 80 1,069 1.2% 1,206 1.2% 80 11,175 4.0%
Manufacturing ................. 17 789 0.9% 795 0.8% 17 4,204 1.5%
Wholesale ..................... 24 237 0.3% 293 0.3% 24 4,577 1.7%
Car washes .................... 4 27 -- 28 -- 4 1,231 0.4%
----- ------- ----- -------- ----- ----- -------- -----
Total ........................... 499 26,305 28.2% 28,223 29.1% 499 165,886 59.9%
----- ------- ----- -------- ----- ----- -------- -----
SMALL BUSINESS INVESTMENT COMPANY LOANS:
WESTERN FINANCIAL CAPITAL CORPORATION
Hotels and motels ............. 17 8,326 8.9% 8,550 8.8% 26 16,069 5.8%
Gasoline / service stations ... 1 345 0.4% 345 0.4% 4 1,459 0.5%
Restaurants ................... -- -- -- -- -- 1 196 0.1%
Retail, other ................. 4 2,431 2.6% 2,504 2.6% 6 2,651 1.0%
Services ...................... 11 1,538 1.6% 1,570 1.6% 16 2,458 0.9%
Health care ................... 35 923 1.0% 1,006 1.0% 36 1,059 0.4%
Food and grocery stores ....... 2 307 0.3% 307 0.3% 2 307 0.1%
Laundromats ................... 1 85 0.1% 85 0.1% 1 85 --
Manufacturing ................. 2 344 0.4% 344 0.4% 2 344 0.1%
Other notes receivable ........ 2 114 0.1% 147 0.2% 5 325 0.1%
----- ------- ----- -------- ----- ----- -------- -----
Total ........................... 75 14,413 15.4% 14,858 15.4% 99 24,953 9.0%
----- ------- ----- -------- ----- ----- -------- -----
SPECIALIZED SMALL BUSINESS INVESTMENT COMPANY LOANS:
PMC INVESTMENT CORPORATION
Hotels and motels ............. 37 23,464 25.1% 24,011 24.8% 64 43,648 15.8%
Gasoline / service stations ... 5 2,041 2.2% 2,097 2.1% 7 3,223 1.2%
Restaurants ................... 1 296 0.3% 299 0.3% 2 960 0.3%
Retail, other ................. 1 60 0.1% 61 0.1% 1 61 --
Services ...................... 2 173 0.2% 173 0.2% 2 173 0.1%
Health care ................... 20 670 0.7% 779 0.8% 20 779 0.3%
Food and grocery stores ....... 5 1,124 1.2% 1,147 1.2% 7 1,940 0.6%
Other notes receivable ........ 2 734 0.8% 768 0.8% 2 869 0.3%
----- ------- ----- -------- ----- ----- -------- -----
Total ........................... 73 28,562 30.6% 29,335 30.3% 105 51,653 18.6%
----- ------- ----- -------- ----- ----- -------- -----
COMMERCIAL LOANS:
PMC CAPITAL, INC.
Hotels and motels ............. 30 19,720 21.1% 19,717 20.4% 43 28,727 10.4%
Gasoline / service stations ... 1 320 0.3% 323 0.3% 1 323 0.1%
Restaurants ................... 1 168 0.2% 169 0.2% 1 169 0.1%
Retail centers and other ...... 4 3,066 3.3% 3,408 3.5% 5 4,474 1.6%
Apartment complex ............. 1 800 0.9% 811 0.8% 1 811 0.3%
----- ------- ----- -------- ----- ----- -------- -----
Total ........................... 37 24,074 25.8% 24,428 25.2% 51 34,504 12.5%
----- ------- ----- -------- ----- ----- -------- -----
TOTAL LOANS RECEIVABLE (4) ...... 684 $93,354 100.0% $ 96,844 100.0% 754 $276,996 100.0%
===== ======= ===== ======== ===== ===== ======== =====
</TABLE>
(Continued on next page)
F-7
<PAGE> 73
PMC CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
(CONTINUED)
<TABLE>
<CAPTION>
CATEGORY/ISSUER VALUE % COST %
--------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
TOTAL LOANS RECEIVABLE (FROM PRIOR PAGE) ........................... $ 93,354 58.5% $ 96,844 59.4%
-------- ----- -------- -----
MONEY MARKET AND FUND DEPOSIT ACCOUNTS (5):
Certificates of deposit (6) ................................... 1,287 0.8% 1,287 0.8%
Bank money market saving accounts ............................. 24,263 15.2% 24,263 14.9%
SunTrust, overnight repo account .............................. 1,745 1.1% 1,745 1.1%
Short-term government agency securities ....................... 9,527 5.9% 9,527 5.8%
Dreyfus, Cash Management Plus money market fund ............... 3,021 1.9% 3,021 1.9%
Goldman Sachs, Prime Obligation money market fund ............ 5,398 3.4% 5,398 3.3%
Goldman Sachs, Money Market Portfolio money market fund ...... 4,436 2.8% 4,436 2.7%
-------- ----- -------- -----
Total money market and fund deposit accounts .................... 49,677 31.1% 49,677 30.5%
-------- ----- -------- -----
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES:
Investment in PMC Limited Partnership ......................... 8,205 5.1% 8,205 5.0%
Investment in PMC Advisers, LTD ............................... 26 -- 26 --
Investment in PMC Capital Corp. 1996-A and PMC Trust 1996-A ... 262 0.2% 262 0.2%
Investment in PMC Funding Corp ................................ 92 0.1% 92 0.1%
-------- ----- -------- -----
Total investment in unconsolidated subsidiaries ................. 8,585 5.4% 8,585 5.3%
-------- ----- -------- -----
OTHER INVESTMENTS:
Excess servicing asset ........................................ 6,429 4.0% 6,429 3.9%
SunBank Miami, restricted investments ......................... 1,229 0.8% 1,229 0.7%
Real property owned ........................................... 303 0.2% 303 0.2%
-------- ----- -------- -----
Total other investments ......................................... 7,961 5.0% 7,961 4.8%
-------- ----- -------- -----
TOTAL INVESTMENTS (7) .............................................. $159,577 100.0% $163,067 100.0%
======== ===== ======== =====
</TABLE>
(1) Names have been omitted as disclosure to the public may be detrimental to
the small business.
(2) Balances include retained loans, loans sold into the secondary market
($122,061,000), the loans contributed to the Partnership ($42,384,000),
loan participations ($105,000) and the unguaranteed portion of First
Western loans sold in 1994 ($15,602,000). The balance does not include
approximately $93 million of loan portfolio serviced on behalf of PMC
Commercial Trust.
(3) Interest rates on loans receivable range from 8.0% to 14.9%.
(4) Balances are at face value of loans, less discounts aggregating $2,452,000
in accordance with Emerging Issues Task Force 88-11, discounts on
purchased loans of $413,000, deferred fee revenue of $960,000 and reserves
of $435,000.
(5) Interest or dividend rates on money market and fund deposit accounts range
from 4.8% to 6.1%.
(6) Interest rates on certificates of deposit range from 5.2% to 5.6%. All
certificates held by either PMC or any of its subsidiaries are less than
$100,000 in any one institution, generally have original maturities of 90
days and are considered to be cash equivalents.
(7) The aggregate cost of investments for Federal income tax purposes is
$160,972,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE> 74
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest ................................................. $ 18,571 $ 16,330 $ 11,952
Premium income ........................................... 1,942 2,847 2,728
Other investment income, net ............................. 608 368 303
-------- -------- --------
Total investment income .................................... 21,121 19,545 14,983
Other income, net .......................................... 2,331 1,795 1,467
Equity in income (loss) of unconsolidated entities ......... 369 (78) --
-------- -------- --------
Total income ............................................... 23,821 21,262 16,450
-------- -------- --------
EXPENSES:
Interest ................................................. 5,708 5,049 3,615
Salaries and related benefits ............................ 3,180 2,778 2,552
General and administrative ............................... 843 1,053 900
Profit sharing plan ...................................... 217 190 168
Rent ..................................................... 213 203 176
Legal and accounting ..................................... 149 152 76
Small Business Administration fees ....................... 99 77 48
Directors and shareholders expense ....................... 45 39 43
-------- -------- --------
Total expenses ............................................. 10,454 9,541 7,578
-------- -------- --------
Net operating income ...................................... 13,367 11,721 8,872
-------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ...................................... (214) (309) (406)
Recoveries on loans written-off ........................ 35 40 68
Sale of assets ......................................... -- -- 3,346
Change in unrealized appreciation
(depreciation) on investments ........................ 32 (90) 143
-------- -------- --------
Total realized and unrealized gain (loss) on investments ... (147) (359) 3,151
-------- -------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................... $ 13,220 $ 11,362 $ 12,023
======== ======== ========
PREFERRED DIVIDENDS ........................................ $ 251 $ 222 $ 112
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 11,002 10,768 10,650
======== ======== ========
EARNINGS PER COMMON SHARE .................................. $ 1.18 $ 1.03 $ 1.12
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<PAGE> 75
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NET
UNDISTRIBUTED UNREALIZED
ADDITIONAL NET DEPRECIATION
COMMON PAID-IN OPERATING ON
STOCK CAPITAL INCOME INVESTMENTS TOTAL
------ ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 ............ $ 106 $ 55,074 $ 863 $ (520) $ 55,523
Issuance of common stock pursuant
to dividend reinvestment and cash
purchase plan, 81,345 shares ...... 1 1,180 -- -- 1,181
Net income .......................... -- -- 11,880 143 12,023
Dividends:
Preferred ......................... -- -- (112) -- (112)
Common ($1.06 per common share) ... -- -- (11,244) -- (11,244)
------ ---------- ------------- ------------ ---------
BALANCE, DECEMBER 31, 1994 .......... 107 56,254 1,387 (377) 57,371
Issuance of common stock pursuant
to dividend reinvestment and cash
purchase plan, 187,005 shares ..... 2 2,175 -- -- 2,177
Net income .......................... -- -- 11,452 (90) 11,362
Dividends:
Preferred ......................... -- -- (222) -- (222)
Common ($1.08 per common share) ... -- -- (11,600) -- (11,600)
------ ---------- ------------- ------------ ---------
BALANCE, DECEMBER 31, 1995 .......... 109 58,429 1,017 (467) 59,088
Issuance of common stock pursuant
to dividend reinvestment and cash
purchase plan, 291,042 shares ..... 3 3,696 -- -- 3,699
Net income .......................... -- -- 13,188 32 13,220
Dividends:
Preferred ......................... -- -- (251) -- (251)
Common ($1.16 per common share) ... -- -- (12,853) -- (12,853)
------ ---------- ------------- ------------ ---------
BALANCE, DECEMBER 31, 1996 .......... $ 112 $ 62,125 $ 1,101 $ (435) $ 62,903
====== ========== ============= ============ =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS
F-10
<PAGE> 76
PMC CAPITAL, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized
gain (loss) on investments ..................................... $ 13,220 $ 11,362 $ 12,023
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 ................................... (21,915) (30,468) (32,249)
Proceeds from sale of guaranteed loans ........................ 19,988 30,299 32,989
Change in unrealized depreciation on investments
and loans written-off ....................................... 182 359 196
Unrealized premium income, net ................................ (5) 80 5
Depreciation and amortization ................................. 1,084 1,142 1,642
Accretion of loan discount and deferred fees .................. (957) (799) (803)
Deferred fees collected ....................................... 785 1,050 1,004
(Gain) loss on sale of assets ................................. -- 26 (43)
Gain on structured sale of loans .............................. -- -- (3,346)
Equity in (income) loss of unconsolidated subsidiaries ........ (369) 78 --
Net change in operating assets and liabilities:
Accrued interest receivable ............................... 347 (298) (45)
Other assets .............................................. 357 (166) 460
Accrued interest payable .................................. 8 401 202
Borrower advances ......................................... (465) (694) 371
Other liabilities ......................................... 1,812 503 1,485
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 14,072 12,875 13,891
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ..................................................... (48,239) (47,098) (43,100)
Principal collected and other adjustments ........................ 22,647 10,651 17,756
Proceeds from structured sale of loans ........................... -- -- 24,844
Purchase of furniture and fixtures and other assets .............. (127) (53) (828)
Purchase of government securities ................................ -- (3,942) (4,856)
Proceeds from maturities of government securities ................ -- 8,947 3,000
Proceeds from sale of assets ..................................... -- 233 1,010
Release of (investment in) restricted cash ....................... 556 (251) (1,533)
Investment in unconsolidated subsidiaries ........................ (893) (400) --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES .............................. (26,056) (31,913) (3,707)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption of SBA debentures .......... 941 15,000 6,000
Proceeds from issuance of notes payable ......................... -- 10,000 --
Proceeds from issuance of common stock .......................... 2,834 1,399 535
Proceeds from issuance of preferred stock ....................... -- 2,000 2,000
Proceeds from unconsolidated subsidiary ......................... 37,803 -- --
Payment of dividends on common stock ............................ (11,935) (11,189) (9,774)
Payment of dividends on preferred stock ......................... (250) (204) (67)
Advances from (to) unconsolidated affiliates, net ............... 1,114 357 (370)
Payment of issuance costs on notes and debentures ............... (80) (447) (158)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 30,427 16,916 (1,834)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 18,443 (2,122) 8,350
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 31,574 33,696 25,346
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 50,017 $ 31,574 $ 33,696
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ................................................... $ 5,433 $ 4,648 $ 3,413
======== ======== ========
Dividends reinvested ............................................ $ 880 $ 777 $ 646
======== ======== ========
Loans receivable acquired in exchange for SBA debentures ........ $ 158 $ 2,109 $ --
======== ======== ========
Reclassification from loans receivable to real property owned ... $ 453 $ 65 $ 649
======== ======== ========
Loans to facilitate sale of real property owned ................. $ -- $ 85 $ 1,345
======== ======== ========
Loans contributed to unconsolidated subsidiary, net ............. $ 45,145 $ -- $ --
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE> 77
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
PMC Capital, Inc. ("PMC" or "PMC Capital") is a diversified, closed-end
management investment company that has elected to operate as a business
development company under the Investment Company Act of 1940 (the "1940 Act").
PMC engages in the business of originating loans to small businesses either
directly or through its three principal subsidiaries: First Western SBLC, Inc.
("First Western"), PMC Investment Corporation ("PMIC") and Western Financial
Capital Corporation ("Western Financial"). First Western, PMIC and Western
Financial are registered under the 1940 Act as diversified, closed-end
management investment companies. In addition, PMC is either directly or
indirectly 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 distributes substantially all of its taxable income as dividends to
shareholders.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PMC and its
wholly owned regulated investment company subsidiaries (collectively, the
"Company"). 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"). While the eligibility requirements of the 7(a) Program vary by the
industry of the borrower and other factors, the general eligibility
requirements are that: (i) gross sales of the borrower cannot exceed $5.0
million (other than with respect to certain industries where eligibility is
determined based on the number of employees), (ii) liquid assets or real estate
equity of the borrower (and certain affiliates) cannot exceed the greater of
25% of the loan amount or $50,000 and (iii) the maximum aggregate SBA loan
guarantees to a borrower cannot exceed $750,000.
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 was eligible to obtain long-term, fixed-rate funding, generally at
below-market rates, from the SBA through the issuance of debentures (which are
guaranteed by the SBA and on which the interest rate is reduced through an SBA
subsidy by 3% during the first five years) and preferred stock.
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 ENTITIES
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.
F-12
<PAGE> 78
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PMC Funding is a Florida corporation that holds assets on behalf of the
Company. PMC Capital is the sole shareholder of PMC Funding.
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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
VALUATION OF INVESTMENTS
Loans receivable are carried at the Board of Directors' estimate of fair value.
The Board of Directors has estimated the fair value of loans receivable to be
the loan principal balance less deferred fees and discounts, unless there is
doubt as to the realization of the loan (a "Problem Loan"). A valuation reserve
is established for a Problem Loan based on the creditor's payment history,
collateral value, guarantor support and other factors. Changes in market
interest rates are not considered in determining the estimate of fair value.
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 60 days. If a loan or a portion of a loan is classified as doubtful
or is partially reserved or charged-off, the loan is classified as nonaccrual.
Loans that are on a current payment status or past due less than 60 days may
also be classified as nonaccrual if repayment in full of principal and/or
interest is in doubt.
When selling the SBA-guaranteed portion of loans, the basis of the retained
portion of the loans has been reduced by the differential between the face
amount of the unguaranteed portion of the loans and the value as determined in
accordance with the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") 88-11. This difference being the Retained Loan
Discount. At the time of sale, premium income has been reduced by the Retained
Loan Discount. Unless the underlying loans are paid in full or sold, the
Retained Loan Discount is amortized over the life of the underlying loan based
on an effective yield method. When a loan is prepaid, the remaining Retained
Loan Discount is recognized as an increase to interest income. When a loan is
sold, the remaining Retained Loan Discount is included as a reduction to the
basis of the retained portion of the underlying loan as a reduction of cost.
Excess servicing related to the sale of the guaranteed portion of SBA loans is
carried at the Board of Directors' estimate of fair value at the time of the
related loan sale and amortized on a pool basis over the estimated life of the
underlying pool of loans.
For those sales of the unguaranteed portion of SBA loans, an allowance has been
established which represents the Board of Directors' estimate of probable
credit losses to be incurred over the lives of the loans sold.
Deferred fees consist of non-refundable fees less direct loan origination
costs. These fees are being recognized over the expected life of the related
loan as an adjustment of yield.
Real property owned is carried at the Board of Directors' estimate of fair
value, based upon appraisals and other factors.
F-13
<PAGE> 79
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Cash equivalents are carried at value, which approximates cost.
VALUATION OF DEBT
Debt incurred by the Company is valued at cost. Changes in market interest
rates are not considered in determining fair value as determined by the Board
of Directors.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are carried at their value,
which is cost less accumulated depreciation and amortization. Depreciation and
amortization is computed using accelerated and straight-line methods, with
estimated useful lives ranging from five to 15 years.
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gains or losses are measured by the difference between the proceeds
from the sale and the cost basis of the investment, without regard to
unrealized gains and losses previously recognized. The gain or loss calculated
also includes loans written-off or charged-down during the year and recoveries
of loans written-off or charged-down in prior years.
Other changes in the value of investments are included as changes in the
unrealized appreciation (depreciation) on investments in the statements of
income.
Realized gains on the sale of the unguaranteed portion of SBA loans are
recognized based upon the difference between the sales price as adjusted for
any excess servicing (less any allowance for credit losses) and the carrying
value of the assets (including the Retained Loan Discount).
INTEREST INCOME
Interest income on loans is accrued as earned. The accrual of interest is
generally suspended when the related loan becomes 60 days past due
("Non-accrual Loan"). Interest income on a Non-accrual Loan is recognized on
the cash basis.
Interest income includes the interest rate spread on loans sold to the
secondary market or through the securitization and sale of the unguaranteed
portion of SBA loans less the amortization of any excess servicing asset.
PREMIUM INCOME
For loans originated by the SBLC, gain on the sale of the SBA guaranteed
portion of such loans to the secondary market has been adjusted to reflect a
normal service fee for the future servicing rights retained by the Company.
Premium income represents the differential between the value attributable to
the sale of a loan to the secondary market and the principal balance (cost) of
the loan in accordance with EITF 88-11. The sale price includes the value
attributable to any excess servicing spread retained by the Company plus any
cash received.
DEFERRED CHARGES
Costs incurred in connection with the issuance of SBA debentures and notes
payable are included in deferred charges, deposits and other assets. These
costs are amortized over the life of the related obligation.
FEDERAL INCOME TAXES
The Company has elected to be treated as a regulated investment company by
meeting certain requirements of the Internal Revenue Code relating to the
distribution of its net investment income to shareholders. Thereby the Company
incurs no Federal income tax liability on such income. Based on its status as a
regulated investment company, the Company may elect to retain, deem to
distribute or distribute, in whole or in part, net long-term capital gains
realized on the disposition of its investments.
Any dividends declared by the Company in October, November or December of any
calendar year, payable to shareholders of record on a specified date in such
month and actually paid during January of the following year, may be treated as
if it were received by the shareholders on December 31 of the year declared.
F-14
<PAGE> 80
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents for
purposes of the consolidated statement of cash flows.
EXCESS SERVICING ASSET
During 1995, the EITF reached a consensus on Issue No. 94-9,
"Determining a Normal Servicing Fee Rate for the Sale of an SBA Loan."
This consensus provides that for purposes of allocating the recorded
investment in a loan between the portion of the loan sold and the
portion retained, including any excess servicing asset, a normal
servicing fee of 40 basis points should be used. The Company had
historically used 50 basis points as a normal servicing fee. The
effect of this change in estimate was not material to the consolidated
financial statements during the year ended December 31, 1995.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 122
During May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights," an amendment to SFAS No. 65. The Company
elected to adopt this standard for its financial statement reporting
beginning in 1996. SFAS No. 122 prohibits retroactive application.
Accordingly, the Company's financial statement reporting for years
prior to 1996 was accounted for under SFAS No. 65, the predecessor
Statement to SFAS No. 122. The impact of SFAS No. 122 to the
consolidated financial statements was not significant to operations
during the year ended December 31, 1996.
SFAS NO. 125
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities."
Those standards have been established to provide a consistent
application of accounting based on a financial-components approach
which distinguishes the transfer of financial assets that are sales
from those that are secured borrowings. This approach is based upon
control of the related assets, whereby after a transfer of financial
assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, and derecognizes
financial assets when control has been surrendered and liabilities are
extinguished. SFAS No. 125 is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, and may only be applied prospectively.
SFAS NO. 128
In February 1997, 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
is not considered significant.
SFAS NO. 129
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 is not considered significant.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to
current year presentation.
F-15
<PAGE> 81
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LOANS RECEIVABLE:
Loans receivable consist primarily of loans made under SBIC, SSBIC and
SBLC programs established by the SBA and financings to businesses
outside of the SBA loan programs.
As an SBLC, First Western originates loans which are partially
guaranteed by the SBA and which are collateralized generally, with
first liens on real and/or personal property of the borrower. The SBA
guarantees repayment of up to 90% of the principal amount of the loans
originated by First Western. First Western sells, without recourse,
the guaranteed portion of its loans into the secondary market ("SBA
Guaranteed Sales") while retaining the rights to service the loans.
Funding for the 7(a) Program depends on the annual appropriations by
the U.S. Congress. At December 31, 1996, included in loans receivable
are approximately $3.8 million which represents the guaranteed portion
of First Western loans available for sale.
The principal balance of the loans serviced on behalf of third parties
by First Western was approximately $137.7 million and $150.1 million
at December 31, 1996 and 1995, respectively.
First Western's loans: (i) range in original principal amount from
$30,000 to $1,400,000, (ii) provide for a variable rate of interest
based on 1.0% to 2.75% above the then prevailing prime rate, (iii)
have a term of seven to 25 years, (iv) may be prepaid without penalty
and (v) require monthly payments covering accrued interest and
amortization of principal based in part on the remaining useful life
of the assets collateralizing the loans and on the borrowers' use of
loan proceeds.
PMIC and Western Financial originate loans that are payable in monthly
installments of principal and interest based upon four to 20 year
amortization periods, with the balance due at maturity. These loans
are collateralized with first liens on real and/or personal property
and are generally guaranteed by the principals of the borrower.
PMC originates loans to borrowers on a non-SBA supported basis, using
similar criteria for loans that are funded under the SBA programs
utilized by its three principal subsidiaries. These loans are: (i) to
borrowers who exceed the eligibility requirements of the 7(a) Program
or SBIC programs, (ii) payable in monthly installments of principal
and interest based upon four to 25 year amortization periods, with the
balance due at maturity, (iii) generally collateralized by real estate
and/or equipment and (iv) are generally guaranteed by the principals
of the borrower.
The Company's portfolio of investments consists of loans to borrowers
located principally in the southern portion of the United States. The
most significant concentration of loans were to borrowers in Texas,
Florida and Georgia, as noted below:
<TABLE>
<CAPTION>
Percentage of Loan Portfolio
State December 31,
----- ----------------------------
1996 1995
------ -----
<S> <C> <C>
Texas 38% 41%
Florida 13% 13%
Georgia 11% 10%
Other 38% 36%
--- ---
100% 100%
=== ===
</TABLE>
The activity in net unrealized depreciation on investments is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Balance, beginning of period .......... $ 467,000 $ 377,000
Provision for losses .................. 182,000 399,000
Loans written-off ..................... (214,000) (309,000)
--------- ---------
Balance, end of period ................ $ 435,000 $ 467,000
========= =========
</TABLE>
F-16
<PAGE> 82
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LOANS RECEIVABLE: (CONTINUED)
Loans receivable with an aggregate retained balance of $1.0 million
and $1.8 million were greater than 60 days past due, litigation
against the borrowers has commenced, or the loans are in the process
of liquidation at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, the recorded investment in loans
identified as impaired in accordance with SFAS No. 114 totaled $1.0
million and $1.5 million, respectively. Of this total, at December 31,
1996 and 1995, approximately $80,000 and $20,000, respectively,
related to loans with no valuation reserve, since the estimated fair
value of the collateral for each loan exceeds the respective loan
balance. Approximately $900,000 and $1.5 million of these loans at
December 31, 1996 and 1995, have a corresponding valuation allowance
of $412,000 and $446,000, respectively. At December 31, 1996 and 1995,
the Company has recognized $22,000 and $21,000 in valuation allowances
on identified problem loans of $317,000 and $300,000, respectively,
which were not deemed impaired. The Company did not recognize any
material amount of interest on impaired loans during the portion of
the period that they were impaired. Had these impaired loans performed
in accordance with their original terms, interest income of
approximately $113,000 and $168,000, respectively, would have been
recognized during the years ended December 31, 1996 and 1995.
In addition to the SBA Guaranteed Sales, First Western sells through
separate transactions, the unguaranteed portion of certain of its
originated loans through private placements ("SBA Unguaranteed
Sales"). First Western retains the right to service all such loans.
The guaranteed portions are sold to either dealers in government
guaranteed loans or institutional investors and certain of the
unguaranteed portions have been sold in privately negotiated
transactions between First Western and the purchaser.
PMC Capital contributed approximately $45.7 million (aggregate
principal balance due, including $34.4 million in loans transferred
from PMIC and Western Financial to PMC Capital) of loans to the
Partnership without recourse. (See Note 15.)
NOTE 3. EXCESS SERVICING ASSET:
By retaining the right to service the loan, First Western earns an
interest rate spread equal to the difference between the interest rate
on the loan and the interest rate paid to the purchaser on the sold
portion (this difference being the "Servicing Spread"). On SBA
Guaranteed Sales, First Western or PMC recognizes premium income by
receiving either a cash premium, an excess servicing right on the sale
or a combination of these elements. On SBA Guaranteed Sales that
involve receiving the maximum premium, First Western retains the
minimum Servicing Spread of 1% required by SBA regulations ("SBA
Minimum Servicing"). When receiving the maximum premium, PMC or First
Western would recognize as premium income the difference between the
amount received from the purchaser and the aggregate of the
outstanding principal amount of the guaranteed portion plus any value
of the Servicing Spread in excess of normal servicing (the "Excess
Servicing Spread").
On SBA Guaranteed Sales, First Western recognizes premium income equal
to the value of the Excess Servicing Spread, plus the difference, if
any, between the amount received from the purchaser and the
outstanding principal amount of the guaranteed portion sold as valued
in accordance with EITF 88-11.
The Board of Directors estimates the value of the Excess Servicing
Spread based upon various factors including premiums realized on
comparable transactions in the secondary market with a 1% servicing
fee being retained, comparable market bids with normal servicing rates
on SBA loans and the likelihood of prepayment. The value of the Excess
Servicing Spread is recognized as premium income at the time of the
sale and is concurrently capitalized as an asset on the Company's
balance sheet (the "Excess Servicing Asset"), which is then amortized
over the estimated life of the loan. In using this valuation method,
the Company incorporated assumptions that market participants would
use in estimating future net servicing income which included estimates
of the cost of servicing per loan, the discount rate, prepayment
speeds and default rates. During 1995, the Company completed a
reassessment of the method used to amortize the Excess Servicing
Asset. Historically, the Company had amortized the Excess Servicing
F-17
<PAGE> 83
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. EXCESS SERVICING ASSET: (CONTINUED)
Asset based upon the estimated life for each loan at the time of sale,
expectation of prepayments and other considerations. When a loan was
paid in full, the remaining unamortized Excess Servicing Asset, if
any, was charged against income. Considering the above factors and the
Company's historical portfolio performance, the Company extended to
the expected remaining life of the related loans, on a pooled basis,
the period over which the remaining Excess Servicing Asset would be
amortized for loans originated and sold prior to January 1, 1995. The
Excess Servicing Asset is amortized on an accelerated method over the
estimated remaining lives of the related pool assets. There can be no
assurance of the accuracy of management's prepayment estimates. If
prepayments occur at a faster rate than expected, the amortization of
the Excess Servicing Asset will be accelerated as a charge to
earnings. If actual prepayments occur at a slower rate than estimated,
cash flows from the Excess Servicing Spread would exceed previously
expected amounts and total income in future periods would be enhanced.
The sale of the unguaranteed portion of SBA loans has also generated
an Excess Servicing Asset to the extent that the Servicing Spread
exceeds the normal servicing fee. (See Note 8.)
Pursuant to SFAS No. 122, impairment of the Excess Servicing Asset is
measured based on its fair value. In measuring impairment at December
31, 1996, the servicing portfolio was evaluated based upon the
predominant risk characteristics which the Company has determined to
be prepayment and payment default risks. The Company evaluated the
serviced portfolio for both the Excess Servicing Asset related to SBA
Guaranteed Sales and related to the sale of the unguaranteed portion
of SBA loans in 1994 (the "SBA Unguaranteed Sale"). Based upon current
prepayment assumptions, estimates of default rates and a discount
factor considering the current interest rate environment, it has been
determined that there was no impairment reserve required as of
December 31, 1996. As a result of an increase in the rate of
prepayment of loans during 1996, the Company accelerated the
amortization of its Excess Servicing Asset related to the SBA
Unguaranteed Sale by $780,000. The related allowance for credit losses
on loans sold was also adjusted by a similar amount as a result of
these prepayments. The acceleration of the Excess Servicing Asset
amortization is included in the schedule below.
The activity in the excess servicing asset is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year ...... $ 7,514,000 $ 7,694,000 $ 5,108,000
Additions, net of allowances .... 707,000 791,000 4,078,000
Less: amortization, net ........ (1,792,000) (971,000) (1,492,000)
----------- ----------- -----------
Balance, end of year ............ $ 6,429,000 $ 7,514,000 $ 7,694,000
=========== =========== ===========
</TABLE>
Additions in 1994 include $3,047,000 relating to the Excess Servicing
Spread from the SBA Unguaranteed Sale.
NOTE 4. PROPERTY AND EQUIPMENT:
At December 31, 1996 and 1995, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Furniture and equipment ..................... $319,000 $288,000
Leasehold improvements ...................... 150,000 150,000
Automobiles ................................. 13,000 13,000
-------- --------
482,000 451,000
Less:accumulated depreciation ...... 301,000 252,000
-------- --------
$181,000 $199,000
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1996, 1995 and 1994 was approximately $49,000, $57,000 and $75,000,
respectively.
F-18
<PAGE> 84
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. NOTES PAYABLE:
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 the London Interbank Offering Rate (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 December 31, 1996, the Company had no amounts
outstanding pursuant to this credit facility and the Company was in
compliance with all covenants of this facility. At December 31, 1995,
PMC had a $10 million revolving credit facility which expired in 1996.
PMC has consummated $35 million in private placements of
uncollateralized notes. These borrowings have been utilized to fund
commitments of the non-SBA lending program. The notes require the
Company to meet certain covenants (terms are as defined in the
applicable note agreement), the most restrictive of which require; (i)
that net loans receivable exceed 150% of senior funded debt, (ii) the
increase in the Company's loan valuation reserve for any 12 month
period must not exceed 3% of net loans receivable and (iii) the
Company's consolidated earnings plus interest expense must exceed 150%
of interest expense. At December 31, 1996, the Company was in
compliance with all of the covenants of these notes. At December 31,
1996 outstanding uncollateralized notes were as follows:
<TABLE>
<CAPTION>
Interest Final
Date Rate Amount Maturity
- ----------------- ---------------- -------------- -----------------
<S> <C> <C> <C>
July 19, 1993 7.20% $20,000,000(2) July 19, 2001
December 15, 1993 6.97% 5,000,000 December 15, 2002
April 19, 1995 8.60% 5,000,000 April 19, 2003
April 19, 1995 LIBOR +1.3% (1) 5,000,000 April 19, 2004
-----------
$35,000,000
===========
</TABLE>
(1) Reset quarterly, 6.83% at December 31, 1996.
(2) Payable in three equal annual installments commencing July
19, 1999.
Principal payments required on the notes at December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ -----------
<S> <C>
1999 $6,666,667
2000 6,666,667
2001 6,666,666
2002 5,000,000
2003 5,000,000
2004 5,000,000
-----------
$35,000,000
===========
</TABLE>
F-19
<PAGE> 85
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. SBA DEBENTURES PAYABLE:
Debentures payable represent amounts due to the SBA as a result of
borrowing made pursuant to the SBIA.
At December 31, 1996, the maturities, interest rates and principal
payments on the SBA debentures were as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Amount
-------------------- ---------------- -----------
<S> <C> <C>
February 1, 1997 (1) 7.950% $ 2,480,000
September 1, 1997 (2) 10.350% 800,000
February 1, 1998 8.850% 1,500,000
August 18, 1999 (3) 8.125% 1,000,000
September 1, 1999 8.800% 2,500,000
December 1, 1999 (2) 8.600% 650,000
January 2, 2000 (4) 7.875% 3,000,000
March 1, 2000 9.350% 1,000,000
June 1, 2000 (2) 9.300% 300,000
June 1, 2000 (5) 9.300% 2,000,000
June 1, 2000 (6) 9.300% 1,030,000
September 1, 2000 9.600% 4,310,000
December 1, 2002 (2) 7.510% 510,000
September 1, 2004 (7) 5.200% 3,000,000
September 1, 2004 8.200% 3,000,000
March 1, 2005 (8) 4.840% 3,000,000
June 1, 2005 (9) 3.690% 5,000,000
September 1, 2005 (10) 3.875% 7,000,000
September 1, 2006 7.590% 2,490,000
-----------
$44,570,000
===========
</TABLE>
(1) Paid off in February 1997.
(2) During April 1995, the Company assumed $2,260,000 in SBA
debentures from a non-affiliated small business investment
corporation in exchange for loans receivable of $2,109,062
and cash of $150,938. The loans acquired were initially
originated by the Company and a portion sold to the
non-affiliated small business investment corporation. All of
these loans were purchased at par and were performing
according to their terms at the time of reacquisition.
(3) The interest rate on this debenture was 5.125% through August
18, 1994, as a result of the subsidy program provided by the
SBA.
(4) The interest rate on this debenture was 4.875% through
January 2, 1995, as a result of the subsidy program provided
by the SBA.
(5) The interest rate on this debenture was 6.300% through June
1, 1995, as a result of the subsidy program provided by the
SBA.
(6) During May 1996, the Company assumed $1,030,000 in SBA
debentures from a non-affiliated SBIC in exchange for loans
receivable of approximately $200,000 and cash of
approximately $900,000. The loans acquired were initially
originated by the Company and a portion sold to the
non-affiliated SBIC. All of these loans were purchased at par
and were performing according to their terms at the time of
reacquisition.
F-20
<PAGE> 86
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. SBA DEBENTURES PAYABLE: (CONTINUED)
(7) The interest rate will increase to 8.200% in September 1999
until maturity.
(8) The interest rate will increase to 7.840% in March 2000 until
maturity.
(9) The interest rate will increase to 6.690% in June 2000 until
maturity.
(10) The interest rate will increase to 6.875% in September 2000
until maturity.
NOTE 7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
During 1991, the Company entered into an agreement to lease its
corporate office space for a 15 year period from a corporation, a
majority of whose principals are officers and directors of the
Company. Leasehold improvements of $150,000 have been paid to the
corporation for costs incurred during the build-out of the leased
premises. The lease has been amended to allow the Company to terminate
such lease without penalty upon 60 days written notice to the
corporation. The Company has also entered into agreements to lease
additional space in the same building for one year periods.
The independent members of the Board of Directors decide on an annual
basis whether PMC will continue the leases and the annual lease
payment.
At December 31, 1996, the Company has additional agreements to lease
office space in Florida and Georgia.
Rental expense amounted to approximately $213,000 , $203,000 and
$176,000 during the years ended December 31, 1996, 1995 and 1994,
respectively.
Future minimum lease payments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ -----------
<S> <C>
1997 $ 227,000
1998 225,000
1999 226,000
2000 223,000
2001 235,000
Thereafter 1,364,000
----------
$2,500,000
==========
</TABLE>
LOAN COMMITMENTS
Loan commitments outstanding at December 31, 1996, to various
prospective small business companies, including the unfunded portion
of projects in the construction phase, amounted to approximately $45.9
million. Of these commitments, $5.0 million are for loans to be
originated by First Western, a portion of which will be sold pursuant
to SBA Guaranteed Sales. These commitments are made in the ordinary
course of the Company's business and in management's opinion, are
generally on the same terms as those to existing borrowers.
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 are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
F-21
<PAGE> 87
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain of its officers for
terms expiring June 1999. Annual remuneration during the term of the
contracts range from $125,000 to $300,000. Future minimum payments
under these contracts are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ----------
<S> <C>
1997 $1,148,000
1998 1,075,000
1999 538,000
----------
$2,761,000
==========
</TABLE>
During the years ended December 31, 1996, 1995 and 1994 compensation
to officers was approximately $1,382,000, $1,229,000 and $1,243,000,
respectively.
LITIGATION
In the normal course of business, the Company is subject to various
proceedings and claims, the resolution of which will not, in
management's opinion, have a material adverse effect on the Company's
consolidated financial position or results of operations.
NOTE 8. CREDIT AND INTEREST RATE RISK:
In connection with First Western's structured sale of a 94% portion of
certain unguaranteed SBA loans during December 1994, the Company is
subject to credit risk. Total proceeds from the sale amounted to $24.8
million. Pursuant to the structured sale, the investors' protection
from losses is provided by: (i) the subordination of the Company's
right to receive payment on loans receivable totaling approximately
$1.6 million at the time of sale ($1.0 million at December 31, 1996),
(ii) the subordination of the Company's right to receive the Servicing
Spread on those loans sold in the securitization ($1,335,000 at
December 31, 1996, included in Excess Servicing Asset on the
accompanying balance sheet) and (iii) cash deposits provided by the
Company. At December 31, 1996, approximately $1,229,000 of cash
deposits held in interest bearing accounts were restricted. In
connection with this structured sale, a valuation reserve of $2.6
million was established at the time of sale. At December 31, 1996 the
valuation reserve was $1,533,000.
In connection with the Company's investment in the Partnership, all
payments of principal and interest on the loans contributed to the
Partnership are to be deposited with the trustee and are used to pay
the noteholders the required monthly principal and interest then due
on the notes pursuant to the Trust Indenture (as defined below) prior
to releasing any excess funds to the Partnership free and clear of the
Trust Indenture. The Partnership's obligations to the noteholders are
also collateralized by: (i) the differential between the outstanding
principal balance remaining due on the underlying loans held by the
Partnership and the balance due the noteholders, (ii) the reserve
account established to provide liquidity to the noteholders ( the
"Reserve Account") and (iii) money held in the operating accounts of
the Partnership to the extent they are restricted pursuant to the
terms of the trust indenture established by the noteholders, the
Company and the Partnership (the "Trust Indenture"). The Trust
Indenture provides for several covenants which would require, under
certain circumstances, that the excess cash , after payment of the
required principal and interest to the Partnership Noteholders (the
"Excess Cash"), be retained in the Reserve Account until the covenants
are in compliance. Of the assets of the Partnership at December 31,
1996, approximately $280,000 was Excess Cash which was distributed to
the Partners in January 1997.
The Company has a fundamental policy that requires investment of at
least 25% of its total assets in the lodging industry, and allows
investment of up to 100% of total assets in this industry. At December
31, 1996 and 1995, loans to businesses in the lodging industry
comprised 44% and 55% of its total assets, respectively, and 77% and
78% of
F-22
<PAGE> 88
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CREDIT AND INTEREST RATE RISK: (CONTINUED)
its loans receivable, net, respectively. There can be no assurance
that the Company will continue to experience the positive results it
has historically acheived from these lending activities or that market
conditions will enable the Company to maintain or increase this level
of loan concentration. Any economic factors that negatively impact the
lodging industry could have a material adverse effect on the business
of the Company. Additionally, loans to businesses located in Texas,
Florida and Georgia currently comprise approximately 38%, 13% and 11%
of the Company's outstanding loan portfolio, respectively. A decline
in economic conditions in any of these states may adversely affect the
Company.
Net income of the Company is effected by the spread between the rate
at which it borrows funds and the rate at which it loans these funds.
The portfolios of PMC Capital, Western Financial and PMIC have
typically been long-term and at fixed rates and the borrowed funds of
these companies are typically long-term and at fixed rates. First
Western originates variable rate loans and has utilized equity capital
of PMC Capital and a structured sale in 1994 to obtain funds necessary
to originate loans. If the yield on loans originated by the Company
with funds obtained from borrowings or the issuance of preferred stock
fails to cover the cost of such funds, the Company's cash flow will be
reduced. During periods of changing interest rates, interest rate
mismatches could negatively impact the Company's net income, dividend
yield and the market price of the Common Stock. Most of the fixed rate
loans that the Company originates have prepayment penalties. If
interest rates decline, the Company may experience significant
prepayments. Such prepayments, as well as scheduled repayments, are
likely to be reloaned or invested at lower rates, which may have an
adverse effect on the Company's ability to maintain distributions at
existing levels.
NOTE 9. CUMULATIVE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY:
PMIC has outstanding 30,000 shares of $100 par value, 3% cumulative
preferred stock (the "3% Preferred Stock") and 40,000 shares of $100
par value, 4% cumulative preferred stock (the "4% Preferred Stock").
The 3% Preferred Stock and the 4% Preferred Stock (collectively the
"Preferred Stock") are held by the SBA pursuant to the SBIA.
PMIC is entitled to redeem, in whole or in part, the 3% Preferred
Stock by paying 35% of the par value of these securities plus
dividends accumulated and unpaid on the date of redemption. While the
3% Preferred Stock may be redeemed, redemption is not mandatory.
Dividends of approximately $90,000 on the 3% Preferred Stock were
recognized during each of the years ended December 31, 1996, 1995 and
1994.
The 4% Preferred Stock was issued during 1994 ($2,000,000) and 1995
($2,000,000), and must be redeemed at par no later than 15 years from
the date of issuance. Dividends of approximately $160,000, $132,000
and $22,000 were recognized on the 4% Preferred Stock during the years
ended December 31, 1996, 1995 and 1994, respectively.
Neither series of Preferred Stock has any preemptive or conversion
rights. The Preferred Stock provides for a liquidation preference in
the amount of $100 per share plus accrued and unpaid dividends.
NOTE 10. SHAREHOLDERS' EQUITY:
The Company has a dividend reinvestment and cash purchase plan (the
"Plan") for up to 1,000,000 shares of common stock. As amended,
participants in the Plan have the option to reinvest all or a portion
of dividends received plus an optional cash purchase of up to $10,000
per month. The purchase price of the shares is 98% of the average of
the high and low price of the common stock as published for the five
trading days immediately prior to the dividend record date or prior to
the optional cash payment purchase date, whichever is applicable.
During the years ended December 31, 1996, 1995 and 1994, the Company
issued 291,042, 187,005 and 81,345 shares of common stock pursuant to
the Plan for proceeds (through cash and the reinvestment of dividends)
of approximately $3.7 million, $2.2 million and $1.2 million,
respectively.
F-23
<PAGE> 89
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. EARNINGS PER COMMON SHARE COMPUTATIONS:
The computations of earnings per common share are based on the
weighted average number of shares outstanding of the Company. Earnings
are defined as the net operating income and realized and unrealized
gain (loss) on investments and are reduced by the preferred stock
dividend requirements of PMIC. Preferred stock dividend requirements
were approximately $250,000, $222,000 and $112,000 during the years
ended December 31, 1996, 1995 and 1994, respectively. The weighted
average number of shares used in the computations of earnings per
common share were 11.0 million, 10.8 million and 10.6 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 12. BORROWER ADVANCES:
The Company finances several projects during the construction phase.
At December 31, 1996, the Company was in the process of funding
approximately $15.1 million in construction projects, of which $5.9
million in funding remained. As part of the monitoring process to
verify that the borrowers' cash equity is utilized for its intended
purpose, the Company deposits amounts received from the borrowers and
releases the funds upon presentation of appropriate supporting
documentation. The Company had approximately $1.8 million and $2.3
million in funds held on behalf of borrowers at December 31, 1996 and
1995, respectively.
NOTE 13. PROFIT SHARING PLAN:
The Company has a profit sharing plan available to its full-time
employees after one year of employment. Vesting increases ratably to
100% after the sixth year of employment. Pursuant to the profit
sharing plan, the Company has expensed approximately $217,000,
$188,000 and $168,000 during the years ended December 31, 1996, 1995
and 1994, respectively. Contributions to the profit sharing plan are
at the discretion of the Board of Directors.
NOTE 14. RELATED PARTY TRANSACTIONS:
Pursuant to agreements between PMC Capital and its wholly owned
subsidiaries, during the three years in the period ended December 31,
1996, PMC provided certain services to the subsidiaries at no cost.
These services and costs include salaries, rent and other general
corporate expenses. However, PMC retains all cash premiums on First
Western's SBA Guaranteed Sales ($1,937,000, $2,927,000 and $2,734,000
during the years ended December 31, 1996, 1995 and 1994, respectively)
as compensation for these services and for the working capital
provided by PMC Capital to First Western.
During December 1993, PMC Advisers entered into an investment
management agreement with the Trust. The officers and certain trust
managers of the Trust are officers and directors of PMC. Pursuant to
its agreement with PMC Advisers, through June 30, 1996 the Trust paid
PMC Advisers a base annual servicing fee of 0.50% of the average
assets (as defined in the agreement) of the Trust under management
plus an advisory fee of 1% of the average invested assets (as defined
in the agreement ) of the Trust. In addition, PMC Advisers earned an
advisory fee up to 1% of the average invested assets upon meeting
certain criteria in regards to investment returns to the Trust
shareholders. All such advisory fees were reduced by 50% with respect
to the value of average invested assets that exceed the beneficiaries'
equity of the Trust as a result of leverage or the issuance of
preferred shares.
Effective July 1, 1996, the Investment Management Agreement was
amended to include compensation to PMC Advisers for its assistance in
any issuance of debt or equity securities for PMC Commercial. Such
compensation includes a consulting fee based on (i) 12.5% of any
offering fees incurred by PMC Commercial pursuant to the public
offering or private placement of its common shares, and (ii) 50% of
any issuance or placement fees incurred by PMC Commercial pursuant to
the public offering or private placement of its debt securities or
preferred shares of beneficial interest. Of the amount of servicing
and advisory fees paid or payable to PMC Advisers as of December 31,
1996, approximately $251,000 was earned pursuant to a public offering
of common shares by PMC Commercial in July 1996.
F-24
<PAGE> 90
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. RELATED PARTY TRANSACTIONS: (CONTINUED)
Pursuant to the amended Investment Management Agreement, the quarterly
servicing and advisory fee (the "Base Fee") is based on the assets and
capital structure of PMC Commercial. As defined in the Investment
Management Agreement, the Base Fee is the sum of (i) 0.4167% (1.67% on
an annual basis) of the lesser of (a) the average quarterly value of
common equity capital or (b) the average quarterly value of all
invested assets and (ii) 0.21875% (0.875% on an annual basis) of the
difference between the average quarterly value of all invested assets
and the average quarterly value of common equity capital. For purposes
of calculating the Base Fee, the average quarterly value of common
equity capital shall not be increased by the proceeds received from
any public offering of common shares by PMC Commercial (other than
pursuant to its dividend reinvestment plan or any employee/trust
manager benefit plan) during the 180 calendar day period immediately
following such public offering. In no event will the aggregate annual
fees charged under the new agreement be greater than that which would
have been charged had there been no revision to the investment
management agreement.
Pursuant to the applicable investment management agreement between PMC
Advisers and PMC Commercial, PMC Advisers earned $1.6 million, $1.2
million and $429,000 during the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES:
As described in Note 1, PMC Advisers, PMC Funding, PMC Capital Corp.,
PMC Trust 1996-A and the Partnership are accounted for under the
equity method of accounting. The condensed balance sheet and income
statement, as applicable, for each of the entities on an individual
basis are provided for below (rounded to the nearest thousand).
PMC ADVISERS
The following is the condensed balance sheet for PMC Advisers as of
December 31, 1996 and 1995 and the condensed statements of income for
the years ended December 31, 1996, 1995 and 1994:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
ASSETS
<S> <C> <C>
Cash and cash equivalents .................. $ 63,000 $140,000
Due from affiliate ......................... 649,000 841,000
Other assets ............................... 7,000 2,000
-------- --------
$719,000 $983,000
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Due to parent ......................... $395,000 $365,000
Deferred fee revenue .................. 286,000 592,000
Other liabilities ..................... 12,000 --
-------- --------
693,000 957,000
-------- --------
SHAREHOLDER'S EQUITY:
Common stock .......................... 1,000 1,000
Additional paid-in capital ............ 25,000 25,000
-------- --------
26,000 26,000
-------- --------
$719,000 $983,000
======== ========
</TABLE>
F-25
<PAGE> 91
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
INCOME:
<S> <C> <C> <C>
Management fee ................ $1,562,000 $1,190,000 $ 429,000
Other income .................. 14,000 55,000 194,000
---------- ---------- ----------
Total income ............... 1,576,000 1,245,000 623,000
---------- ---------- ----------
EXPENSES:
General and administrative .... 1,572,000 1,242,000 620,000
Other ......................... 4,000 3,000 3,000
---------- ---------- ----------
Total expenses ............. 1,576,000 1,245,000 623,000
---------- ---------- ----------
NET INCOME................. $ -- $ -- $ --
========== ========== ==========
</TABLE>
PMC Capital allocates overhead to PMC Advisers to the extent that PMC
Advisers utilizes the staff and facilities of PMC Capital. The
overhead allocated during the years ended December 31, 1996, 1995 and
1994, were $1,571,000, $1,190,000 and $620,000, respectively. These
amounts are included in Other income, net on the accompanying
Statements of Operations. In no event will the allocated expenses
exceed the income available from the operations of PMC Advisers.
PMC FUNDING CORP.
The following is the condensed balance sheet for PMC Funding Corp. as
of December 31, 1996 and 1995 and the condensed statements of income
for the years ended December 31, 1996 and 1995:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .......................... $ 81,000 $ 277,000
Property and equipment ............................. 628,000 646,000
Other assets ....................................... 26,000 7,000
---------- ----------
$ 735,000 $ 930,000
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Due to Parent ................................. $ 642,000 $ 766,000
Other liabilities ............................. -- 162,000
---------- ----------
642,000 928,000
---------- ----------
SHAREHOLDER'S EQUITY:
Common stock and additional paid-in capital ... 451,000 401,000
Accumulated deficit ........................... (358,000) (399,000)
---------- ----------
93,000 2,000
---------- ----------
$ 735,000 $ 930,000
========== ==========
</TABLE>
F-26
<PAGE> 92
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)
CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
INCOME:
Investment income ........................... $ 3,000 $ 3,000
Other income, net ........................... 173,000 46,000
---------- ----------
176,000 49,000
---------- ----------
EXPENSES:
General and administrative expense .......... 135,000 126,000
---------- ----------
NET INCOME (LOSS) ...................... $ 41,000 $ (77,000)
========== ==========
</TABLE>
PMC CAPITAL LIMITED PARTNERSHIP
On November 13, 1996, the Partnership (a newly formed special purpose
affiliate of the Company) completed a private placement of
approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "Notes"). The Notes, issued at par, which have a
stated maturity in 2005 and bear interest at the rate of 6.725% per
annum, are collateralized by approximately $45.7 million of loans
contributed by PMC Capital to the Partnership. In connection with this
private placement, the Notes were given a rating of "Aa2" by Moody's
Investors Service. The Partnership has the exclusive obligation for
the repayment of the Notes, and the holders of the Notes have no
recourse to PMC Capital or its other subsidiaries or their assets in
the event of nonpayment of the loans. The net proceeds from the
issuance of the Notes (approximately $37.5 million before giving
effect to payment of offering costs of approximately $396,000 and
after giving effect to the funding of a $2.04 million reserve fund
held by the trustee as collateral) were distributed to PMC Capital.
The net effect of the contributed loans less the distributed funds
comprises the limited partners capital on the following condensed
statement of assets, liabilities and partners' capital.
The following is the condensed statement of assets, liabilities and
partners' capital for PMC Capital Limited Partnership as of December
31, 1996 and for the period November 8, 1996 (inception) to December
31, 1996:
CONDENSED STATEMENT OF
ASSETS, LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Loans receivable, net ............................................ $41,805,000
Restricted Investments - money market funds and cash ............. 5,444,000
Due from affiliates .............................................. 826,000
Deferred borrowing costs and other assets ........................ 640,000
-----------
$48,715,000
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable ............................................... $40,183,000
Accrued interest payable .................................... 233,000
Due to affiliates ........................................... 83.000
-----------
40,499,000
-----------
PARTNERS' CAPITAL:
General Partner's interest ................................. 11,000
Limited Partner's interest ................................. 8,205,000
-----------
8,216,000
-----------
$48,715,000
===========
</TABLE>
F-27
<PAGE> 93
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)
CONDENSED STATEMENT OF INCOME
FOR THE PERIOD NOVEMBER 8, 1996 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
INCOME:
<S> <C>
Investment income ...................... $710,000
--------
EXPENSES:
Interest expense ....................... 362,000
General and administrative expense ..... 20,000
--------
382,000
--------
NET INCOME .................................. $328,000
========
</TABLE>
PMC CAPITAL CORP. AND PMC TRUST 1996-A:
The following is the condensed combined balance sheet for PMC Capital
Corp. (the independent trustee of the general partner for PMC Capital
Limited Partnership) and PMC Trust 1996-A (the general partner for PMC
Capital Limited Partnership), as of December 31, 1996. PMC Capital
Corp. and PMC Trust 1996-A did not have any income statement activity
from inception through December 31, 1996 other than approximately
$3,000 earned pursuant to PMC Trust 1996-A's interest in the
Partnership of which $2,000 was distributed as a dividend to PMC
Capital:
CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Cash ............................................................ $ 1,000
Investment in Partnership ....................................... 11,000
Due from parent ................................................. 250,000
------------
$ 262,000
============
SHAREHOLDERS' AND BENEFICIAL OWNERS EQUITY
Common stock and beneficial owners beneficial interest .......... 261,000
Retained earnings ............................................... 1,000
------------
$ 262,000
============
</TABLE>
F-28
<PAGE> 94
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. COMBINED FINANCIAL STATEMENTS:
As described in Note 1, the consolidated financial statements include
the accounts of PMC and its wholly owned regulated investment company
subsidiaries. The accounts of PMC Advisers, PMC Funding Corp., 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 is
the condensed combined balance sheet as of December 31, 1996 and the
condensed combined income statement for the year ended December 31,
1996 for the Company and the Unconsolidated Entities.
CONDENSED COMBINED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Investments at value:
Loans receivable, net ..................................... $ 135,159
Cash equivalents .......................................... 49,816
Excess servicing asset .................................... 6,429
Restricted investments and real property owned ............ 6,976
------------
198,380
Other assets ................................................... 6,222
------------
Total assets .............................................. $ 204,602
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable .................................... $ 44,570
Notes payable ............................................. 75,183
Other liabilities ......................................... 14,946
------------
134,699
------------
Cumulative preferred stock of subsidiary .................. 7,000
------------
SHAREHOLDERS' EQUITY:
Common Stock .............................................. 112
Additional paid-in capital ................................ 62,125
Undistributed net operating income ........................ 1,101
Net unrealized depreciation on investments ................ (435)
------------
62,903
------------
Total liabilities and shareholders' equity ................ $ 204,602
============
</TABLE>
CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands)
<TABLE>
<S> <C>
INCOME:
Investment income ......................................... $ 21,835
Other income, net ......................................... 2,504
------------
Total income ........................................... 24,339
------------
EXPENSES:
Salaries and related benefits ............................. 3,180
General and administrative expenses ....................... 998
Interest .................................................. 6,070
Other ..................................................... 724
------------
Total expense .......................................... 10,972
------------
Net operating income ........................................... 13,367
Realized and unrealized gain (loss) on investments ............. (147)
------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................. $ 13,220
============
</TABLE>
F-29
<PAGE> 95
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimates of fair value as required by SFAS No. 107 differ from
the value of the financial assets and liabilities determined by the
Board of Directors primarily as a result of the effects of discounting
future cash flows. Considerable judgement is required to interpret
market data and develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts of the Company could realize in a current market exchange or
the amount that ultimately will be realized by the Company upon
maturity or disposition.
The estimated fair values of the Company's financial instruments
pursuant to SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Loans receivable, net ....... $ 93,354 $ 97,048 $110,499 $114,353
Cash and cash equivalents ... 50,017 50,017 31,574 31,574
Restricted investments ...... 1,229 1,229 1,785 1,785
Excess servicing asset ...... 6,429 6,429 7,514 7,514
Liabilities:
Debentures payable .......... 44,570 42,864 43,540 42,362
Notes payable ............... 35,000 34,310 35,000 34,881
</TABLE>
Loans receivable, net: The estimated fair value for all fixed rate
loans is estimated by discounting the estimated cash flows using the
current rate at which similar loans would be made to borrowers with
similar credit ratings and maturities. The impact of delinquent loans
on the estimation of the fair values described above is not
considered to have a material effect and accordingly, delinquent
loans have been disregarded in the valuation methodologies employed.
Cash and cash equivalents, restricted investments and excess
servicing asset: The carrying amount is a reasonable estimation of
fair value.
Debentures payable and notes payable: The estimated fair value is
based on present value calculation based on prices of the same or
similar instruments after considering risk, current interest rates
and remaining maturities.
NOTE 18. WRITE-DOWN OF REGISTRATION COSTS:
In 1994, PMC Investment Corporation ("PMIC") filed a registration
statement with the Securities and Exchange Commission to register
shares of its common stock. The Company had incurred approximately
$136,000 in costs in connection with the filing of the registration
statement. PMIC, a licensed specialized small business investment
company, uses long-term funds provided by the SBA through the
issuance of Debentures (which are guaranteed by the SBA and on which
the interest rate is reduced through an SBA subsidy of 3% during the
first five years). Due to the lack of availability of SBA subsidized
Debentures or preferred stock for the SSBIC program, the Company
believed the registration would not be completed in the near term.
Accordingly, during the year ended December 31, 1995, the Company
expensed the costs of registration.
F-30
<PAGE> 96
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONSOLIDATED
BEFORE
ELIMINATION ELIMINATION PMC CAPITAL,
CONSOLIDATED ENTRIES ENTRIES INC.
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
Loans receivable, net ................ $ 93,354 $ -- $ 93,354 $ 24,074
Cash equivalents ..................... 49,677 -- 49,677 13,178
Investment in subsidiaries ........... 8,585 (24,428)(a) 33,013 33,013
Excess servicing asset, net .......... 6,429 -- 6,429 --
Restricted investments ............... 1,229 -- 1,229 --
Real property owned .................. 303 -- 303 --
------------ ------------ ------------ ------------
Total investments ...................... 159,577 (24,428) 184,005 70,265
------------ ------------ ------------ ------------
OTHER ASSETS:
Receivable for loans sold ............ 2,508 -- 2,508 222
Due from affiliates .................. 1,097 (33,466)(b) 34,563 34,494
Deferred charges, deposits and
other assets ....................... 885 -- 885 216
Accrued interest receivable .......... 376 -- 376 157
Cash ................................. 340 -- 340 140
Property and equipment, net .......... 181 -- 181 82
------------ ------------ ------------ ------------
Total other assets ..................... 5,387 (33,466) 38,853 35,311
------------ ------------ ------------ ------------
TOTAL ASSETS ........................... $ 164,964 $ (57,894) $ 222,858 $ 105,576
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ............... $ 44,570 $ -- $ 44,570 $ --
Notes payable ........................ 35,000 -- 35,000 35,000
Accounts payable ..................... 4,145 -- 4,145 132
Dividends payable .................... 3,635 -- 3,635 3,572
Allowance for credit losses
on loans sold ...................... 1,533 -- 1,533 --
Borrower advances .................... 1,795 -- 1,795 184
Accrued interest payable ............. 1,442 -- 1,442 433
Due to affiliates .................... 1,076 (33,466)(b) 34,542 1,076
Deferred fee revenue ................. 419 -- 419 167
Other liabilities .................... 1,446 -- 1,446 1,074
------------ ------------ ------------ ------------
Total liabilities ...................... 95,061 (33,466) 128,527 41,638
------------ ------------ ------------ ------------
Cumulative preferred stock
of subsidiary ........................ 7,000 3,000 4,000 --
------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY:
Cumulative preferred stock
of subsidiary, 3% .................. -- (3,000)(a) 3,000 --
Common stock ......................... 112 (22)(a) 134 112
Additional paid-in capital ........... 62,125 (22,373)(a) 84,498 62,125
Undistributed net operating income ... 1,101 (3,033)(a) 4,134 1,701
Net unrealized depreciation
on investments ..................... (435) -- (435) --
------------ ------------ ------------ ------------
62,903 (28,428) 91,331 63,938
Less treasury stock .................. -- 1,000 (1,000) --
------------ ------------ ------------ ------------
Total shareholders' equity ............. 62,903 (27,428) 90,331 63,938
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ................. $ 164,964 $ (57,894) $ 222,858 $ 105,576
============ ============ ============ ============
NET ASSET VALUE PER COMMON SHARE ....... $ 5.64
============
<CAPTION>
FIRST WESTERN
WESTERN SBLC, FINANCIAL PMC
AND CAPITAL INVESTMENT
SUBSIDIARY CORPORATION CORPORATION
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
Loans receivable, net ................ $ 26,305 $ 14,413 $ 28,562
Cash equivalents ..................... 5,172 14,668 16,659
Investment in subsidiaries ........... -- -- --
Excess servicing asset, net .......... 6,429 -- --
Restricted investments ............... 1,229 -- --
Real property owned .................. 163 140 --
------------ ------------ ------------
Total investments ...................... 39,298 29,221 45,221
------------ ------------ ------------
OTHER ASSETS:
Receivable for loans sold ............ 2,286 -- --
Due from affiliates .................. 9 29 31
Deferred charges, deposits and
other assets ....................... 86 167 416
Accrued interest receivable .......... 15 68 136
Cash ................................. 158 18 24
Property and equipment, net .......... 33 33 33
------------ ------------ ------------
Total other assets ..................... 2,587 315 640
------------ ------------ ------------
TOTAL ASSETS ........................... $ 41,885 $ 29,536 $ 45,861
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ............... $ -- $ 20,570 $ 24,000
Notes payable ........................ -- -- --
Accounts payable ..................... 4,011 -- 2
Dividends payable .................... -- -- 63
Allowance for credit losses
on loans sold ...................... 1,533 -- --
Borrower advances .................... 1,048 231 332
Accrued interest payable ............. 51 563 395
Due to affiliates .................... 32,340 93 1,033
Deferred fee revenue ................. 32 90 130
Other liabilities .................... 298 26 48
------------ ------------ ------------
Total liabilities ...................... 39,313 21,573 26,003
------------ ------------ ------------
Cumulative preferred stock
of subsidiary ........................ -- -- 4,000
------------ ------------ ------------
SHAREHOLDERS' EQUITY:
Cumulative preferred stock
of subsidiary, 3% .................. -- -- 3,000
Common stock ......................... -- 21 1
Additional paid-in capital ........... 2,000 7,934 12,439
Undistributed net operating income ... 1,796 110 527
Net unrealized depreciation
on investments ..................... (224) (102) (109)
------------ ------------ ------------
3,572 7,963 15,858
Less treasury stock .................. (1,000) -- --
------------ ------------ ------------
Total shareholders' equity ............. 2,572 7,963 15,858
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ................. $ 41,885 $ 29,536 $ 45,861
============ ============ ============
NET ASSET VALUE PER COMMON SHARE .......
</TABLE>
(a) To eliminate PMC Capital, Inc.'s investment in its wholly owned investment
company subsidiaries.
(b) To eliminate intercompany advances.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS
F-31
<PAGE> 97
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONSOLIDATED
BEFORE
ELIMINATION ELIMINATION PMC CAPITAL,
CONSOLIDATED ENTRIES ENTRIES INC.
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment income:
Interest ............................. $ 18,571 $ -- $ 18,571 $ 3,950
Premium income ....................... 1,942 -- 1,942 1,937
Other investment income, net ......... 608 -- 608 260
------------ ------------ ------------ ------------
Total investment income ................ 21,121 -- 21,121 6,147
Other income, net ...................... 2,331 -- 2,331 1,805
Equity in income (loss) of
subsidiaries ......................... 369 (12,038)(a) 12,407 12,407
------------ ------------ ------------ ------------
Total income ........................... 23,821 (12,038) 35,859 20,359
------------ ------------ ------------ ------------
Expense:
Interest ............................. 5,708 -- 5,708 2,624
Salaries and related benefits ........ 3,180 -- 3,180 3,180
General and administrative ........... 843 -- 843 721
Profit sharing plan .................. 217 -- 217 217
Rent ................................. 213 -- 213 213
Legal and Accounting ................. 149 -- 149 139
Small Business Administration
fees ............................... 99 -- 99 --
Directors and shareholders
expense ............................ 45 -- 45 45
------------ ------------ ------------ ------------
Total expense .......................... 10,454 -- 10,454 7,139
------------ ------------ ------------ ------------
Net operating income .................. 13,367 (12,038) 25,405 13,220
------------ ------------ ------------ ------------
Realized and unrealized gain
(loss) on investments:
Loans written-off .................. (214) -- (214) --
Recoveries on loans written-off .... 35 -- 35 --
Change in unrealized
appreciation (depreciation)
on investments ................... 32 -- 32 --
------------ ------------ ------------ ------------
(147) -- (147) --
------------ ------------ ------------ ------------
Net operating income and realized
and unrealized gain (loss) on
investments .......................... $ 13,220 $ (12,038) $ 25,258 $ 13,220
============ ============ ============ ============
Earnings per common share .............. $ 1.18
============
<CAPTION>
FIRST WESTERN
WESTERN SBLC, FINANCIAL PMC
AND CAPITAL INVESTMENT
SUBSIDIARY CORPORATION CORPORATION
------------ ------------ ------------
<S> <C> <C> <C>
Investment income:
Interest ............................. $ 6,024 $ 3,233 $ 5,364
Premium income ....................... 5 -- --
Other investment income, net ......... 40 164 144
------------ ------------ ------------
Total investment income ................ 6,069 3,397 5,508
Other income, net ...................... 334 50 142
Equity in income (loss) of
subsidiaries ......................... -- -- --
------------ ------------ ------------
Total income ........................... 6,403 3,447 5,650
------------ ------------ ------------
Expense:
Interest ............................. 16 1,781 1,287
Salaries and related benefits ........ -- -- --
General and administrative ........... 35 31 56
Profit sharing plan .................. -- -- --
Rent ................................. -- -- --
Legal and Accounting ................. 3 1 6
Small Business Administration
fees ............................... -- 31 68
Directors and shareholders
expense ............................ -- -- --
------------ ------------ ------------
Total expense .......................... 54 1,844 1,417
------------ ------------ ------------
Net operating income .................. 6,349 1,603 4,233
------------ ------------ ------------
Realized and unrealized gain
(loss) on investments:
Loans written-off .................. (70) (144) --
Recoveries on loans written-off .... 20 -- 15
Change in unrealized
appreciation (depreciation)
on investments ................... (6) 80 (42)
------------ ------------ ------------
(56) (64) (27)
------------ ------------ ------------
Net operating income and realized
and unrealized gain (loss) on
investments .......................... $ 6,293 $ 1,539 $ 4,206
============ ============ ============
Earnings per common share ..............
</TABLE>
(a) To eliminate PMC Capital, Inc.'s equity in the income of its wholly owned
investment company subsidiaries.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS
F-32
<PAGE> 98
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL UNDISTRIBUTED APPRECIATION TOTAL
PREFERRED COMMON PAID-IN NET OPERATING (DEPRECIATION) TREASURY SHAREHOLDERS'
STOCK, 3% STOCK CAPITAL INCOME ON INVESTMENTS STOCK EQUITY
--------- -------- ---------- ------------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PMC CAPITAL, INC
BALANCES, JANUARY 1, 1996 .................... $ -- $ 109 $ 58,429 $ 1,334 $ -- $ -- $ 59,872
Net income ................................... -- -- -- 13,220 -- -- 13,220
Dividend reinvestment plan, 180,767 shares ... -- 3 3,696 -- -- -- 3,699
Dividends on common stock .................... -- -- -- (12,853) -- -- (12,853)
-------- -------- ---------- ------------ ------------ ---------- ------------
BALANCES, DECEMBER 31, 1996 .................. $ -- $ 112 $ 62,125 $ 1,701 $ -- $ -- $ 63,938
======== ======== ========== ============ ============ ========== ============
FIRST WESTERN SBLC, INC. AND SUBSIDIARY
BALANCES, JANUARY 1, 1996 .................... $ -- $ -- $ 2,000 $ 1,497 $ (218) $ (1,000) $ 2,279
Net income ................................... -- -- -- 6,299 (6) -- 6,293
Dividends to parent company .................. -- -- -- (6,000) -- -- (6,000)
-------- -------- ---------- ------------ ------------ ---------- ------------
BALANCES, DECEMBER 31, 1996 .................. $ -- $ -- $ 2,000 $ 1,796 $ (224) $ (1,000) $ 2,572
======== ======== ========== ============ ============ ========== ============
WESTERN FINANCIAL CAPITAL CORPORATION
BALANCES, JANUARY 1, 1996 .................... $ -- $ 21 $ 7,434 $ 401 $ (182) $ -- $ 7,674
Net income ................................... -- -- -- 1,459 80 -- 1,539
Contribution of capital ...................... -- -- 500 -- -- -- 500
Dividends to parent company .................. -- -- -- (1,750) -- -- (1,750)
-------- -------- ---------- ------------ ------------ ---------- ------------
BALANCES, DECEMBER 31, 1996 .................. $ -- $ 21 $ 7,934 $ 110 $ (102) $ -- $ 7,963
======== ======== ========== ============ ============ ========== ============
PMC INVESTMENT CORPORATION
BALANCES, JANUARY 1, 1996 .................... $ 3,000 $ 1 $ 12,439 $ 480 $ (67) $ -- $ 15,853
Net income ................................... -- -- -- 4,248 (42) -- 4,206
Dividends to parent company .................. -- -- -- (3,950) -- -- (3,950)
Dividends, preferred ......................... -- -- -- (251) -- -- (251)
-------- -------- ---------- ------------ ------------ ---------- ------------
BALANCES, DECEMBER 31, 1996 .................. $ 3,000 $ 1 $ 12,439 $ 527 $ (109) $ -- $ 15,858
======== ======== ========== ============ ============ ========== ============
ELIMINATION ADJUSTMENTS
Equity in income of subsidiaries ............. -- -- -- (12,038) -- -- (12,038)
Dividends to parent .......................... -- -- -- 11,700 -- -- 11,700
Stock of subsidiaries ........................ (3,000) (22) (22,373) -- -- 1,000 (24,395)
Undistributed earnings of subsidiaries ....... -- -- -- (2,695) -- -- (2,695)
-------- -------- ---------- ------------ ------------ ---------- ------------
(3,000) (22) (22,373) (3,033) -- 1,000 (27,428)
-------- -------- ---------- ------------ ------------ ---------- ------------
CONSOLIDATED ................................... $ -- $ 112 $ 62,125 $ 1,101 $ (435) $ -- $ 62,903
======== ======== ========== ============ ============ ========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS.
F-33
<PAGE> 99
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED
BEFORE
ELIMINATION ELIMINATION PMC CAPITAL,
CONSOLIDATED ENTRIES ENTRIES INC.
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and
unrealized gain (loss) on investments ...... $ 13,220 $ (12,038)(a) $ 25,258 $ 13,220
Adjustments to reconcile net operating
income and realized and unrealized
gain (loss) on investments to net cash
provided by (used in) operating activities:
Loans funded, held for sale ............... (21,915) -- (21,915) --
Proceeds from sale of guaranteed loans .... 19,988 -- 19,988 --
Change in unrealized depreciation on
investments and loans written-off ..... 182 -- 182 --
Unrealized premium income, net ............ (5) -- (5) --
Amortization and depreciation ............. 1,084 -- 1,084 84
Accretion of loan discount and
deferred fees ........................... (957) -- (957) (167)
Deferred fees collected ................... 785 -- 785 52
Equity in income of unconsolidated
subsidiaries ............................ (369) -- (369) (369)
Net change in operating assets
and liabilities:
Accrued interest receivable ........... 347 -- 347 29
Other assets .......................... 357 -- 357 148
Accrued interest payable .............. 8 -- 8 (9)
Borrower advances ..................... (465) -- (465) (185)
Other liabilities ..................... 1,812 -- 1,812 260
------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 14,072 (12,038) 26,110 13,063
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ................................. (48,239) 3,239(b) (51,478) (14,184)
Principal collected and other adjustments .... 22,647 (3,239)(b) 25,886 7,384
Loans transferred to (from) affiliate ........ -- -- -- (34,379)
Purchase of furniture and fixtures and
other assets .............................. (127) -- (127) (31)
Release of (investment in) restricted cash ... 556 -- 556 --
Investment in subsidiaries ................... (893) 12,538(a) (13,431) (13,431)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ......................... (26,056) 12,538 (38,594) (54,641)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption
of SBA debentures ......................... 941 -- 941 --
Proceeds from issuance of common stock ...... 2,834 (500)(a) 3,334 2,834
Proceeds from subsidiaries .................. 37,803 (11,700)(c) 49,503 49,503
Payment of dividends on common stock ........ (11,935) 11,700(c) (23,635) (11,935)
Payment of dividends on preferred stock ..... (250) -- (250) --
Advances from (to) affiliates, net .......... 1,114 -- 1,114 (4,752)
Payment of issuance costs on notes
and debentures ............................ (80) -- (80) (15)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ......................... 30,427 (500) 30,927 35,635
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................. 18,443 -- 18,443 (5,943)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ............................ 31,574 -- 31,574 19,261
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ......... $ 50,017 $ -- $ 50,017 $ 13,318
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Interest paid ............................... $ 5,433 $ -- $ 5,433 $ 2,366
============ ============ ============ ============
Dividends reinvested ........................ $ 880 $ -- $ 880 $ 880
============ ============ ============ ============
Loans receivable acquired in exchange
for SBA debentures ........................ $ 158 $ -- $ 158 $ --
============ ============ ============ ============
Reclassification from loans receivable
to real property owned .................... $ 453 $ -- $ 453 $ --
============ ============ ============ ============
Loans contributed to unconsolidated
subsidiary, net ........................... $ 45,145 $ -- $ 45,145 $ 45,145
============ ============ ============ ============
<CAPTION>
FIRST WESTERN
WESTERN SBLC, FINANCIAL PMC
AND CAPITAL INVESTMENT
SUBSIDIARY CORPORATION CORPORATION
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and
unrealized gain (loss) on investments ...... $ 6,293 $ 1,539 $ 4,206
Adjustments to reconcile net operating
income and realized and unrealized
gain (loss) on investments to net cash
provided by (used in) operating activities:
Loans funded, held for sale ............... (21,915) -- --
Proceeds from sale of guaranteed loans .... 19,988 -- --
Change in unrealized depreciation on
investments and loans written-off ..... 76 64 42
Unrealized premium income, net ............ (5) -- --
Amortization and depreciation ............. 907 34 59
Accretion of loan discount and
deferred fees ........................... (350) (166) (274)
Deferred fees collected ................... 35 90 608
Equity in income of unconsolidated
subsidiaries ............................ -- -- --
Net change in operating assets
and liabilities:
Accrued interest receivable ........... 111 114 93
Other assets .......................... 164 (3) 48
Accrued interest payable .............. 6 (14) 25
Borrower advances ..................... (225) 27 (82)
Other liabilities ..................... 1,597 (3) (42)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 6,682 1,682 4,683
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ................................. (7,305) (7,473) (22,516)
Principal collected and other adjustments .... 4,660 8,117 5,725
Loans transferred to (from) affiliate ........ -- 9,996 24,383
Purchase of furniture and fixtures and
other assets .............................. -- (96) --
Release of (investment in) restricted cash ... 556 -- --
Investment in subsidiaries ................... -- -- --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ......................... (2,089) 10,544 7,592
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption
of SBA debentures ......................... -- 941 --
Proceeds from issuance of common stock ...... -- 500 --
Proceeds from subsidiaries .................. -- -- --
Payment of dividends on common stock ........ (6,000) (1,750) (3,950)
Payment of dividends on preferred stock ..... -- -- (250)
Advances from (to) affiliates, net .......... 4,861 65 940
Payment of issuance costs on notes
and debentures ............................ -- (65) --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ........................ (1,139) (309) (3,260)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................. 3,454 11,917 9,015
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ............................ 1,876 2,769 7,668
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ......... $ 5,330 $ 14,686 $ 16,683
============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Interest paid ............................... $ 10 $ 1,795 $ 1,262
============ ============ ============
Dividends reinvested ........................ $ -- $ -- $ --
============ ============ ============
Loans receivable acquired in exchange
for SBA debentures ........................ $ -- $ 158 $ --
============ ============ ============
Reclassification from loans receivable
to real property owned .................... $ 292 $ 161 $ --
============ ============ ============
Loans contributed to unconsolidated
subsidiary, net ........................... $ -- $ -- $ --
============ ============ ============
</TABLE>
(a) To eliminate PMC Capital, Inc.'s equity in the income of its wholly owned
subsidiaries and the increase in investment in its wholly owned
subsidiaries.
(b) To eliminate the repurchase by PMC Investment Corporation of loans
previously participated with Western Financial Capital Corporation.
(c) To eliminate dividends paid to PMC Capital, Inc. from its investment
company subsidiaries.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS.
F-34
<PAGE> 100
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partner
PMC Capital Limited Partnership:
We have audited the accompanying statement of assets, liabilities and partners'
capital of PMC Capital Limited Partnership (the "Partnership") as of December
31, 1996, and the related statements of income, partners' capital and cash
flows for the period from November 8, 1996 (inception) to December 31, 1996.
These financial statements are the responsibility of the Partnership's General
Partner. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the General Partner, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PMC Capital Limited
Partnership as of December 31, 1996, and the results of its operations and its
cash flows for the period from November 8, 1996 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 5, 1997
F-35
<PAGE> 101
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net ............................................. $ 41,805
Restricted investments - money market funds and cash ............. 5,444
--------
TOTAL INVESTMENTS ................................................... 47,249
--------
OTHER ASSETS:
Due from affiliates ............................................... 826
Deferred borrowing costs .......................................... 390
Interest receivable ............................................... 239
Other ............................................................. 11
--------
TOTAL OTHER ASSETS .................................................. 1,466
--------
TOTAL ASSETS ........................................................ $ 48,715
========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable ..................................................... $ 40,183
Accrued interest payable .......................................... 233
Due to affiliates ................................................. 83
--------
TOTAL LIABILITIES ................................................... 40,499
--------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
PARTNERS' CAPITAL:
General Partner's interest ....................................... 11
Limited Partner's interest ....................................... 8,205
--------
8,216
--------
TOTAL LIABILITIES AND PARTNERS' CAPITAL ............................. $ 48,715
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-36
<PAGE> 102
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF INCOME
PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest ......................................................... $ 599
Other investment income, net ..................................... 111
--------
Total investment income ............................................ 710
--------
EXPENSES:
Interest ......................................................... 362
General and administrative ....................................... 20
--------
Total expenses ..................................................... 382
--------
Net income ......................................................... $ 328
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-37
<PAGE> 103
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Limited General
Partner's Partner's
Interest Interest Total
--------- --------- ---------
<S> <C> <C> <C>
BALANCE, NOVEMBER 8, 1996 (INCEPTION) ...... $ -- $ -- $ --
Limited Partner's contribution of loans
receivable and other assets .............. 45,681 -- 45,681
General Partner's cash contribution ........ -- 10 10
Net income ................................. 325 3 328
Partnership distributions .................. (37,801) (2) (37,803)
--------- --------- ---------
BALANCE, DECEMBER 31, 1996 ................. $ 8,205 $ 11 $ 8,216
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-38
<PAGE> 104
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 328
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization .................................................. 16
Accretion of loan discount and deferred fees .................. (28)
Net change in operating assets
and liabilities:
Interest receivable ....................................... (239)
Other assets .............................................. (11)
Accrued interest payable .................................. 233
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 299
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected and other adjustments ........................ 3,904
Investment in restricted cash, net ............................... (5,444)
--------
NET CASH USED IN INVESTING ACTIVITIES .............................. (1,540)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable ......................... 40,183
Proceeds from issuance of general
partnership interest .......................................... 10
Partner distributions ........................................... (37,803)
Advances from (to) affiliates, net .............................. (743)
Payment of issuance costs on notes .............................. (406)
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 1,241
--------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................... --
--------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ --
========
SUPPLEMENTAL DISCLOSURE:
Interest paid ................................................... $ --
========
Loans receivable contributed from partners ...................... $ 45,681
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-39
<PAGE> 105
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
PMC Capital Limited Partnership ("the Partnership") was formed as a
Delaware limited partnership in November 1996 to act as a special
purpose affiliate of PMC Capital, Inc. ("PMC Capital"). 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. PMC engages in the business of
originating loans to small businesses either directly or through its
three principal subsidiaries. The Partnership was established to
acquire loans from PMC Capital and to issue fixed-rate debt through a
private placement. PMC Capital is either directly or indirectly the
sole partner of the Partnership.
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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
VALUATION OF INVESTMENTS
Loans receivable are carried at amortized cost which is the loan
principal balance less deferred fees and discounts, unless there is
doubt as to the realization of the loan (a "Problem Loan"). A
valuation reserve is established for a Problem Loan based on the
creditor's payment history, collateral value, guarantor support and
other factors.
Loans, including impaired loans, are generally classified as
non-accrual if they are past due as to maturity or payment of
principal or interest for a period of more than 60 days. If a loan or
a portion of a loan is classified as doubtful or is partially
reserved or charged-off, the loan is classified as non-accrual. Loans
that are on a current payment status or past due less than 60 days
may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.
Deferred fees consist of non-refundable fees less direct loan
origination costs. These fees are being recognized over the expected
life of the related loan as an adjustment of yield.
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gains or losses are measured by the difference between the
proceeds from the sale and the cost basis of the investment, without
regard to unrealized gains and losses previously recognized. The gain
or loss calculated also includes loans written-off or charged-down
during the year and recoveries of loans written-off or charged-down
in prior years.
Other changes in the value of investments are included as changes in
the unrealized appreciation (depreciation) on investments in the
statement of income.
F-40
<PAGE> 106
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTEREST INCOME
Interest income on loans is accrued as earned. The accrual of
interest is generally suspended when the related loan becomes 60 days
past due ("Non-accrual Loan"). Interest income on a Non-accrual Loan
is recognized on the cash basis.
DEFERRED BORROWING COSTS
Costs incurred in connection with the issuance of notes payable are
included in deferred borrowing costs. These costs are amortized over
the estimated life of the related obligation.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents for
purposes of the statement of cash flows.
NOTE 2. LOANS RECEIVABLE:
On November 13, 1996, PMC Capital contributed approximately $45.7
million of loans (the "Contributed Loans") to the Partnership without
recourse to PMC Capital.
At December 31, 1996 their was no recorded investment in loans
identified as impaired.
The Company's portfolio of investments consists of loans to borrowers
located principally in the southern portion of the United States. The
most significant concentration of loans were as noted below:
<TABLE>
<CAPTION>
Percentage of Loan Portfolio
State December 31, 1996
----- ----------------------------
<S> <C>
Texas 42%
Florida 10%
Other 48%
---
100%
===
</TABLE>
There were no loans receivable; (i) greater than 60 days past due,
(ii) on which litigation against the borrowers had commenced, or (iii)
which were in the process of liquidation at December 31, 1996.
NOTE 3. CREDIT RISK:
At December 31, 1996, loans to businesses in the lodging industry
comprised 85% of loans receivable and 74% of total assets. There can
be no assurance that the Partnership will experience the positive
results which PMC Capital has historically achieved from these lending
activities. Any economic factors that negatively impact the lodging
industry could have a material adverse effect on the business of the
Company. Additionally, loans to businesses located in Texas and
Florida currently comprise approximately 42% and 10% of the Company's
outstanding loan portfolio, respectively. A decline in economic
conditions in any of these states may adversely affect the
Partnership.
F-41
<PAGE> 107
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 4. NOTES PAYABLE:
On November 13, 1996, the Partnership completed a private placement
of approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "Notes"). The Notes, issued at par, which have a
stated maturity in 2005 and bear interest at the rate of 6.725% per
annum, are collateralized by approximately $45.7 million of loans
contributed by PMC Capital to the Partnership. In connection with
this private placement, the Notes were given a rating of "Aa2" by
Moody's Investors Service. The Partnership has the exclusive
obligation for the repayment of the Notes, and the holders of the
Notes have no recourse to PMC Capital or its other subsidiaries or
their assets in the event of nonpayment of the loans. Required
principal payments to the noteholders are based upon the collection
of principal on the Contributed Loans. All principal collected on
the Contributed Loans during the monthly period (as defined in the
Trust Indenture) are used to make the required principal payment on
the first business day of the following month.
NOTE 5. PARTNERS' CAPITAL:
The net proceeds from the issuance of the Notes (approximately $37.5
million before giving effect to payment of offering costs of
approximately $396,000 and after giving effect to the funding of a
$2.04 million reserve fund held by the trustee as collateral) were
distributed to PMC Capital. Pursuant to an agreement between PMC
Capital and PMC Trust 1996-A, PMC Trust 1996-A waived any rights it
had under the partnership agreement to receive any portion of such
distribution.
NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimates of fair value as required by Statement of Financial
Accounting Standards ("SFAS") No. 107 differ from the value of the
financial assets and liabilities determined by the General Partner
primarily as a result of the effects of discounting future cash
flows. Considerable judgement is required to interpret market data
and develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Partnership could realize in a current market exchange or the amount
that ultimately will be realized by the Partnership upon maturity or
disposition.
The estimated fair values of the Partnership's financial instruments
pursuant to SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
1996
----------------------
Estimated
Carrying Fair
Amount Value
----------------------
(In thousands)
<S> <C> <C>
Assets:
Loans receivable, net ...... $41,805 $44,115
Restricted investments ..... 5,444 5,444
Liabilities:
Notes payable .............. 40,183 39,770
</TABLE>
Loans receivable, net: The estimated fair value for all fixed rate
loans is estimated by discounting the estimated cash flows using the
current rate at which similar loans would be made to borrowers with
similar credit ratings and maturities. The impact of delinquent
loans on the estimation of the fair values described above is not
considered to have a material effect and accordingly, delinquent
loans have been disregarded in the valuation methodologies employed.
F-42
<PAGE> 108
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
Restricted investments : The carrying amount is a reasonable
estimation of fair value.
Notes payable: The estimated fair value is based on present value
calculation using prices of the same or similar instruments after
considering risk, current interest rates and remaining maturities.
NOTE 7. RELATED PARTY TRANSACTIONS:
At December 31, 1996, the balance in due to affiliates of $83,000
was a result of payments on loans receivable of affiliates deposited
directly by the borrower into the Partnership's operating bank
account. The balance in due from affiliates of $826,000 was a result
of payments on the Partnership's loans receivable deposited directly
by the borrower into an affiliate's operating bank account. These
balances were transferred to the appropriate company subsequent to
year end.
F-43
<PAGE> 109
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) The listing of the financial statements and notes thereto in the Index
to Consolidated Financial Statements in the Registration Statement attached
hereto is incorporated herein by reference.
(2) Exhibits.
Exhibit Description
------- -----------
a. Charter documents:
a.1 Articles of Incorporation, as amended (previously
filed as Exhibit 4(b)(1) to the Registrant's
Registration Statement on Form N-2 (Registration No.
33-2535) (the "Registration Statement"), dated
November 29, 1991, and incorporated herein by
reference).
b. Bylaws:
b.1 Bylaws, as amended (previously filed as Exhibit 2
to Amendment No. 7 to the Registration Statement,
dated April 27, 1989, and incorporated herein by
reference).
c. Not applicable.
d. Certificate of Common Stock, par value $.01 per share
(previously filed as Exhibit 4 to Amendment No. 1 to the
Registration Statement, dated November 10, 1983, and
incorporated herein by reference).
f. Long term debt instruments:
f.1 Debenture dated September 24, 1996 for
$2,490,000 loan with SBA (previously filed
as Exhibit 4.2 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1996
and incorporated herein by reference).
f.2 Debenture dated February 4, 1987 for $2,480,000
loan with SBA (previously filed as an exhibit to
Amendment No. 6 to the Registration Statement,
dated April 27, 1988, and incorporated herein by
reference).
C-1
<PAGE> 110
f.3 Debenture dated February 17, 1988 for
$1,500,000 loan with SBA (previously filed
as Exhibit 4(b)(2) to Amendment No. 7 to the
Registration Statement, dated April 27,
1989, and incorporated herein by reference).
f.4 Debenture dated June 27, 1990 for $2,000,000
loan with SBA (previously filed as Exhibit
4(b)(5)(n) to Amendment No. 9 to the
Registration Statement, dated April 29,
1991, and incorporated herein by reference).
f.5 Debenture dated September 26, 1990 for
$2,810,000 loan with SBA (previously filed
as Exhibit 4(b)(5)(o) to Amendment 9 to the
Registration Statement, dated April 29,
1991, and incorporated herein by reference).
f.6 Debenture dated September 26, 1990 for
$1,500,000 loan with SBA (previously filed
as Exhibit 4(b)(5)(p) to Amendment 9 to the
Registration Statement, dated April 29,
1991, and incorporated herein by reference).
f.7 Debenture dated March 29, 1990 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(q) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.8 Debenture dated September 27, 1989 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(r) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.9 Debenture dated September 27, 1989 for
$1,500,000 loan with SBA (previously filed
as Exhibit 5(s) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.10 Debenture dated January 2, 1990 for
$3,000,000 loan with SBA (previously filed
as Exhibit 5(t) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.11 Debenture dated August 18, 1989 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(u) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
C-2
<PAGE> 111
f.12 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.13 to the Registrant's Form
10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
f.13 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.14 to the Registrant's Form
10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
f.14 Senior Note dated July 19, 1993 for
$6,000,000 with Columbine Life Insurance
Company (previously filed as Exhibit 4.15 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.15 Senior Note dated July 19, 1993 for
$9,000,000 with Life Insurance Company of
Georgia (previously filed as Exhibit 4.16 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.16 Senior Note dated July 19, 1993 for
$5,000,000 with SouthLand Life Insurance
Company (previously filed as Exhibit 4.17 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.17 Senior Note dated December 15, 1993 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.18 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated
herein by reference).
f.18 Senior Note dated December 15, 1993 for
$3,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.19 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.19 Debenture dated March 29, 1995 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.20 to the Registrant's Form
10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.20 Debenture dated June 28, 1995 for $5,000,000
loan with SBA (previously filed as Exhibit
4.21 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
C-3
<PAGE> 112
f.21 Debenture dated September 27, 1995 for
$7,000,000 loan with SBA (previously filed
as Exhibit 4.22 to the Registrant's Form
10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.22 Debenture dated September 29, 1987 for
$800,000 loan with SBA (previously filed as
Exhibit 4.23 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.23 Debenture dated December 20, 1989 for
$650,000 loan with SBA (previously filed as
Exhibit 4.24 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.24 Debenture dated June 27, 1990 for $300,000
loan with SBA (previously filed as Exhibit
4.25 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
f.25 Debenture dated December 6, 1992 for
$510,000 loan with SBA (previously filed as
Exhibit 4.26 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.26 Senior Note Dated April 19, 1995 for
$5,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.27 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.27 Senior Note Dated April 19, 1995 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.28 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.28 Senior Note Dated April 19, 1995 for
$2,000,000 with Indiana Insurance Company
(previously filed as Exhibit 4.29 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.29 Senior Note Dated April 19, 1995 for
$1,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.30 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
C-4
<PAGE> 113
f.30 Debenture dated June 27, 1990 for $1,030,000
with SBA (previously filed as Exhibit 4.31
to the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and
incorporated herein by reference).
f.31 Master Promissory Note for $15,000,000 with
Bank One, Texas N.A. (previously filed as
Exhibit 10.7 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1996
and incorporate herein by reference).
g. Not applicable.
h. Not applicable.
i. Not applicable.
j. Not applicable.
k. Material Contracts
k.1 Employment contract between the Registrant
and Lance B. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.1 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.2 Employment contract between the Registrant
and Andrew S. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.2 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.3 Employment contract between the Registrant
and Fredric M. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.3 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.4 Employment contract between the Registrant
and Jan F. Salit dated June 30, 1996
(previously filed as Exhibit 10.4 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.5 Employment contract between the Registrant
and Barry N. Berlin dated June 30, 1996
(previously filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
C-5
<PAGE> 114
k.6 Employment contract between the Registrant
and Mary J. Brownmiller dated June 30, 1996
(previously filed as Exhibit 10.6 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.7 Servicing Agreement by and among Sun Trust,
PMC Capital Limited Partnership and PMC
Capital (previously filed as Exhibit 10.8 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and
incorporated herein by reference).
l. Opinion of counsel, as to the legality of the shares being
registered.*
m. Not applicable
n. Consents
n.1 Consent of Coopers & Lybrand L.L.P. as to
inclusion of their report.**
o. Not applicable.
p. Not applicable.
q. Not applicable.
r. Financial Data Schedule**
--------------------
* Previously filed as an exhibit to the Registrant's
Registration Statement on Form N-2 Registration No. 333-33151.
** Filed herewith
ITEM 25. MARKETING ARRANGEMENTS
None
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
Registration Fees $ 4,418
Stock Exchange Fees $ 1,000
Printing and Mailing $ 3,000
Accounting Fees $ 5,000
Legal Fees $ 10,000
Plan Administrator Fee $ 1,000
Miscellaneous $ 1,582
--------------
TOTAL $ 26,000
==============
</TABLE>
C-6
<PAGE> 115
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Registrant owns 100% of the issued and outstanding common
stock or is the sole owner (either directly or indirectly) of
the following: Western Financial Capital Corporation ("WFCC"),
a Florida corporation, First Western SBLC, Inc. ("First
Western"), a Florida corporation, PMC Investment Corporation
("PMIC"), PMC Funding Corp., a Florida corporation ("PMC
Funding"), PMC Advisers, Ltd., a Texas limited partnership
("PMC Advisers"), PMC Capital Corp. 1996-A, a Texas
corporation, PMC Trust 1996-A, a Delaware Trust, and PMC
Capital Limited Partnership, a Delaware Limited Partnership.
WFCC, First Western and PMIC are registered under the
Investment Company Act. Each of the investment company
subsidiaries is included in the consolidated financial
statements of PMC Capital included herein. PMC Advisers, PMC
Funding, PMC Capital Corp. 1996-A, PMC Trust 1996-A and PMC
Capital Limited Partnership are not consolidated because they
are not investment companies.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of May 27, 1997 there were approximately 1,794 holders of
record of the Registrant's common stock, par value $.01 per
share.
ITEM 29. INDEMNIFICATION
Section 607.0850 of the Florida Statutes and Article IX of the
Articles of Incorporation and Article VI of the Bylaws of the Registrant provide
for indemnification of the Registrant's directors and officers under certain
circumstances. Additionally, in 1992, each of the Company's directors entered
into an indemnification agreement with the Company which provides for such
director's indemnification under certain circumstances.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereby, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Not applicable.
C-7
<PAGE> 116
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Registrant's books and records are located at 17290
Preston Road, 3rd Floor, Dallas, Texas 75252, c/o Lance B.
Rosemore, President
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers
or sales are being made, a post-effective
amendment to this registration statement:
(i) To include any prospectus required
by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any
facts or events arising after the
effective date of the registration
statement (or the most recent
post-effective amendment thereof)
which, individually or in the
aggregate, represent a fundamental
change in the information set forth
in the registration statement; and
(iii) To include any material information
with respect to the plan of
distribution not previously
disclosed in the registration
statement or any material change to
such information in the registration
statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933,
each such post-effective amendment shall be
deemed to be a new registration statement
relating to the securities offered therein,
and the offering of such securities at that
time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the
securities being registered which remain
unsold at the termination of the offering.
B. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is,
C-8
<PAGE> 117
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
C-9
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-effective Amendment No. 1 to the Registration Statement on
Form N-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, and State of Texas, on the 19th day of
December, 1997.
PMC CAPITAL, INC.
By: /s/ Lance B. Rosemore
---------------------------------
Lance B. Rosemore, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-effective Amendment No. 1 to the Registration Statement on Form N-2 has
been signed below on December 19, 1997 by the following persons in the
capacities indicated.
/s/ Fredric M. Rosemore Chairman of the Board and Treasurer
- ------------------------
FREDRIC M. ROSEMORE
/s/ Lance B. Rosemore President, Chief Executive Officer,
- ------------------------ Secretary and Director
LANCE B. ROSEMORE
/s Andrew S. Rosemore Executive Vice President, Chief Operating
- ------------------------ Officer and Director
ANDREW S. ROSEMORE
/s/ Barry N. Berlin Chief Financial Officer and Principal
- ------------------------ Accounting Officer
BARRY N. BERLIN
/s/ Robert Diamond Director
- ------------------------
ROBERT DIAMOND
/s/ Lee Ruwitch Director
- ------------------------
LEE RUWITCH
C-10
<PAGE> 119
/s/ Martha R. Greenberg Director
- ------------------------
MARTHA R. GREENBERG
/s/ Barry A. Imber Director
- ------------------------
BARRY A. IMBER
/s/ Irvin M. Borish Director
- ------------------------
IRVIN M. BORISH
/s/ Thomas Hamill Director
- ------------------------
THOMAS HAMILL
C-11
<PAGE> 120
EXHIBIT INDEX
Exhibit Description Page No.
------------------- --------
a. Charter documents:
a.1 Articles of Incorporation, as amended (previously
filed as Exhibit 4(b)(1) to the Registrant's
Registration Statement on Form N-2 (Registration
No. 33-2535) (the "Registration Statement"), dated
November 29, 1991, and incorporated herein by
reference).
b. Bylaws:
b.1 Bylaws, as amended (previously filed as Exhibit 2
to Amendment No. 7 to the Registration Statement,
dated April 27, 1989, and incorporated herein by
reference).
c. Not applicable.
d. Certificate of Common Stock, par value $.01 per share
(previously filed as Exhibit 4 to Amendment No. 1 to the
Registration Statement, dated November 10, 1983, and
incorporated herein by reference).
f. Long term debt instruments:
f.1 Debenture dated September 24, 1996 for $2,490,000
loan with SBA (previously filed as Exhibit 4.2 to
the Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated herein
by reference).
f.2 Debenture dated February 4, 1987 for $2,480,000
loan with SBA (previously filed as an exhibit to
Amendment No. 6 to the Registration Statement,
dated April 27, 1988, and incorporated herein by
reference).
f.3 Debenture dated February 17, 1988 for $1,500,000
loan with SBA (previously filed as Exhibit 4(b)(2)
E-1
<PAGE> 121
Exhibit Description
-------------------
to Amendment No. 7 to the Registration
Statement, dated April 27, 1989, and
incorporated herein by reference).
f.4 Debenture dated June 27, 1990 for $2,000,000
loan with SBA (previously filed as Exhibit
4(b)(5)(n) to Amendment No. 9 to the
Registration Statement, dated April 29,
1991, and incorporated herein by reference).
f.5 Debenture dated September 26, 1990 for
$2,810,000 loan with SBA (previously filed
as Exhibit 4(b)(5)(o) to Amendment 9 to the
Registration Statement, dated April 29,
1991, and incorporated herein by reference).
f.6 Debenture dated September 26, 1990 for
$1,500,000 loan with SBA (previously filed
as Exhibit 4(b)(5)(p) to Amendment 9 to the
Registration Statement, dated April 29,
1991, and incorporated herein by reference).
f.7 Debenture dated March 29, 1990 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(q) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.8 Debenture dated September 27, 1989 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(r) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.9 Debenture dated September 27, 1989 for
$1,500,000 loan with SBA (previously filed
as Exhibit 5(s) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.10 Debenture dated January 2, 1990 fo
$3,000,000 loan with SBA (previously filed
as Exhibit 5(t) to Amendment No. 3 to the
Registration Statement,
E-2
<PAGE> 122
Exhibit Description
-------------------
dated August 18, 1992, and incorporated
herein by reference).
f.11 Debenture dated August 18, 1989 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(u) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.12 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.13 to the Registrant's Form
10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
f.13 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.14 to the Registrant's Form
10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
f.14 Senior Note dated July 19, 1993 for
$6,000,000 with Columbine Life Insurance
Company (previously filed as Exhibit 4.15 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.15 Senior Note dated July 19, 1993 for
$9,000,000 with Life Insurance Company of
Georgia (previously filed as Exhibit 4.16 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.16 Senior Note dated July 19, 1993 for
$5,000,000 with SouthLand Life Insurance
Company (previously filed as Exhibit 4.17 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.17 Senior Note dated December 15, 1993 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.18 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated
herein by reference).
E-3
<PAGE> 123
Exhibit Description
-------------------
f.18 Senior Note dated December 15, 1993 for
$3,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.19 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.19 Debenture dated March 29, 1995 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.20 to the Registrant's Form
10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.20 Debenture dated June 28, 1995 for $5,000,000
loan with SBA (previously filed as Exhibit
4.21 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
f.21 Debenture dated September 27, 1995 for
$7,000,000 loan with SBA (previously filed
as Exhibit 4.22 to the Registrant's Form
10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.22 Debenture dated September 29, 1987 for
$800,000 loan with SBA (previously filed as
Exhibit 4.23 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.23 Debenture dated December 20, 1989 for
$650,000 loan with SBA (previously filed as
Exhibit 4.24 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.24 Debenture dated June 27, 1990 for $300,000
loan with SBA (previously filed as Exhibit
4.25 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
E-4
<PAGE> 124
Exhibit Description
-------------------
f.25 Debenture dated December 6, 1992 for
$510,000 loan with SBA (previously filed as
Exhibit 4.26 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.26 Senior Note Dated April 19, 1995 for
$5,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.27 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.27 Senior Note Dated April 19, 1995 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.28 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.28 Senior Note Dated April 19, 1995 for
$2,000,000 with Indiana Insurance Company
(previously filed as Exhibit 4.29 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.29 Senior Note Dated April 19, 1995 for
$1,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.30 to the Registrant's Form 10-K
for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.30 Debenture dated June 27, 1990 for $1,030,000
with SBA (previously filed as Exhibit 4.31
to the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and
incorporated herein by reference)
f.31 Master Promissory Note for $15,000,000 with
Bank One, Texas N.A. (previously filed as
Exhibit 10.7 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1996
and incorporated herein byreference.)
g. Not applicable.
E-5
<PAGE> 125
Exhibit Description
-------------------
h. Not applicable.
i. Not applicable.
j. Not applicable.
k. Material Contracts
k.1 Employment contract between the Registrant
and Lance B. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.1 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.2 Employment contract between the Registrant
and Andrew S. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.2 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.3 Employment contract between the Registrant
and Fredric M. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.3 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.4 Employment contract between the Registrant
and Jan F. Salit dated June 30, 1996
(previously filed as Exhibit 10.4 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.5 Employment contract between the Registrant
and Barry N. Berlin dated June 30, 1996
(previously filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.6 Employment contract between the Registrant
and Mary J. Brownmiller dated June 30, 1996
(previously filed as Exhibit 10.6 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
E-6
<PAGE> 126
Exhibit Description
-------------------
k.7 Servicing Agreement by and among Sun Trust,
PMC Capital Limited Partnership and PMC
Capital (previously filed as Exhibit 10.8 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and
incorporated herein by reference).
l. Opinion of counsel, as to the legality of the shares being
registered.*
m. Not applicable
n. Consents
23.1 Consent of Coopers & Lybrand L.L.P. as to
inclusion of their report.**
o. Not applicable.
p. Not applicable.
q. Not applicable.
27. Financial Data Schedule**
--------------------
* Previously filed as an exhibit to the Registrant's
Registration Statement on Form N-2 Registration No. 333-33151.
** Filed herewith
E-7
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post Effective Amendment No. 1 in this
registration statement on Form N-2 (File No. 333-3315) of our reports dated
March 5, 1997 on our audits of the consolidated financial statements,
consolidated schedule of investments and financial highlights of PMC Capital,
Inc. and subsidiaries and of the financial statements of PMC Capital Limited
Partnership. We also consent to the reference to our firm under the caption
"Experts".
COOPERS & LYBRAND L.L.P.
Dallas, Texas
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 FORM 10-K OF PMC CAPITAL INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 340
<SECURITIES> 49,677
<RECEIVABLES> 96,673<F1>
<ALLOWANCES> (435)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 482
<DEPRECIATION> (301)
<TOTAL-ASSETS> 164,964<F2>
<CURRENT-LIABILITIES> 12,093<F3>
<BONDS> 79,570
4,000<F4>
3,000<F4>
<COMMON> 62,237
<OTHER-SE> 666
<TOTAL-LIABILITY-AND-EQUITY> 164,964<F5>
<SALES> 0
<TOTAL-REVENUES> 23,821<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,746
<LOSS-PROVISION> 147
<INTEREST-EXPENSE> 5,708
<INCOME-PRETAX> 13,220
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,220
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
<FN>
<F1>INCLUDES CURRENT AND LONG TERM PORTION OF ALL LOANS RECEIVABLE - BEFORE
RESERVE, INTEREST RECEIVABLE ON LOANS AND RECEIVABLE FOR LOANS SOLD. DOES NOT
INCLUDE RECEIVABLE FROM AFFILIATE.
<F2>INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE
(i) EXCESS SERVICING ASSET $ 6,429
(ii) RESTRICTED INVESTMENTS 1,229
(iii) REAL PROPERTY OWNED 303
(iv) DUE FROM AFFILIATES 1,097
(v) DEFERRED CHARGES, DEPOSITS AND
OTHER ASSETS, NET 885
(vi) INVESTMENT IN SUBSIDIARIES 8,585
---------
$ 18,528
=========
<F3>INCLUDES THE FOLLOWING:
(i) ACCRUED INTEREST PAYABLE $ 1,442
(ii) BORROWER ADVANCES 1,795
(iii) DIVIDENDS PAYABLE 3,635
(iv) ACCOUNTS PAYABLE 4,145
(v) DUE TO UNCONSOLIDATED SUBSIDIARIES 1,076
-------
$12,093
=======
<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 $ 419
(ii) OTHER LIABILITIES 1,446
(iii) ALLOWANCE FOR CREDIT
LOSSES ON LOANS SOLD 1,533
------
$3,398
======
<F6>RESERVES CONSIST PRIMARILY OF INTEREST AND OTHER YIELD ON INVESTMENTS.
</FN>
</TABLE>
