<PAGE> 1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -------------
Commission File Number 811-3780
----------------
PMC CAPITAL, INC.
-----------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2338439
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
17290 Preston Road, 3rd Floor, Dallas, TX 75252 (972) 349-3200
- ----------------------------------------------- -----------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO
As of August 1, 1997, Registrant had outstanding 11,401,436 shares of Common
Stock, par value $.01 per share.
<PAGE> 2
PMC CAPITAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1997 (Unaudited) and December 31, 1996 .... 2
Consolidated Statements of Income (Unaudited) -
Six Months Ended June 30, 1997 and 1996 ............. 3
Three Months Ended June 30, 1997 and 1996 ........... 4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 1997 and 1996 ............. 5
Notes to Consolidated Financial Statements
(Unaudited) ......................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 12
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders .. 22
Item 6. Exhibits and Reports on Form 8-K ..................... 22
</TABLE>
<PAGE> 3
PART I
Financial Information
ITEM 1. Financial Statements
1
<PAGE> 4
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
( In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ----------
(Unaudited)
ASSETS
<S> <C> <C>
Investments at value:
Loans receivable, net ....................................................... $ 113,992 $ 93,354
Cash equivalents ............................................................ 24,268 49,677
Investment in unconsolidated subsidiaries ................................... 8,229 8,585
Interest-only strip receivable .............................................. 3,058 3,143
Restricted investments ...................................................... 1,046 1,229
Real property owned ......................................................... 305 303
--------- ---------
Total investments ............................................................. 150,898 156,291
--------- ---------
Other assets:
Receivable for loans sold ................................................... 3,053 2,508
Due from unconsolidated subsidiaries ........................................ 1,746 1,097
Servicing asset ............................................................. 1,748 1,753
Deferred charges, deposits and other assets ................................. 1,053 885
Accrued interest receivable ................................................. 407 376
Cash ........................................................................ 370 340
Property and equipment, net ................................................. 182 181
--------- ---------
Total other assets ............................................................ 8,559 7,140
--------- ---------
Total assets .................................................................. $ 159,457 $ 163,431
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
SBA debentures payable ...................................................... $ 42,090 $ 44,570
Notes payable ............................................................... 35,000 35,000
Accounts payable ............................................................ 1,514 4,145
Dividends payable ........................................................... 3,588 3,635
Borrower advances ........................................................... 1,303 1,795
Accrued interest payable .................................................... 1,343 1,442
Due to unconsolidated subsidiaries .......................................... 584 1,076
Other liabilities ........................................................... 851 1,446
Deferred fee revenue ........................................................ 615 419
--------- ---------
Total liabilities ............................................................. 86,888 93,528
--------- ---------
Cumulative preferred stock of subsidiary ...................................... 7,000 7,000
--------- ---------
Shareholders' equity:
Common stock, authorized 30,000,000 shares of $.01 par value,
11,384,000 and 11,162,000 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively ................... 114 112
Additional paid-in capital .................................................. 65,085 62,125
Undistributed net operating income .......................................... 753 1,101
Net unrealized depreciation on investments .................................. (383) (435)
--------- ---------
65,569 62,903
--------- ---------
Total liabilities and shareholders' equity .................................... $ 159,457 $ 163,431
========= =========
Net asset value per common share .............................................. $ 5.76 $ 5.64
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 5
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------
1997 1996
-------- ---------
(Unaudited)
<S> <C> <C>
Investment income:
Interest ............................................. $ 8,155 $ 9,106
Premium income ....................................... 1,229 998
Other investment income, net ......................... 255 204
-------- --------
Total investment income ................................ 9,639 10,308
Equity in income (loss) of unconsolidated subsidiaries . 1,329 10
Other income, net ...................................... 1,089 1,066
-------- --------
Total income ........................................... 12,057 11,384
-------- --------
Expenses:
Interest ............................................. 2,744 2,844
Salaries and related benefits ........................ 1,657 1,460
General and administrative ........................... 443 353
Profit sharing plan .................................. 78 102
Rent ................................................. 122 100
Legal and accounting ................................. 114 97
Small Business Administration fees ................... 53 40
Directors and shareholders expense ................... 34 30
-------- --------
Total expenses ......................................... 5,245 5,026
-------- --------
Net operating income .................................. 6,812 6,358
-------- --------
Realized and unrealized gain (loss)
on investments:
Loans written-off .................................. (71) -
Recoveries on loans written-off .................... - 29
Change in unrealized appreciation
(depreciation) on investments .................... 52 (47)
-------- --------
Total realized and unrealized gain (loss) on investments (19) (18)
-------- --------
Net operating income and realized and unrealized
gain (loss) on investments ........................... $ 6,793 $ 6,340
======== ========
Preferred dividends .................................... $ 125 $ 125
======== ========
Weighted average common shares outstanding ............. 11,291 10,938
======== ========
Earnings per common share .............................. $ 0.59 $ 0.57
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------------
1997 1996
-------- ---------
(Unaudited)
<S> <C> <C>
Investment income:
Interest ............................................. $ 4,166 $ 4,704
Premium income ....................................... 587 507
Other investment income, net ......................... 170 137
-------- --------
Total investment income ................................ 4,923 5,348
Equity in income (loss) of unconsolidated subsidiaries . 649 3
Other income, net ...................................... 531 553
-------- --------
Total income ........................................... 6,103 5,904
-------- --------
Expenses:
Interest ............................................. 1,369 1,420
Salaries and related benefits ........................ 835 768
General and administrative ........................... 222 178
Profit sharing plan .................................. 37 52
Rent ................................................. 63 54
Legal and accounting ................................. 42 47
Small Business Administration fees ................... 22 18
Directors and shareholders expense ................... 25 21
-------- --------
Total expenses ......................................... 2,615 2,558
-------- --------
Net operating income .................................. 3,488 3,346
-------- --------
Realized and unrealized gain (loss)
on investments:
Loans written-off .................................. (45) -
Recoveries on loans written-off .................... - -
Change in unrealized appreciation
(depreciation) on investments .................... 83 (1)
-------- --------
Total realized and unrealized gain (loss) on investments 38 (1)
-------- --------
Net operating income and realized and unrealized
gain (loss) on investments ........................... $ 3,526 $ 3,345
======== ========
Preferred dividends .................................... $ 63 $ 63
======== ========
Weighted average common shares outstanding ............. 11,345 10,957
======== ========
Earnings per common share .............................. $ 0.31 $ 0.30
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 7
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------
1997 1996
-------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net operating income and realized and unrealized gain (loss) on investments .. $ 6,793 $ 6,340
Adjustments to reconcile net operating income and realized and unrealized
gain (loss) on investments to net cash provided by operating activities:
Loans funded, held for sale ............................................ (12,546) (12,183)
Proceeds from sale of guaranteed loans ................................. 14,532 9,290
Change in unrealized depreciation on investments and loans written-off . 19 47
Unrealized premium income, net ......................................... (145) (286)
Depreciation and amortization .......................................... 601 600
Accretion of loan discount and deferred fees ........................... (657) (458)
Deferred fees collected ................................................ 501 737
Gain on sale of assets ................................................. (4) -
Equity in income of unconsolidated subsidiaries, net ................... (1,329) (10)
Net change in operating assets and liabilities:
Accrued interest receivable ........................................ (31) (181)
Other assets ....................................................... (234) 237
Accrued interest payable ........................................... (99) 40
Borrower advances .................................................. (492) 859
Other liabilities .................................................. (3,226) (754)
-------- --------
Net cash provided by operating activities ...................................... 3,683 4,278
-------- --------
Cash flows from investing activities:
Loans funded ................................................................. (29,734) (28,931)
Principal collected and other adjustments .................................... 6,067 9,501
Proceeds from interest-only strip receivable ................................. 486 -
Purchase of furniture and fixtures and other assets .......................... (56) (31)
Proceeds from sale of assets ................................................. 102 -
Proceeds from partnership distributions ...................................... 1,685 -
Investment in unconsolidated subsidiary ...................................... - (50)
Release of (investment in) restricted cash ................................... 183 179
-------- --------
Net cash used in investing activities .......................................... (21,267) (19,332)
-------- --------
ash flows from financing activities:
Proceeds from issuance of common stock ....................................... 2,491 647
Proceeds from issuance of SBA debentures ..................................... - 940
Payment of dividends on common stock ......................................... (6,542) (6,053)
Payment of dividends on preferred stock ...................................... (123) (125)
Payment of SBA debentures .................................................... (2,480) -
Advances from (to) unconsolidated subsidiaries, net .......................... (1,141) 479
-------- --------
Net cash used in financing activities .......................................... (7,795) (4,112)
-------- --------
Net decrease in cash and cash equivalents ...................................... (25,379) (19,166)
Cash and cash equivalents, beginning of period ................................. 50,017 31,574
-------- --------
Cash and cash equivalents, end of period ....................................... $ 24,638 $ 12,408
======== ========
Supplemental disclosure:
Interest paid ............................................................... $ 2,843 $ 2,804
======== ========
Dividends reinvested ........................................................ $ 471 $ 433
======== ========
Loans receivable acquired in exchange for SBA debentures .................... $ - $ 158
======== ========
Reclassification from loans receivable to real property owned ............... $ 102 $ -
======== ========
Loans to facilitate sale of real property owned ............................. $ - $ 103
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 8
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet of PMC Capital, Inc.
("PMC" or "PMC Capital") and its wholly-owned regulated investment company
subsidiaries (collectively, the "Company") as of June 30, 1997, the
consolidated statements of income for the three and six months ended June 30,
1997 and 1996, and the consolidated statements of cash flows for the six months
ended June 30, 1997 and 1996 have not been audited by independent accountants.
In the opinion of the Company's management, the financial statements reflect
all adjustments necessary to present fairly the financial position at June 30,
1997, the results of operations for the three and six months ended June 30,
1997 and 1996 and the cash flows for the six months ended June 30, 1997 and
1996. These adjustments are of a normal recurring nature.
Certain notes and other information have been omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1996 Annual
Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
The results for the six months ended June 30, 1997 are not necessarily
indicative of future financial results.
NOTE 2. RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to
current year presentation.
NOTE 3. BUSINESS:
PMC Capital is a diversified, closed-end management investment company
that has elected to operate as a business development company under the
Investment Company Act of 1940 (the "1940 Act"). PMC engages in the business of
originating loans to small businesses either directly or through its three
principal subsidiaries: First Western SBLC Inc. ("First Western"), PMC
Investment Corporation ("PMIC") and Western Financial Capital Corporation
("Western Financial"). First Western, PMIC and Western Financial are registered
under the 1940 Act as diversified, closed-end management investment companies.
In addition, PMC is directly or indirectly either the sole shareholder or
partner of PMC Advisers, Ltd. ("PMC Advisers"), PMC Funding Corp. ("PMC
Funding"), PMC Capital Corp. 1996-A ("PMC Capital Corp."), PMC Trust 1996-A and
PMC Capital Limited Partnership (the "Partnership"). PMC has elected to be
taxed as a regulated investment company and consequently distributes
substantially all of its taxable income as dividends to shareholders.
6
<PAGE> 9
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BASIS FOR CONSOLIDATION:
The consolidated financial statements include the accounts of PMC and
its wholly-owned regulated investment company subsidiaries. Intercompany
transactions have been eliminated in consolidation.
The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC
Trust 1996-A and the Partnership are accounted for by the equity method of
accounting in conformity with Federal securities laws.
Consolidated Subsidiaries
First Western is a small business lending company ("SBLC") that
originates variable-rate loans which are partially guaranteed by the Small
Business Administration ("SBA") pursuant to its Section 7(a) Program (the "7(a)
Program").
PMIC is a licensed specialized small business investment company
("SSBIC") under the Small Business Investment Act of 1958, as amended ("SBIA").
PMIC uses long-term funds provided by the SBA, together with its own capital,
to provide long-term, fixed-rate collateralized loans to eligible small
businesses owned by "disadvantaged" persons, as defined under the regulations
of the SBA. As an SSBIC, PMIC is eligible to obtain long-term, fixed-rate
funding from the SBA through the issuance of debentures (which are guaranteed
by the SBA and on which the interest rate was reduced through an SBA subsidy by
3% during the first five years). The SBA subsidy is no longer provided on new
issuances under the SSBIC program.
Western Financial is a licensed small business investment company
("SBIC") under the SBIA that provides fixed-rate loans to borrowers whether or
not they qualify as "disadvantaged." As an SBIC, Western Financial is eligible
to obtain long-term, fixed-rate funding from the SBA through the issuance of
debentures.
PMC originates loans to borrowers on a non-SBA supported basis using
similar criteria as that used for other loans that are funded under the SBA
programs utilized by the subsidiaries. These loans are made to borrowers who
exceed the eligibility requirements of the 7(a) Program or SBIC programs.
Unconsolidated Subsidiaries
PMC Advisers, was organized in July 1993 to be the investment advisor
for PMC Commercial Trust ("PMC Commercial"), a Texas real estate investment
trust and an affiliate of PMC Capital.
PMC Funding is a Florida corporation that holds assets on behalf of
the Company. PMC Capital is the sole shareholder of PMC Funding.
7
<PAGE> 10
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BASIS FOR CONSOLIDATION: (CONTINUED)
The Partnership was formed as a Delaware limited partnership in
November 1996 to act as a special purpose affiliate of the Company. The
Partnership was established to acquire loans from the Company and to issue
fixed-rate debt through a private placement.
PMC Capital Corp. is a Delaware corporation formed in November 1996 to
be the independent trustee of the general partner of the Partnership. PMC Trust
1996-A is a Delaware business trust formed in November 1996 to be the general
partner of the Partnership.
NOTE 5. IMPLEMENTATION OF SFAS 125:
Effective January 1, 1997, the Company prospectively adopted Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides for the accounting and reporting of transfers and servicing of
financial assets based on a financial-components approach.
The transfer of assets that qualifies for sale treatment under SFAS
No. 125 is generally accounted for by the seller by: (i) derecognizing all
assets sold, (ii) recognizing all assets obtained and liabilities incurred at
their relative fair value, and (iii) recognizing all assets retained at their
allocated previous carrying amount based on relative fair values. The Company
typically receives cash and retains the right to receive contractual servicing
fees and the right to receive future interest income on loans sold that exceed
the contractually specified servicing fee (the interest-only strip receivable)
in exchange for a portion of the loan, typically the guaranteed portion of an
SBA 7(a) loan. The difference between (i) the carrying value of the portion of
loans sold and (ii) the sum of (a) cash received, (b) the relative fair values
of the servicing rights and (c) the interest-only strip receivable retained,
constitutes the gain on sale.
SFAS No. 125 also requires that amounts carried previously as excess
servicing assets be reclassified between a servicing asset and an interest-only
strip receivable, as defined. Accordingly, the Company reclassified its excess
servicing asset (net of an allowance for credit losses on loans sold) of
$4,896,000 at December 31, 1996 to $1,753,000 of a servicing asset and
$3,143,000 of an interest-only strip receivable.
In accordance with SFAS No. 125, the servicing asset is amortized in
proportion to and over the period of estimated net servicing income and is
evaluated for impairment by stratifying the servicing assets by one or more of
the predominant risk characteristics of the underlying financial assets. The
interest-only strip receivable is accounted for as an investment in debt
securities classified as trading under SFAS No. 115. Accordingly, commencing
with the three months ended March 31, 1997 and for each quarter thereafter, the
Company measures the fair value of the interest-
8
<PAGE> 11
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. IMPLEMENTATION OF SFAS 125: (CONTINUED)
only strip receivable based upon the future anticipated cash flows discounted
to reflect the current market interest rates for investments of this type. Any
appreciation or depreciation of the interest-only strip receivable is reflected
on the accompanying consolidated statements of income as an unrealized gain
(loss) on investment. During the three and six months ended June 30, 1997,
there was no material appreciation or depreciation of the interest-only strip
receivable recognized.
The estimated net servicing income and the investment in the
interest-only strip receivable are based in part upon management's estimate of
prepayment speeds, including default rates. There can be no assurance of the
accuracy of these estimates. If the prepayment speeds occur at a faster rate
than anticipated, the amortization of the servicing asset will be accelerated,
the interest-only strip receivable will be repaid faster than originally
estimated and total income during the period of change and subsequent periods
would be reduced. If prepayments occur slower than anticipated, cash flows
would exceed estimated amounts and total income during the period of change and
subsequent periods would be enhanced. During the three and six months ended
June 30, 1997, as a result of increased prepayment speeds, the amount of
amortization of the servicing asset was increased.
NOTE 6. LONG-TERM DEBT:
During February 1997, the Company repaid a $2,480,000 SBA debenture at
its maturity.
NOTE 7. DIVIDENDS DECLARED:
During the three and six months ended June 30, 1997, the Company
declared dividends on its common stock in amounts of $0.31 and $0.615 per
share, respectively.
NOTE 8. PMC LIMITED PARTNERSHIP:
As described in Note 4, the accounts of the Partnership are accounted
for by the equity method of accounting in conformity with Federal securities
law. During the six months ended June 30, 1997, the Partnership had $2,641,000
in total revenues and net operating income of $1,351,000.
NOTE 9. CONDENSED COMBINED FINANCIAL STATEMENTS:
As described in Note 3, the consolidated financial statements include
the accounts of PMC and its wholly-owned regulated investment company
subsidiaries. The accounts of PMC Advisers, PMC Funding, the Partnership, PMC
Capital Corp. and PMC Trust 1996-A (the "Unconsolidated Entities") are
accounted for by the equity method of accounting in conformity with Federal
securities law. The following are the condensed combined balance sheets as of
June 30, 1997 and December 31, 1996 and the condensed combined statements of
income for the three and six months ended June 30, 1997 for the Company and the
Unconsolidated Entities.
9
<PAGE> 12
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS (In thousands)
Investments at value:
Loans receivable, net ................... $ 152,832 $ 135,159
Cash equivalents ........................ 25,612 49,816
Interest-only strip receivable .......... 3,058 3,143
Restricted investments and
real property own ................... 5,572 6,976
--------- ---------
108,074 195,094
Other assets ................................. 8,052 7,975
--------- ---------
Total assets ............................ $ 195,126 $ 203,069
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable .................. $ 42,090 $ 44,570
Notes payable ........................... 69,533 75,183
Other liabilities ....................... 10,934 13,413
--------- ---------
122,557 133,166
--------- ---------
Cumulative preferred stock
of subsidiary........................ 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock ............................ 114 112
Additional paid-in capital .............. 65,085 62,125
Undistributed net operating income ...... 753 1,101
Net unrealized depreciation
on investments ...................... (383) (435)
--------- ---------
65,569 62,903
--------- ---------
Total liabilities and
shareholders' equity ................ $ 195,126 $ 203,069
========= =========
</TABLE>
10
<PAGE> 13
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1997
--------- ---------
(Unaudited, in thousands)
<S> <C> <C>
INCOME:
Investment income ........................................... $ 12,280 $ 6,207
Other income, net ........................................... 1,130 539
-------- --------
Total income ............................................. 13,410 6,746
-------- --------
EXPENSES:
Interest .................................................... 4,007 1,988
Salaries and related benefits ............................... 1,657 835
General and administrative expenses ......................... 533 246
Other ....................................................... 401 189
-------- --------
Total expense ............................................ 6,598 3,258
-------- --------
Net operating income ....................................... 6,812 3,488
Realized and unrealized gain (loss) on investments ......... (19) 38
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS .............................. $ 6,793 $ 3,526
======== ========
</TABLE>
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the
computation, presentation, and disclosure requirements for earnings per share.
SFAS No. 128 is designed to improve the earnings per share information provided
in financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements and increasing the comparability of PMC 's
earnings per share data to that of other similar entities. SFAS No. 128 is
effective for financial statements for periods ending after December 15, 1997.
In the opinion of management, the effect of this pronouncement on earnings per
share will not be significant.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129 requires certain disclosure
about an entity's capital structure. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. In the opinion of
management, the effect of this pronouncement on the Company's financial
position or results of operations will not be significant.
11
<PAGE> 14
PART I
Financial Information
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
GENERAL
The Company's operations include originating and servicing commercial
loans for its own account as well as operating as an investment advisor who
evaluates and services loans under a fee arrangement for PMC Commercial, an
affiliate of the Company. In addition, the Company sells the guaranteed portion
of its loans originated under the SBA 7(a) Loan Program. In November 1996, the
Company securitized a portion of its fixed-rate portfolio as part of a
structured financing (the "Structured Financing") to provide an additional
source of working capital. The Company retains servicing and residual interests
in all loans sold.
The Company's revenue sources include the following:
o Interest earned on loans originated and retained including the
effect of commitment fees collected at the inception of the loan
(generally 3% on fixed rate loans).
o Advisory fee income from the management of PMC Commercial.
o Equity in the income of non-investment company subsidiaries.
o Premiums recognized from the sale of the government guaranteed
portion of 7(a) Program loans.
o Interest earned on temporary (short-term) investments.
o Other fees, including: late fees, prepayment fees, construction
monitoring and site visit fees.
The following table sets forth information relating to the aggregate
gross loans funded by the Company:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS YEARS
ENDED ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31,
----------------- ---------------- --------------
1997 1996 1997 1996 1996 1995
---- ---- ---- ---- ---- ----
COMPANY
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PMIC ................. $ 10.2 $ 13.8 $ 5.2 $ 6.4 $ 19.3 $ 21.2
Western Financial..... 3.3 3.8 2.6 1.4 7.5 8.0
First Western ........ 17.9 16.3 7.6 9.2 29.2 40.6
PMC Capital .......... 10.8 7.2 6.3 3.7 14.2 7.7
------- ------- ------- ------- ------- -------
Total ............ $ 42.2 $ 41.1 $ 21.7 $ 20.7 $ 70.2 $ 77.5
======= ======= ======= ======= ======= =======
</TABLE>
12
<PAGE> 15
In 1993, the Company formed an investment advisor which pursuant to
the terms of an investment management agreement acts as the investment advisor
for PMC Commercial. PMC Advisers has been the investment advisor for PMC
Commercial since the completion of PMC Commercial's public offering in December
1993. During the three and six months ended June 30, 1997, PMC Advisers earned
management fees of approximately $405,000 and $791,000, respectively, from PMC
Commercial.
The Company also earns income through its equity ownership in its
non-investment company subsidiaries, primarily the Partnership. In November
1996, as part of the Structured Financing, the Partnership completed the
private placement of approximately $40.7 million of notes which were issued at
par with an annual interest rate of 6.725% (the "Notes"). The Notes were
originally collateralized by approximately $45.7 million of loans contributed
to the Partnership by PMC Capital. The net proceeds of the issuance of the
Notes, approximately $37.5 million, were distributed to PMC Capital and are
being utilized to originate additional loans. The differential between the
interest received on the collateralized loans (originally $45.7 million of
loans at an average yield of 11.5%) and the interest paid on the Notes
(originally $40.7 million at an interest rate of 6.725%), less any loan losses
and amortization of transaction fees, contributes to the profit of PMC Capital.
The Partnership's net income was $328,000 from November 12, 1996 (inception) to
December 31, 1996 and $659,000 and $1,351,000 during the three and six months
ended June 30, 1997, respectively.
In management's opinion, there has been an increasing amount of
competitive lending activity at advance rates and interest rates which are
considerably more aggressive than those offered by the Company. In order to
maintain a quality portfolio, the Company will continue to adhere to its
historical underwriting criteria, and as a result, certain loan origination
opportunities will not be funded by the Company. The Company has instituted the
Prime Lending Program, as defined below, to attract those established seasoned
small business lending opportunities which merit lower interest rates. The
yield on these loans (assuming no change in the prime rate) will be lower than
the Company has historically experienced.
Due to the reduction of loan origination opportunities experienced by
First Western over the past several years, the Company has actively sought to
increase other sources of revenues and thereby reduce its reliance on the
income generated by First Western. During this period the Company's other
lending activities have increased and the Company has established other revenue
sources such as investment advisory income.
Late in the fourth quarter of 1996, the Company began marketing a new
variable rate lending program (the "Prime Lending Program") which is separate
from the 7(a) Program of First Western, the Company's other variable rate
lending program. The Prime Lending Program is designed to refinance existing
real estate collateralized commercial loans with borrowers who have proven
timely payment histories and loan-to-value and debt coverage ratios within the
Company's underwriting criteria. It is anticipated that many of the loans
refinanced under the Prime Lending Program will originally have been 7(a)
Program loans and that some of these loan originations may refinance loans
currently in First Western's portfolio. These loans have variable interest
rates based on the Prime Rate (as defined below).
13
<PAGE> 16
Additionally, the Company was approved in March 1997 as a licensee
under the Rural Economic Development Business and Industry Loan Program
sponsored by the U.S. Department of Agriculture (the "B & I Loan Program").
Under the B & I Loan Program, loans are to be originated in rural areas
(generally areas with a population of less than 50,000) and are partially
guaranteed by the U.S. Government. The U.S. Government guarantees repayment of
an amount in general up to 80% of the principal amount of loans originated
under the B & I Loan Program. To date, the Company has not funded any loans
under the B & I Loan Program.
Substantially all of the First Western loans are variable rate which
reset quarterly based on a spread above the prime rate of interest as stated in
The Wall Street Journal on the first day of the applicable period ("Prime
Rate"). The spread above the Prime Rate charged by First Western ranges from
1.0% to 2.75%.
Prime rates utilized by First Western were as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994
------ ------ ----- -----
<S> <C> <C> <C> <C>
First Quarter 8.25% 8.50% 8.50% 6.00%
Second Quarter 8.50% 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 the second quarter of 1995
and the increased availability of either fixed rate loans or variable rate
loans with interest rates less than that on the outstanding portfolio of First
Western, prepayments increased during the latter half of 1996 and have
continued during 1997.
The Company receives other investment income from various sources
including late fees, prepayment fees, construction monitoring and site visit
fees. The amount earned will vary based on volume funded, the mix of loans
(construction versus non-construction), the rate on loans originated (whether
fixed or floating) as well as the general level of interest rates.
Expenses primarily consist of interest expense and overhead. Expenses
were 44% of total income during both the six months ended June 30, 1997 and the
six months ended June 30, 1996.
Interest expense is primarily derived from: (i) $35.0 million of
unsecured notes with a weighted average interest rate of 7.3% and weighted
average remaining maturity of 4.3 years as of June 30, 1997, and (ii) $42.1
million of debentures due to the SBA as a result of borrowings made by the
Company's SBIC subsidiaries, with a weighted average interest rate of 6.9% and
weighted average remaining maturity of 5.2 years as of June 30, 1997. At June
30, 1997, the Company had no borrowings outstanding under its revolving credit
facility, and had availability of $15 million. Any borrowings thereunder would
bear interest at a rate based on either the prime rate or LIBOR.
Company overhead is comprised of salaries and related benefits,
general and administrative, profit sharing plan, rent, legal and accounting,
SBA fees and directors and shareholders expense. The Company's operations are
centralized from its headquarters in Dallas, Texas. The Company
14
<PAGE> 17
presently has other marketing offices located in Hollywood, Florida, Atlanta,
Georgia and Phoenix, Arizona. The largest overhead expense is the salaries and
related benefits for the Company's officers and employees who provide the
management and portfolio functions including marketing, servicing, accounting
and portfolio analysis. Salaries and related benefits were 14% and 13% of total
income during the six months ended June 30, 1997 and June 30, 1996,
respectively. It is anticipated that overhead expenses will continue to
increase as the Company's portfolio under management increases.
General and administrative expenditures consist primarily of the Texas
franchise and other taxes, advertising and promotional expense, telephone
services, corporate printing costs and general office expenses. General and
administrative expenses as a percentage of total income were 4% and 3% during
the six months ended June 30, 1997 and 1996, respectively. These costs are
anticipated to increase in proportion to the growth of the Company's portfolio
under management. During each of the six month periods ended June 30, 1997 and
1996, the Company expensed $102,000 relating to the Texas franchise tax.
Other expenses incurred by the Company are profit sharing plan, rent,
legal and accounting, SBA fees and directors and shareholders expense
(collectively the "Other Administrative Costs"). The Other Administrative Costs
were 3% of total income for both the six months ended June 30, 1997 and 1996.
These costs are anticipated to increase in proportion to the increase in
salaries and general administrative expense as a result of the anticipated
growth of the Company's portfolio under management.
CERTAIN ACCOUNTING CONSIDERATIONS
Effective January 1, 1997, the Company adopted as required, SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides for the accounting and
reporting of transfers and servicing of financial assets based on a
financial-components approach. SFAS No. 125 is required to be adopted
prospectively.
The transfer of assets that qualifies for sale treatment under SFAS
No. 125 is generally accounted for by the seller by: (i) derecognizing all
assets sold, (ii) recognizing all assets obtained and liabilities incurred at
their relative fair value, and (iii) recognizing all assets retained at their
allocated previous carrying amount based on relative fair values. The Company
typically receives cash and retains the right to receive contractual servicing
fees and the right to receive future interest income on loans sold that exceed
the contractually specified servicing fee (the interest-only strip receivable)
in exchange for a portion of the loan, typically the guaranteed portion of an
SBA 7(a) loan. The difference between (i) the carrying value of the portion of
loans sold and (ii) the sum of (a) cash received, (b) the relative fair values
of the servicing rights and (c) the interest-only strip receivable retained,
constitutes the gain on sale.
SFAS No. 125 also requires that amounts carried previously as excess
servicing assets be reclassified between a servicing asset and an interest-only
strip receivable, as defined. Accordingly, the Company reclassified its excess
servicing asset (net of an allowance for credit losses on loans sold) of
$4,896,000 at December 31, 1996 to $1,753,000 of a servicing asset and
$3,143,000 of an interest-only strip receivable.
15
<PAGE> 18
In accordance with SFAS No. 125, the servicing asset is amortized in
proportion to and over the period of estimated net servicing income and is
evaluated for impairment by stratifying the servicing assets by one or more of
the predominant risk characteristics of the underlying financial assets. The
interest-only strip receivable is accounted for like an investment in debt
securities classified as trading under SFAS No. 115. Accordingly, commencing
with the three months ended June 30, 1997 and for each quarter thereafter, the
Company measures the fair value of the interest-only strip receivable based
upon the future anticipated cash flows discounted to reflect the current market
interest rates for investments of this type. Any appreciation or depreciation
of the interest-only strip receivable will be reflected on the accompanying
consolidated statements of income as an unrealized gain (loss) on investment.
During the three months and six months ended June 30, 1997, there was no
material appreciation or depreciation of the interest-only strip receivable
recognized.
The estimated net servicing income and the investment in the
interest-only strip receivable are based in part upon management's estimate of
prepayment speeds, including default rates. There can be no assurance of the
accuracy of these estimates. If the prepayment speeds occur at a faster rate
than anticipated, the amortization of the servicing asset will be accelerated
and the interest-only strip receivable will be repaid faster than originally
estimated. If prepayments occur slower than anticipated, cash flows would
exceed estimated amounts and total income in future periods would be enhanced.
During the three months and six months ended June 30, 1997, as a result of
increased prepayment speeds, the amount of amortization of the servicing asset
was increased.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
Interest income decreased by $951,000 (10%), from $9,106,000 for the
six months ended June 30, 1996 to $8,155,000 for the six months ended June 30,
1997. This decrease was primarily attributable to the Structured Financing
completed during November 1996. The average retained loan portfolio outstanding
during the first six months of 1997 and 1996 was $103.6 million and $123.0
million, respectively, a 16% decrease. This portfolio reduction was due to the
transfer of approximately $46 million of loans to the Partnership as part of
the Structured Financing. Accordingly, interest income (not including the
Partnership) on loans decreased by $1,348,000, or 16%, from $8,568,000 during
the six months ended June 30, 1996 to $7,220,000 during the six months ended
June 30, 1997. Including the interest earned by the Partnership of $2,429,000,
interest income on loans increased by $1,081,000 (13%) to $9,649,000 for the
six months ended June 30, 1997 as compared to the six months ended June 30,
1996. During the first six months of 1997, the Company earned increased
interest on short-term investments due to the funds received from the
Structured Financing. As a result, during the first six months of 1997, average
temporary investments outstanding were $37.5 million, a 68% increase, from
$22.3 million during the first six months of 1996. Accordingly, interest on
temporary investments increased by $397,000, or 74%, from $538,000 during the
six months ended June 30, 1996 to $935,000 during the six months ended June 30,
1997.
Premium income increased by $231,000 (23%), from $998,000 for the six
months ended June 30, 1996 to $1,229,000 for the six months ended June 30,
1997. This increase was primarily attributable to a 56% increase in the
guaranteed portion of loans held for sale or sold (under the 7(a) Program) from
$9.1 million during the six months ended June 30, 1996 to $14.2 million during
the six months ended June 30, 1997.
16
<PAGE> 19
Other investment income, net, increased by $51,000 (25%), from
$204,000 for the six months ended June 30, 1996 to $255,000 for the six months
ended June 30, 1997. This increase was primarily attributable to an increase in
prepayment fees received on loans during the six months ended June 30, 1997 as
compared to the six months ended June 30, 1996.
Equity in income (loss) of unconsolidated subsidiaries increased by
$1,319,000, from $10,000 during the six months ended June 30, 1996 to
$1,329,000 during the six months ended June 30, 1997. The increase is primarily
due to the formation of the Partnership in November 1996 which had net profits
of $1,351,000 during the six months ended June 30, 1997. The Partnership
profits include all yield generated from the loans contributed by PMC Capital
less the cost of the Notes issued by the Partnership. Offsetting a portion of
the Partnership income were the operations of PMC Funding which had a decrease
in revenues from charter services of its airplane which resulted in a reduction
in profits from income of $10,000 during the six months ended June 30, 1996 to
a loss of $22,000 during the six months ended June 30, 1997.
Other income, net, increased by $23,000 (2%), from $1,066,000 during
the six months ended June 30, 1996 to $1,089,000 during the six months ended
June 30, 1997. Other income increased in the first six months of 1997 as
compared to the first six months of 1996 as a result of investment management
fees generated by PMC Advisers. This increase was partially offset by a
decrease in construction fee income.
Operating expenses, not including interest, increased by $319,000
(15%), from $2,182,000 during the six months ended June 30, 1996 to $2,501,000
during the six months ended June 30, 1997. This increase was a result of an
increase in salaries and related benefits of $197,000 (13%), from $1,460,000
during the six months ended June 30, 1996, to $1,657,000 during the six months
ended June 30, 1997. The increase in salaries and related benefits was
attributable to an increased number of employees (due to the increase in
portfolio under management and the complexity of the financing transactions
undertaken by the Company), and a general increase in the level of salaries for
employees during 1996 and 1997. Rent expense increased by $22,000 due to the
opening of a new office during January 1997 (Phoenix, Arizona), the expansion
of the Company's space occupied and an increase in the base rent at its
headquarters. Legal and accounting increased $17,000 due to the increased cost
of the annual audit (primarily attributable to the formation of the
Partnership) and increases in general corporate legal services. General and
administrative costs increased by $90,000 primarily as a result of increased
marketing efforts including attendance at trade shows by representatives of the
Company.
Interest expense decreased by $100,000 (4%), from $2,844,000 during
the six months ended June 30, 1996 to $2,744,000 during the six months ended
June 30, 1997. The decrease was primarily attributable to the repayment at
maturity of approximately $2.5 million in SBA debentures during February 1997.
Realized and unrealized gain (loss) on investments changed from a loss
of $18,000 during the six months ended June 30, 1996 to a loss of $19,000
during the six months ended June 30, 1997. During both periods, loan losses
were minimal. During the first six months of 1996, the Company recognized
$29,000 in recoveries which reduced the net loss during the period. There were
no comparable recoveries during the six months ended June 30, 1997. During the
six months ended June 30, 1997, the Company recognized approximately $86,000 in
reversal of reserves on loans
17
<PAGE> 20
which paid in full which previously had reserves or have become amortizing
loans and the likelihood of collection has significantly increased which
reduced the net loss during the period. There were no comparable adjustments
during the six months ended June 30, 1996.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996
Interest income decreased by $538,000 (11%), from $4,704,000 for the
three months ended June 30, 1996 to $4,166,000 for the three months ended June
30, 1997. This decrease was primarily attributable to the Structured Financing
completed during November 1996. The average retained loan portfolio outstanding
during the second quarter of 1997 and 1996 was $108.7 million and $129.3
million, respectively, a 16% decrease. This portfolio reduction was due to the
transfer of approximately $46 million of loans to the Partnership as part of
the Structured Financing. Accordingly, interest income (not including the
Partnership) on loans decreased by $767,000, or 17%, from $4,512,000 during the
three months ended June 30, 1996 to $3,745,000 during the three months ended
June 30, 1997. Including the interest earned by the Partnership, interest
income on loans increased by $427,000 (9%) to $4,939,000 for the three months
ended June 30, 1997. During the second quarter of 1997, the Company earned
increased interest on short-term investments due to the funds received from the
Structured Financing. As a result, during the second quarter of 1997, average
temporary investments outstanding were $30.8 million, an 80% increase, from
$17.1 million during the second quarter of 1996. Accordingly, interest on
temporary investments increased by $229,000, or 119%, from $192,000 during the
three months ended June 30, 1996 to $421,000 during the three months ended June
30, 1997.
Premium income increased by $80,000 (16%), from $507,000 for the three
months ended June 30, 1996 to $587,000 for the three months ended June 30,
1997. This increase was primarily attributable to a 50% increase in the
guaranteed portion of loans held for sale or sold (under the 7(a) Program),
from $4.6 million during the three months ended June 30, 1996 to $6.9 million
during the three months ended June 30, 1997.
Other investment income, net, increased by $33,000 (24%), from
$137,000 for the three months ended June 30, 1996 to $170,000 for the three
months ended June 30, 1997. This increase was primarily attributable to an
increase in prepayment fees received on loans.
Equity in income (loss) of unconsolidated subsidiaries increased by
$646,000, from $3,000 during the three months ended June 30, 1996 to $649,000
during the three months ended June 30, 1997. The increase is primarily due to
the formation of the Partnership in November 1996 which had net profits of
$659,000 during the three months ended June 30, 1997. The Partnership profits
include all yield generated from the loans contributed by PMC Capital less the
cost of the Notes issued by the Partnership. Offsetting a portion of the
Partnership income were the operations of PMC Funding which had a decrease in
revenues from charter services of its airplane which resulted in a reduction in
profits from income of $3,000 during the three months ended June 30, 1996 to a
loss of $10,000 during the three months ended June 30, 1997.
Other income, net, decreased by $22,000 (4%), from $553,000 during the
three months ended June 30, 1996 to $531,000 during the three months ended June
30, 1997. Other income increased in the second quarter of 1997 as compared to
the second quarter of 1996 as a result of investment management fees generated
by PMC Advisers. This increase was partially offset by a decrease in
construction fee income.
18
<PAGE> 21
Operating expenses, not including interest, increased by $108,000
(9%), from $1,138,000 during the three months ended June 30, 1996 to $1,246,000
during the three months ended June 30, 1997. This increase was a result of an
increase in salaries and related benefits of $67,000 (9%), from $768,000 during
the three months ended June 30, 1996, to $835,000 during the three months ended
June 30, 1997. The increase in salaries and related benefits was attributable
to an increased number of employees (due to the increase in portfolio under
management and the complexity of the financing transactions undertaken by the
Company), and a general increase in the level of salaries for employees during
1996 and 1997. Rent expense increased by $9,000 due to the opening of a new
office during January 1997 (in Phoenix, Arizona), the expansion of the
Company's space occupied and an increase in the base rent at its headquarters.
General and administrative costs increased by $44,000 primarily as a result of
(i) increased advertising incurred during the second quarter of 1997, primarily
a result of increased marketing efforts including attendance at trade shows by
representatives of the Company.
Interest expense decreased by $51,000 (4%), from $1,420,000 during the
three months ended June 30, 1996 to $1,369,000 during the three months ended
June 30, 1997. The decrease was primarily attributable to the repayment at
maturity of approximately $2.5 million in SBA debentures during February 1997.
Realized and unrealized gain (loss) on investments changed from a loss
of $1,000 during the three months ended June 30, 1996 to a gain of $38,000
during the three months ended June 30, 1997. During both periods, loan losses
were minimal. During the second quarter of 1997, the Company recognized
approximately $86,000 in reversal of reserves on loans which paid in full which
previously had reserves or have become amortizing loans and the likelihood of
collection has significantly increased which reduced the net loss during the
period. There were no comparable adjustments during the three months ended June
30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans. The
Company also uses funds to acquire loans from governmental agencies and/or
their agents, for the payment of financing costs, dividends to shareholders,
general and administrative expenses, capital expenditures, advances on loan
liquidations and payments of principal due on borrowing facilities.
Approximately $2.5 million of the Company's SBA debentures were paid in full in
February 1997. As a regulated investment company, pursuant to the Internal
Revenue Code of 1986, the Company is required to pay out substantially all of
its net investment company taxable income to the common shareholders. To
sustain growth in the size of its investment portfolio, the Company continually
reviews the need for obtaining additional funds from either: (i) debt offerings
and additional credit facilities, (ii) securitization and sale of a portion of
the loan portfolio and/or (iii) equity offerings. Historically, the Company's
primary sources of capital and liquidity have been debentures issued through
programs of the SBA, private and public issuances of common stock, the issuance
of senior unsecured notes, the securitization and sale of its loan portfolio
and the utilization of its short-term, uncollateralized revolving credit
facility.
Loan commitments outstanding at June 30, 1997 to various prospective
small business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $73.5 million. Of these
commitments, $19.2 million were for loans partially
19
<PAGE> 22
guaranteed by the SBA of which approximately $16.4 million would be sold (if
fully funded) into the secondary market. Such commitments are made in the
ordinary course of the Company's business. Commitments to extend credit are
agreements to lend to a customer provided that the terms established in the
contract are met. Commitments generally have fixed expiration dates and require
payment of a fee. Since some commitments expire without the proposed loan
closing, the total commitment amounts do not necessarily represent future cash
requirements.
In order to meet its working capital requirements and increase the
size of its investment portfolio, the Company and the Partnership have completed
the following leverage transactions since the beginning of 1995:
<TABLE>
<CAPTION>
STATED
MATURITY
DATE AMOUNT RATE DATE DESCRIPTION
---- ------ ---- ---- -----------
<S> <C> <C> <C> <C>
April, 1995 $ 5,000,000 8.600% April, 2003 Unsecured note
April, 1995 $ 5,000,000 Libor + 1.300% April, 2004 Unsecured note
May, 1995 $ 2,000,000 4.000% May, 2010 Preferred Stock - PMIC
May, 1995 (1) $ 2,260,000 7.500% to 10.400% Up to December, 2002 SBA Debentures
March, 1995 $ 3,000,000 4.840% (2) March, 2005 SBA Debentures
June, 1995 $ 5,000,000 3.690% (2) June, 2005 SBA Debentures
September, 1995 $ 7,000,000 3.875% (2) September, 2005 SBA Debentures
May, 1996 (1) $ 1,030,000 9.300% June, 2000 SBA Debentures
November, 1996 $40,746,000 6.725% August, 2011 Structured Financing(3)
</TABLE>
(1) Assumed debentures from a non-affiliated SBIC.
(2) Rate increases 3% five years from the date of issuance until
maturity.
(3) Fixed rate loan-backed notes issued by the Partnership.
PMC has a $15 million uncollateralized revolving credit facility which
expires May 1998. Advances pursuant to the credit facility bear interest at the
Company's option at the bank's prime rate less 50 basis points or LIBOR plus
175 basis points. The credit facility requires the Company to meet certain
covenants, the most restrictive of which includes that the ratio of net
charge-offs to net loans receivable will not exceed 2%, and the ratio of assets
to senior debt (as defined in the note agreement) will not fall below 150%. At
June 30, 1997, the Company had no balance outstanding on this credit facility.
At June 30, 1997, the Company was in compliance with all covenants of this
facility.
Due to changes in the SBIC program to the cost and availability of SBA
debentures and preferred stock the Company has utilized other sources of funds
to expand its loan portfolio. The cost and terms of these other sources of
funds will not be as favorable as those historically achieved on SBA
debentures; however, the Company has been able to issue debt through private
placement of notes and receive working capital through securitization and sale
of a portion of its portfolio. If additional funds are required, the Company
will attempt to either issue additional unsecured notes, privately or publicly
raise equity and/or securitize and structure a sale of a portion of either the
unguaranteed portion of SBA loans or the portfolio of PMC, Western Financial
and/or PMIC. Management believes that through utilization of one or more of
these sources of debt or equity capital, the Company should meet its liquidity
needs for the foreseeable future.
20
<PAGE> 23
PMC Capital is in compliance with the requirement to maintain a
minimum of 200% asset coverage of debt as defined in sections 18 and 61 of the
1940 Act as modified by exemptive orders obtained by the Company from the
Securities and Exchange Commission.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the
computation, presentation, and disclosure requirements for earnings per share.
SFAS No. 128 is designed to improve the earnings per share information provided
in financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements and increasing the comparability of
earnings per share data. SFAS No. 128 is effective for financial statements for
periods ending after December 15, 1997. In the opinion of management, the
effect of this pronouncement on earnings per share will not be significant.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129 requires certain disclosure
about an entity's capital structure. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. In the opinion of
management, the effect of this pronouncement on the Company's financial
position or results of operations will not be significant.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which are intended to be
covered by the safe harbors created thereby. These statements include the plans
and objectives of management for future operations, including plans and
objectives relating to future growth of the loan portfolio and availability of
funds. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties and in most
instances are identified through the use of words such as "anticipates,"
"expects," and "should." Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Quarterly Report on Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
21
<PAGE> 24
PART II
Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 14, 1997,
the following members were re-elected to the Board of Directors:
Fredric M. Rosemore
Lance B. Rosemore
Andrew S. Rosemore
Other members of the Board of Directors are as follows:
Martha R. Greenberg
Robert Diamond
Lee Ruwitch
Irvin M. Borish
Thomas Hamill
Barry A. Imber
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Abstentions
Affirmation Negative and Broker
Votes Votes Non-Votes
----- ----- ---------
<S> <C> <C> <C>
1. To adopt and approve the Company's
1997 Director Stock Option Plan and
1997 Employee Stock Option Plan 9,414,666 204,818 117,136
2. To ratify the appointment of
Coopers & Lybrand L.L.P. as the
independent public accountants
of the Company 9,563,434 16,323 156,867
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
None.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended June 30, 1997.
22
<PAGE> 25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Capital, Inc.
Date: 8/08/97 /s/ Lance B. Rosemore
-------------------------------
Lance B. Rosemore
President
Date: 8/08/97 /s/ Barry N. Berlin
-------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
23
<PAGE> 26
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1997 FORM 10-Q OF PMC CAPITAL INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 370
<SECURITIES> 24,268
<RECEIVABLES> 117,835<F1>
<ALLOWANCES> (383)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 504
<DEPRECIATION> (322)
<TOTAL-ASSETS> 159,457<F2>
<CURRENT-LIABILITIES> 7,748<F3>
<BONDS> 77,090
4,000<F4>
3,000<F4>
<COMMON> 65,199
<OTHER-SE> 370
<TOTAL-LIABILITY-AND-EQUITY> 159,457<F5>
<SALES> 0
<TOTAL-REVENUES> 12,057<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,501
<LOSS-PROVISION> 19
<INTEREST-EXPENSE> 2,744
<INCOME-PRETAX> 6,793
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,793
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
<FN>
<F1>Includes current and long term portion of all loans receivable - before
reserve, interest receivable on loans and receivable for loans sold. Does not
include receivable from affiliate.
<F2>Includes the following items not included above.
(i) Interest - oly strip receivable $ 3,058
(ii) Restricted investments 1,046
(iii) Real property owned 305
(iv) Due from unconsolidated subsidiaries 1,746
(v) Deferred charges, deposits and
other assets, net 1,053
(vi) Investment in unconsolidated subsidiaries 8,229
(vii) Servicing asset 1,748
--------
$ 17,185
========
<F3>Includes the following:
(i) Accrued interest payable $ 1,343
(ii) Borrower advances 1,303
(iii) Dividends payable 3,588
(iv) Accounts payable 1,514
--------
$ 7,748
========
<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 $ 615
(ii) Other liabilities 851
(iii) Due to unconsolidated subsidiaries 584
--------
$ 2,050
========
<F6>Revenues consist primarily of interest, other yield on investments, premium
income and equity in income of unconsolidated subsidiaries.
</FN>
</TABLE>
