<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
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
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PMC CAPITAL, INC.
-----------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of November 1, 1998, Registrant had outstanding 11,829,116 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 -
September 30, 1998 (Unaudited) and December 31, 1997 2
Consolidated Statements of Income (Unaudited) -
Nine months Ended September 30, 1998 and 1997 3
Three Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited) -
Nine months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
1
<PAGE> 4
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net .................................................. $ 140,124 $ 127,240
Cash equivalents ....................................................... 3,215 17,237
Investment in unconsolidated subsidiaries .............................. 8,009 7,797
Interest-only strip receivables ........................................ 3,021 3,708
Restricted investments ................................................. 2,800 2,798
Real property owned .................................................... 45 296
-------------- --------------
TOTAL INVESTMENTS AT VALUE ............................................... 157,214 159,076
-------------- --------------
OTHER ASSETS:
Receivable for loans sold .............................................. 775 1,346
Due from unconsolidated subsidiaries ................................... 1,828 1,302
Servicing asset ........................................................ 1,330 1,607
Deferred charges, deposits and other assets ............................ 1,061 1,398
Accrued interest receivable ............................................ 653 608
Cash ................................................................... 247 265
Property and equipment, net ............................................ 199 237
-------------- --------------
TOTAL OTHER ASSETS ....................................................... 6,093 6,763
-------------- --------------
TOTAL ASSETS ............................................................. $ 163,307 $ 165,839
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ................................................. $ 39,790 $ 41,290
Notes payable .......................................................... 35,000 35,000
Accounts payable ....................................................... 2,278 3,269
Dividends payable ...................................................... 3,907 4,018
Borrower advances ...................................................... 1,251 1,678
Accrued interest payable ............................................... 891 1,316
Due to unconsolidated subsidiaries ..................................... 428 279
Deferred fee revenue ................................................... 720 571
Other liabilities ...................................................... 740 1,252
-------------- --------------
TOTAL LIABILITIES ........................................................ 85,005 88,673
-------------- --------------
Commitments and contingencies
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY ................................. 7,000 7,000
-------------- --------------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares of $.01 par value,
11,829,000 and 11,631,000 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively ......... 118 116
Additional paid-in capital ............................................. 71,310 68,555
Undistributed net operating income ..................................... 654 2,289
Net unrealized depreciation on investments ............................. (780) (794)
-------------- --------------
71,302 70,166
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................... $ 163,307 $ 165,839
============== ==============
NET ASSET VALUE PER COMMON SHARE ......................................... $ 6.03 $ 6.03
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
2
<PAGE> 5
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest ........................................................... $ 12,499 $ 12,633
Premium income ..................................................... 762 1,467
Other investment income, net ....................................... 607 390
-------------- --------------
Total investment income .............................................. 13,868 14,490
Equity in income of unconsolidated subsidiaries, net ................. 1,883 1,963
Other income, net .................................................... 2,529 1,686
-------------- --------------
Total income ......................................................... 18,280 18,139
-------------- --------------
EXPENSES:
Interest ........................................................... 3,993 4,120
Salaries and related benefits ...................................... 2,885 2,490
General and administrative ......................................... 570 670
Profit sharing plan ................................................ 153 115
Rent ............................................................... 181 184
Legal and accounting ............................................... 153 149
Small Business Administration fees ................................. 70 86
Directors and shareholders expense ................................. 50 42
-------------- --------------
Total expenses ....................................................... 8,055 7,856
-------------- --------------
Net operating income ................................................ 10,225 10,283
-------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ................................................ (157) (153)
Change in unrealized appreciation
(depreciation) on investments .................................. 14 114
-------------- --------------
Total realized and unrealized gain (loss) on investments ............. (143) (39)
-------------- --------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ......................................... $ 10,082 $ 10,244
============== ==============
PREFERRED DIVIDENDS .................................................. $ 188 $ 188
============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ........................... 11,791 11,345
============== ==============
BASIC AND DILUTED EARNINGS PER COMMON SHARE .......................... $ 0.84 $ 0.89
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest ........................................................... $ 4,243 $ 4,478
Premium income ..................................................... 235 238
Other investment income, net ....................................... 124 135
-------------- --------------
Total investment income .............................................. 4,602 4,851
Equity in income of unconsolidated subsidiaries, net ................. 708 634
Other income, net .................................................... 739 597
-------------- --------------
Total income ......................................................... 6,049 6,082
-------------- --------------
EXPENSES:
Interest ........................................................... 1,340 1,376
Salaries and related benefits ...................................... 923 833
General and administrative ......................................... 232 227
Profit sharing plan ................................................ 75 37
Rent ............................................................... 63 62
Legal and accounting ............................................... 19 35
Small Business Administration fees ................................. 21 33
Directors and shareholders expense ................................. 7 8
-------------- --------------
Total expenses ....................................................... 2,680 2,611
-------------- --------------
Net operating income ................................................ 3,369 3,471
-------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ................................................ (46) (82)
Change in unrealized appreciation
(depreciation) on investments .................................. 136 62
-------------- --------------
Total realized and unrealized gain (loss) on investments ............. 90 (20)
-------------- --------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ......................................... $ 3,459 $ 3,451
============== ==============
PREFERRED DIVIDENDS .................................................. $ 63 $ 63
============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ........................... 11,828 11,452
============== ==============
BASIC AND DILUTED EARNINGS PER COMMON SHARE .......................... $ 0.29 $ 0.30
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE> 7
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments ............ $ 10,082 $ 10,244
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 ...................................................... (6,349) (15,725)
Proceeds from sale of guaranteed loans ........................................... 8,881 18,782
Change in unrealized depreciation on investments and loans written-off ........... 143 295
Unrealized premium income, net ................................................... -- (188)
Depreciation and amortization .................................................... 996 1,055
Accretion of loan discount and deferred fees ..................................... (822) (1,208)
Deferred fees collected .......................................................... 178 740
(Gain) loss on sale of assets .................................................... (3) (4)
Equity in income of unconsolidated subsidiaries, net ............................. (1,883) (1,963)
Net change in operating assets and liabilities:
Accrued interest receivable .................................................. (46) (166)
Other assets ................................................................. 358 (439)
Accrued interest payable ..................................................... (425) (533)
Borrower advances ............................................................ (428) (286)
Other liabilities ............................................................ (1,503) (2,743)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................................ 9,179 7,861
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ........................................................................... (33,214) (47,525)
Principal collected and other adjustments .............................................. 18,514 6,884
Proceeds from interest-only strip receivables .......................................... 618 486
Purchase of furniture and fixtures and other assets .................................... (54) (133)
Proceeds from sale of assets ........................................................... 179 107
Proceeds from partnership distributions ................................................ 1,722 2,583
Investment in subsidiary ............................................................... (50) --
Release of (investment in) restricted investments ...................................... (2) (294)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES .................................................... (12,287) (37,892)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................................ 2,257 3,731
Proceeds from revolving credit facility ............................................... -- 1,000
Payment of dividends on common stock .................................................. (11,128) (9,826)
Payment of dividends on preferred stock ............................................... (183) (190)
Payment of SBA debentures ............................................................. (1,500) (3,280)
Advances to unconsolidated affiliates, net ............................................ (378) (781)
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES .................................................... (10,932) (9,346)
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................................ (14,040) (39,377)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 17,502 50,017
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 3,462 $ 10,640
============== ==============
SUPPLEMENTAL DISCLOSURE:
Interest paid ......................................................................... $ 4,385 $ 4,653
============== ==============
Dividends reinvested .................................................................. $ 499 $ 711
============== ==============
Reclassification from loans receivable to real property owned ......................... $ 45 $ 292
============== ==============
Loans to facilitate sale of real property owned ....................................... $ 122 $ --
============== ==============
</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 with PMC, the "Company") as of September 30, 1998 and the
consolidated statements of income for the three and nine months ended September
30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998
and 1997 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 Company's financial position at September 30,
1998, the results of operations for the three and nine months ended September
30, 1998 and 1997, and the cash flows for the nine months ended September 30,
1998 and 1997. These adjustments are of a normal recurring nature.
Certain notes and other information have been omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1997 Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results for the three and nine months ended September 30, 1998 are not
necessarily indicative of future financial results.
NOTE 2. 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.
NOTE 3. 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,
6
<PAGE> 9
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BASIS FOR CONSOLIDATION: (CONTINUED)
to provide long-term collateralized loans to eligible small businesses owned by
"disadvantaged" persons, as defined under the regulations of the SBA. The
interest rates on loans originated by PMIC are either fixed-rate or a variable
rate which is based on a the prime lending rate as published in the Wall Street
Journal (the "Prime Rate"). 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 such debt was outstanding). The SBA
subsidy is no longer available for new debt issuances under the SSBIC program.
Western Financial is a licensed small business investment company ("SBIC")
under the SBIA that provides loans to borrowers whether or not they qualify as
"disadvantaged." The interest rates on loans originated by Western Financial
are either fixed-rate or a variable-rate which is based on the Prime Rate. 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 PMC's subsidiaries. These loans are made to borrowers who exceed
the eligibility requirements of the 7(a) Program or SBIC programs.
Unconsolidated Subsidiaries
PMC Advisers, organized in July 1993, either directly or through a subsidiary
acts as the investment manager for PMC Commercial Trust ("PMC Commercial" or
the "Trust"), a Texas real estate investment trust and an affiliate of PMC
Capital.
PMC Funding is a Florida corporation that holds assets on behalf of the
Company. PMC Capital is the sole shareholder of PMC Funding.
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 (the
"Notes") through a private placement (the "Structured Financing").
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 4. LONG-TERM DEBT:
During February 1998, the Company repaid a $1,500,000 SBA debenture at
maturity.
NOTE 5. DIVIDENDS PAID AND DECLARED:
In January 1998, the Company paid $0.340 per share in dividends to common
shareholders of record on December 31, 1997 which included a special dividend
of $0.02 per common share. In April 1998, July 1998 and October 1998, the
Company paid quarterly dividends of $0.325 per share.
NOTE 6. PMC CAPITAL LIMITED PARTNERSHIP:
As described in Note 3, the accounts of the Partnership are accounted for by
the equity method of accounting in conformity with Federal securities law.
During the nine months ended September 30, 1998 and 1997, the Partnership
7
<PAGE> 10
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PMC CAPITAL LIMITED PARTNERSHIP: (CONTINUED)
had $3,183,000 and $3,871,000 in gross revenue, respectively, and net operating
income of $1,856,000 and $2,001,000, respectively.
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS:
As described in Note 3, the consolidated financial statements include the
accounts of PMC and its wholly-owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding, the Partnership, PMC Capital Corp.
and PMC Trust 1996-A (the "Unconsolidated Entities") are accounted for by the
equity method of accounting in conformity with Federal securities law. The
following are the condensed combined balance sheets as of September 30, 1998
and December 31, 1997 and the condensed combined statement of income for the
three and nine months ended September 30, 1998 and 1997 for the Company and the
Unconsolidated Entities.
CONDENSED COMBINED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments at value:
Loans receivable, net . . . . . . . . . . . . . . . . . $ 163,255 $ 161,215
Cash equivalents . . . . . . . . . . . . . . . . . . . 3,254 17,272
Interest-only strip receivable . . . . . . . . . . . . . 3,021 3,708
Restricted investments and real property owned . . . . . 8,739 5,780
--------- ---------
178,269 187,975
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 5,820 6,931
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . $ 184,089 $ 194,906
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable . . . . . . . . . . . . . . . . . $ 39,790 $ 41,290
Notes payable . . . . . . . . . . . . . . . . . . . . . 52,817 64,007
Other liabilities . . . . . . . . . . . . . . . . . . . 13,180 12,443
--------- ---------
105,787 117,740
--------- ---------
Cumulative preferred stock of subsidiary . . . . . . . . 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common Stock . . . . . . . . . . . . . . . . . . . . . . 118 116
Additional paid-in capital . . . . . . . . . . . . . . . 71,310 68,555
Undistributed net operating income . . . . . . . . . . . 654 2,289
Net unrealized depreciation on investments . . . . . . . (780) (794)
--------- ---------
71,302 70,166
--------- ---------
Total liabilities and shareholders' equity . . . . . $ 184,089 $ 194,906
========= =========
</TABLE>
8
<PAGE> 11
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited, in thousands)
<S> <C> <C> <C> <C>
INCOME:
Investment income ....................... $ 17,052 $ 18,335 $ 5,613 $ 6,055
Other income, net ....................... 2,557 1,792 745 662
-------- -------- -------- --------
Total income ..................... 19,609 20,127 6,358 6,717
-------- -------- -------- --------
EXPENSES:
Interest ................................ 5,240 5,903 1,700 1,896
Salaries and related benefits ........... 2,885 2,290 923 833
General and administrative
expenses ........................... 652 874 181 341
Other ................................... 607 577 185 176
-------- -------- -------- --------
Total expenses ...................... 9,384 9,844 2,989 3,246
-------- -------- -------- --------
Net operating income ......................... 10,225 10,283 3,369 3,471
Realized and unrealized gain (loss) on
investments ........................ (143) (39) 90 (20)
-------- -------- -------- --------
NET OPERATING INCOME AND REALIZED AND
UNREALIZED GAIN (LOSS) ON INVESTMENTS $ 10,082 $ 10,244 $ 3,459 $ 3,451
======== ======== ======== ========
</TABLE>
NOTE 8. EARNINGS PER COMMON SHARE COMPUTATIONS:
The computations of basic earnings per common share are based on the weighted
average number of shares outstanding of the Company. For the purposes of
determining the diluted earnings per share, there was no change in the weighted
average shares outstanding for the effect of stock options during the three and
nine months ended September 30, 1998 since the stock options were
anti-dilutive. The Company did not issue any stock options prior to June 1997.
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
$63,000 during each of the three months ended September 30, 1998 and 1997 and
$188,000 during each of the nine months ended September 30, 1998 and 1997,
respectively. The weighted average number of shares used in the computations
of basic earnings per common share were 11.8 million and 11.5 million shares
for the three months ended September 30, 1998 and 1997, respectively, and 11.8
million and 11.3 million shares during the nine months ended September 30, 1998
and 1997, respectively.
NOTE 9. CHANGE IN ACCOUNTING:
Deferred fees consist of non-refundable fees less direct loan origination
costs. For loans originated prior to January 1, 1998, these fees are being
recognized over the expected life of the related loan. For loans originated
subsequent to December 31, 1997, these fees are being recognized currently.
The change did not materially impact the Company's financial statements.
9
<PAGE> 12
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART I
FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
GENERAL
The Company's operations include originating and servicing commercial loans for
its own account as well as operating as an investment manager to evaluate
properties and loans and service loans and lease contracts under a fee
arrangement for PMC Commercial. The Company sells the guaranteed portion of
its loans originated under the SBA 7(a) Program. In addition, during November
1996, the Company securitized a portion of its fixed-rate portfolio as part of
the Structured Financing as an additional source of working capital and in
December 1997 sold the unguaranteed portion of its loans originated under the
SBA 7(a) Program as part of a securitization and sale. 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 commercial loans originated and retained
including the effect of commitment fees collected at the inception
of the loan.
o Management fee income from the management of PMC Commercial.
o An equity interest in the income of non-investment company
subsidiaries.
o Premiums recognized from the sale of the government guaranteed
portion of SBA 7(a) Program loans into the secondary market
o Interest earned on temporary (short-term) investments.
o Other fees, including: late fees, prepayment fees, construction
monitoring and site visit fees.
The following table sets forth information concerning the aggregate
gross loans funded by the Company:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS YEARS ENDED
ENDED SEPT. 30, ENDED SEPT. 30, DECEMBER 31,
------------------ -------------------- -----------------
COMPANY 1998 1997 1998 1997 1997 1996
- ------- ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PMIC . . . . . . . . . . . . . $ 11.4 $ 14.5 $ 4.9 $ 4.3 $ 24.1 $ 19.3
Western Financial . . . . . . . 10.5 9.1 3.4 5.8 12.9 7.5
First Western . . . . . . . . . 8.6 22.5 2.0 4.6 29.5 29.2
PMC Capital . . . . . . . . . 9.1 17.1 6.6 6.3 19.9 14.2
------ ------ ------ ------ ------ ------
Total . . . . . . . . $ 39.6 $ 63.2 $ 16.9 $ 21.0 $ 86.4 $ 70.2
====== ====== ====== ====== ====== ======
</TABLE>
In 1993, the Company organized PMC Advisers which, either directly or
through its wholly-owned subsidiary, has acted as the investment manager for
PMC Commercial since the completion of PMC Commercial's initial public offering
in December 1993. During the nine months ended September 30, 1998 and the year
ended December 31,1997, PMC Advisers and its wholly-owned subsidiary earned
management fees from PMC Commercial of approximately $2,078,000 and
$1,600,000, respectively. The fees during the nine months ended September 30,
1998 includes fees earned related to the structured financing and property
acquisitions by PMC Commercial.
PMC Advisers earns fees pursuant to an investment management agreement
entered into during June 1998 with PMC Commercial relating to property
acquisitions by PMC Commercial (the "Property Management Agreement"). The
Property Management Agreement provides for a one time fee of 0.75% of the
purchase price paid by PMC Commercial to Amerihost Properties, Inc. and its
subsidiaries ("Amerihost") (the "Amerihost Purchase Price") in connection with
the purchase of hotels from Amerihost and an annual management fee equal to the
product of 0.70% multiplied by the
10
<PAGE> 13
Amerihost Purchase Price (the "Amerihost Fee"). In the event the Property
Management Agreement with PMC Advisers is terminated or not renewed by PMC
Commercial (other than as a result of a material breach by PMC Advisers) or by
PMC Advisers (as a result of a material breach by PMC Commercial), PMC Advisers
would be entitled to receive the Amerihost Fee for a period of five years from
the termination date. As a result of the cancellation of the proposed merger
(the "Merger") by PMC Commercial with Supertel Hospitality, Inc. ("Supertel"),
PMC Advisers will earn no fee related to the Merger.
The Company also earns income through its equity ownership in the
Unconsolidated Subsidiaries, primarily the Partnership. In November 1996 the
Partnership completed the Structured Financing through the private placement of
approximately $40.7 million of Notes which were issued at par and bear interest
at a 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 were used 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, contributes to the revenues of PMC Capital.
As a result of several factors, the number and dollar volume of loans
originated by First Western under the SBA 7(a) Program have decreased. The
factors which contributed to this decrease included an increase in guarantee
fees due to the SBA by the borrower under the SBA 7(a) Program, increased
competition for SBA 7(a) Program loans, and an increase in competition from
alternative loan products. These other products often provide prospective
borrowers with fixed interest rates at less than the floating interest rates
available through the SBA 7(a) Program. Accordingly, premiums earned have been
significantly reduced. For the nine months ended September 30, 1998 and 1997,
revenues generated by such loan sales were $762,000 and $1,467,000,
respectively. Because of the above factors and an increase in the number of
borrowers requesting fixed-rate financing, the Company believes that revenues
generated from the sales of the guaranteed portion of the SBA 7 (a) Program
loans will continue at present diminished levels for the foreseeable future.
The Company has attempted to offset First Western's decreased revenues through
emphasizing the Company's other lending activities and offering lower fixed
interest rates . In addition, other revenue sources such as investment
management income have been increasing.
The current lower interest rate environment and increased lending
competition have reduced the spread between the rate at which the Company lends
funds and the cost of such funds. There can be no assurance that the Company
will experience increased spreads in the foreseeable future. In some cases,
the increased level of lending competition has resulted in advance rates and
interest rates considerably more aggressive than those offered by the Company.
In order to maintain a quality portfolio, the Company has and will continue to
adhere to its historical underwriting criteria and, as a result, certain loan
origination opportunities have and will not be funded by the Company. In
response to this competition, the Company is in the process of instituting a
new lower fixed-rate lending program and has instituted the Prime Lending
Program as described below. The interest rate on these loans (assuming no
change in the prime rate) is lower than the Company has historically
experienced and the results of the new lending programs (defined below) have,
to date, while beneficial have not met the Company's initial expectations.
Late in the fourth quarter of 1996 the Company began marketing a
variable interest rate lending program based on the Prime Rate, (the "Prime
Lending Program") which is separate from the SBA 7(a) Program of First Western,
the Company's other variable rate lending program. The Prime Lending Program
provides funds 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. Several of the
loans refinanced under this program were originally SBA 7(a) Program loans and
some of these loan originations have refinanced First Western's loans.
On loan prepayments, to the extent the loans were on a fixed-rate of
interest, the Company received the immediate benefit of the prepayment charge,
however, the proceeds from the prepayments were invested initially in temporary
investments and have been reloaned or committed to be reloaned at lower rates,
which has an adverse effect on the Company's future results of operations and
may have an impact on its ability to maintain distributions at current levels.
The impact of the lower lending rates is partially offset (based on current
market conditions) by the reduced cost of the Company's borrowings.
11
<PAGE> 14
As a result of the general downward trend in interest rates and
increased competition, the Company has experienced an increased rate in the
repayment of its loans. For the nine months ended September 30, 1998 and the
year ended December 31, 1997, principal collections including prepayments (as
an annualized percentage of the Company's total loan portfolio including
serviced loans), were 27% and 23%, respectively, as compared to principal
collections including prepayment percentages of 22% and 21%, respectively, for
the nine month period ended September 30, 1997 and the year ended December 31,
1996. The Company believes that the prepayments may continue at accelerated
levels in the near term, however, as a result of recent changes in the market
place, the pace of repayment activity is anticipated to decrease.
The Company's working capital requirements for loan originations, as
well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, require it to maintain temporary
short-term investments. In order to minimize its short-term investment
positions, the Company may enter into a bank warehouse facility and expects to
more fully utilize its revolving credit facility to fund these working capital
requirements.
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 the nine months
ended September 30, 1998 and the year ended December 31,1997 was $607,000 and
$504,000, respectively. The amount earned will vary based on volume of loans
funded, the timing and amount of financings, volume of loans which prepay, the
mix of loans (construction versus non-construction), the rate on loans
originated (whether fixed or variable) as well as the general level of interest
rates.
Expenses primarily consist of interest expense and company overhead as
described below. Expenses were 44% of total income during both the nine
months ended September 30, 1998 and the year ended December 31, 1997.
Interest expense was $3,993,000 and $5,548,000 during the nine months
ended September 30, 1998 and the year ended December 31, 1997, respectively.
Interest expense is primarily a result of (i) $35 million of unsecured notes
with a weighted average interest rate of 7.4% and weighted average remaining
maturity of 3.0 years as of September 30, 1998, and (ii) $39,790,000 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 approximately 6.7% and
weighted average remaining maturity of 4.3 years as of September 30, 1998. At
September 30, 1998, 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 at the Company's option of either the
lender's prime rate less 50 basis points or Libor plus 175 basis points.
Company overhead was $4,061,000 and $5,054,000 during the nine months
ended September 30, 1998 and the year ended December 31, 1997, respectively,
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 in its Dallas,
Texas headquarters. The Company presently has other marketing offices located
in 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,
advisory, and portfolio functions, including marketing, servicing, accounting
and portfolio analysis. Salaries and related benefits were 16% and 14%,
respectively, of total income during the nine months ended September 30, 1998
and the year ended December 31, 1997. It is anticipated that overhead will
continue to increase as the Company's assets under management increases.
General and administrative expenditures consist primarily of Texas
franchise and other taxes, advertising and promotional expense, telephone
services, corporate printing costs and general office expenses. General and
administrative expenses were 3% of total income during both the nine months
ended September 30, 1998 and the year ended December 31, 1997. These costs are
anticipated to increase in proportion to the growth of the Company's assets
under management.
Profit sharing plan, rent, legal and accounting, SBA fees and
directors and shareholders expense (collectively the "Other Administrative
Costs") aggregated $608,000 and $822,000 during the nine months ended September
30, 1998 and the year ended December 31, 1997, respectively. The Other
Administrative Costs were 3% of total income during both the nine months ended
September 30, 1998 and the year ended December 31, 1997, respectively. 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 assets under management.
12
<PAGE> 15
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net income decreased by $162,000 from $10,244,000 during the nine
months ended September 30, 1997 to $10,082,000 during the nine months ended
September 30, 1998. The weighted average common shares outstanding increased
by approximately 4% from 11,345,000 during the nine months ended September 30,
1997 to 11,791,000 during the nine months ended September 30, 1998 as a result
of shares issued pursuant to the dividend reinvestment and cash purchase plan.
The income for the nine months ended September 30, 1998 includes the effect of
the following, as more fully described below: (i) reduced interest income
earned as a result of the sale by First Western of $22.8 million of loans in
December 1997 and a general decline in the interest rate on outstanding loans,
(ii) reduced premium income, (iii) increased investment management fees and
(iv) changes in valuation reserves.
Interest income decreased by $134,000 (1%), from $12,633,000 for the
nine months ended September 30, 1997 to $12,499,000 for the nine months ended
September 30, 1998. This decrease was primarily attributable to a decrease in
interest on temporary investments and the continued decline in interest rates
on new loan originations. These factors more than offset the 21% increase in
average retained loan portfolio outstanding from $110 million during the nine
months ended September 30, 1997 to $133 million during the nine months ended
September 30, 1997. Accordingly, interest income (not including the
Partnership) on loans increased by $601,000, or 5%, from $11,452,000 during
the nine months ended September 30, 1997 to $12,053,000 during the nine months
ended September 30, 1998.
During the nine months ended September 30, 1998, the Company earned a
reduced amount of interest on short-term investments due to the funds received
from the Structured Financing (net proceeds of approximately $37.5 million)
increasing the average temporary investments outstanding during the nine months
ended September 30, 1997 by a greater amount than the securitized sale (net
proceeds of approximately $20 million) increased the average temporary
investments during the nine months ended September 30, 1998. As a result,
during the nine months ended September 30, 1998, average temporary investments
outstanding were $13.9 million, a 55% decrease from $31.1 million during the
nine months ended September 30, 1997. Accordingly, interest on temporary
investments decreased by $735,000, or 62%, from $1,181,000 during the nine
months ended September 30, 1997 to $446,000 during the nine months ended
September 30, 1998.
Premium income decreased by $705,000 (48%) from $1,467,000 for the
nine months ended September 30, 1997 to $762,000 for the nine months ended
September 30, 1998. This decrease was primarily attributable to a $9,901,000
(53%) decrease in the guaranteed portion of loans held for sale or sold (under
the 7(a) Program) from $18,782,000 during the nine months ended September 30,
1997 to $8,881,000 during the nine months ended September 30, 1998.
Other investment income, net, increased by $217,000 (56%) from
$390,000 for the nine months ended September 30, 1997 to $607,000 for the nine
months ended September 30, 1998. This increase was primarily attributable to
an increase in prepayment fees received and recognition of discount related to
fixed-rate loans which were prepaid in full and forfeited commitment fees
during the nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997.
Equity in income (loss) of unconsolidated subsidiaries decreased by
$80,000 (4%), from $1,963,000 during the nine months ended September 30, 1997
to $1,883,000 during the nine months ended September 30, 1998. The Partnership
had net income of $1,856,000 and $2,001,000 during the nine months ended
September 30, 1998 and 1997, respectively. The decrease is primarily due to
the continued reduction in outstanding principal balance of loans in the
Partnership. Accordingly, the interest earned on the Partnership assets is
decreasing resulting in less net profits. The Partnership profits include all
yield generated from the loans transferred by PMC Capital less the cost of the
Notes issued by the Partnership. During the nine months ended September 30,
1998 and 1997, the net income from the Partnership includes $379,000 and
$146,000, respectively, in prepayment fees received on paid-off loans. Also
included in equity in income of unconsolidated subsidiaries is the net income
of PMC Advisers of $108,000 during the nine months ended September 30, 1998 and
the operations of PMC Funding which had a loss of $38,000 during the nine
months ended September 30, 1997 and a loss of $81,000 during the nine months
ended September 30, 1998.
13
<PAGE> 16
Other income, net, increased by $843,000 (50%) from $1,686,000 during
the nine months ended September 30, 1997 to $2,529,000 during the nine months
ended September 30, 1998. Other income increased during the nine months ended
September 30, 1998 primarily as a result of fee income earned as a result of
investment management fees generated by PMC Advisers related to the completion
of a structured financing by PMC Commercial (approximately $165,000) and fees
related to the acquisition by PMC Commercial of the Amerihost hotel properties
(approximately $466,000).
Operating expenses, not including interest, increased by $326,000 (9%)
from $3,736,000 during the nine months ended September 30, 1997 to $4,062,000
during the nine months ended September 30, 1998. This increase was a result of
an increase in salaries and related benefits of $395,000 (16%) from $2,490,000
during the nine months ended September 30, 1997, to $2,885,000 during the nine
months ended September 30, 1998. The increase in salaries and related benefits
was attributable to an increased number of employees (due to the increase in
assets under management including the assets of PMC Commercial and the
complexity of the financing transactions undertaken by the Company), a general
increase in the level of salaries for employees during 1997 and 1998 and a
decrease in the salaries and related benefits which were capitalized relating
to loans closed during the nine months ended September 30, 1998 as compared to
the nine months ended September 30, 1997. General and administrative costs
decreased by $100,000 primarily as a result of (i) an increased level of
advertising during the nine months ended September 30, 1997, and (ii) a
decrease in Texas franchise tax expense during 1998.
Interest expense decreased by $127,000 (3%) from $4,120,000 during the
nine months ended September 30, 1997 to $3,993,000 during the nine months
ended September 30, 1998. The decrease was primarily attributable to the
repayment at maturity of approximately $2.5 million in SBA debentures during
February 1997 and $1.5 million in February 1998.
Realized and unrealized gain (loss) on investments changed from a loss
of $39,000 during the nine months ended September 30, 1997 to a loss of
$143,000 during the nine months ended September 30, 1998. The Company has a
problem loan in Atlanta, GA (with an outstanding balance of approximately
$800,000), the collateral of which has been identified to contain certain
environmental contaminants. Prior to foreclosing on the property, the Company
has been procuring studies to identify the extent of the environmental
contamination, the potential remedies and the cost of the clean-up. Based on
the analysis provided by environmental specialists, it appears that the net
realized recoveries related to property would be approximately $450,000.
Accordingly, the Company has increased the loan loss reserve against this loan
by $300,000 during the nine months ended September 30, 1998. During the nine
months ended September 30, 1998, the Company recorded $145,000 in unrealized
gains relating to the interest-only strip receivables in accordance with SFAS
No. 125. There were no comparable reserves or valuation gains during the nine
months ended September 30, 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net income increased by $8,000 from $3,451,000 during the three months
ended September 30, 1997 to $3,459,000 during the three months ended September
30, 1998. The weighted average common shares outstanding increased by
approximately 3% from 11,452,000 during the three months ended September 30,
1997 to 11,828,000 during the three months ended September 30, 1998 as a result
of shares issued pursuant to the dividend reinvestment and cash purchase plan.
The income for the three months ended September 30, 1998 includes the effect of
the following, as more fully described below: (i) reduced interest income
earned as a result of the sale by First Western of $22.8 million of loans in
December 1997 and a general decline in the interest rate on outstanding loans,
(ii) increase in other income from prepaid loans, and (iii) increased
investment management fees.
Interest income decreased by $235,000, from $4,478,000 for the three
months ended September 30, 1997 to $4,243,000 for the three months ended
September 30, 1998. This decrease was primarily attributable to a decrease in
interest on temporary investments and the continued decline in interest rates
on new loan originations. These factors more than offset the increase in
average retained loan portfolio outstanding from $123 million during the three
months ended September 30, 1997 to $136 million during the three months ended
September 30, 1998, an 11% increase. Accordingly, interest income (not
including the Partnership) on loans decreased by $94,000, or 2%, from
$4,232,000 during the three months ended September 30, 1997 to $4,137,000
during the three months ended September 30, 1998.
14
<PAGE> 17
During the three months ended September 30, 1998, the Company earned
a reduced amount of interest on short- term investments due to the funds
received from the Structured Financing (net proceeds of approximately $37.5
million) increasing the average temporary investments outstanding during the
three months ended September 30, 1997 by a greater amount than the securitized
sale (net proceeds of approximately $20 million) increased the average
temporary investments during the three months ended September 30, 1998. As a
result, during the three months ended September 30, 1998, average temporary
investments outstanding were $10.4 million, a 44% decrease from $18.6 million
during the three months ended September 30, 1997. Accordingly, interest on
temporary investments decreased by $141,000, or 57%, from $246,000 during the
three months ended September 30, 1997 to $106,000 during the three months ended
September 30, 1998.
Premium income decreased by $3,000 (1%) from $238,000 for the three
months ended September 30, 1997 to $235,000 for the three months ended
September 30, 1998.
Other investment income, net, decreased by $11,000 (8%) from $135,000
for the three months ended September 30, 1997 to $124,000 for the three months
ended September 30, 1998. This decrease was primarily attributable to a
decrease in prepayment fees received related to fixed-rate loans which were
prepaid in full and a reduction in forfeited commitment fees during the three
months ended September 30, 1998 as compared to the three months ended September
30, 1997.
Equity in income (loss) of unconsolidated subsidiaries increased by
$74,000 (12%), from $634,000 during the three months ended September 30, 1997
to $708,000 during the three months ended September 30, 1998. The increase is
primarily due to prepayment fees collected by the Partnership and $108,000
earned by PMC Advisers during the three months ended September 30, 1998. This
increase was partially offset by the continued reduction in outstanding
principal balance of loans in the Partnership. Accordingly, the interest
earned on the Partnership assets is decreasing resulting in less net profit.
The Partnership profit includes all yield generated from the loans transferred
by PMC Capital less the cost of the Notes issued by the Partnership. During the
three months ended September 30, 1998 and 1997, the net income from the
Partnership includes $127,000 and $67,000, respectively, in fees received on
prepaid loans. Offsetting a portion of the Partnership income was the
operations of PMC Funding which had a loss of $16,000 during the three months
ended September 30, 1997 and a loss of $22,000 during the three months ended
September 30, 1998.
Other income, net, increased by $142,000 (24%) from $597,000 during
the three months ended September 30, 1997 to $739,000 during the three months
ended September 30, 1998. Other income increased during the three months ended
September 30, 1998 primarily as a result of the income recognition on a loan
paid off in full which was acquired at a discount and the increase in
investment management fees generated by PMC Advisers.
Operating expenses, not including interest, increased by $105,000 (9%)
from $1,235,000 during the three months ended September 30, 1997 to $1,340,000
during the three months ended September 30, 1998. This increase was a result
of an increase in salaries and related benefits of $90,000 (11%) from $833,000
during the three months ended September 30, 1997, to $923,000 during the three
months ended September 30, 1998. The increase in salaries and related benefits
was attributable to a general increase in the level of salaries for employees
during 1997 and 1998 and a decrease in the salaries and related benefits which
were capitalized relating to loans closed during the three months ended
September 30, 1998 as compared to the three months ended September 30, 1997.
Interest expense decreased by $36,000 (3%) from $1,376,000 during the
three months ended September 30, 1997 to $1,340,000 during the three months
ended September 30, 1998. The decrease was primarily attributable to the
repayment at maturity of approximately $1.5 million in February 1998.
Realized and unrealized gain (loss) on investments changed from a loss
of $20,000 during the three months ended September 30, 1997 to a gain of
$90,000 during the three months ended September 30, 1998. During the three
months ended September 30, 1998, the Company recorded $140,000 in unrealized
gains relating to the interest-only strip receivables in accordance with SFAS
No. 125. There were no comparable reserves or valuation gains during the
three months ended September 30, 1997. There were no material gains or losses
on loans required to be recognized during either the three months ended
September 30, 1998 or 1997.
15
<PAGE> 18
CASH FLOW ANALYSIS
The Company generated $9,179,000 and $7,861,000 from operating
activities during the nine months ended September 30, 1998 and 1997,
respectively. The increase of $1,318,000 (17%) was attributable to several
factors including an increase in sources of funds from the change in other
assets. During the nine months ended September 30, 1998 and 1997, the Company
used net cash of $2,083,000 and $4,167,000, respectively, from the change in
operating assets and liabilities. Included in cash flows from operating
activities is the lending activity of First Western relating to the government
guaranteed portion of the SBA 7(a) Program loans originated which are sold into
the secondary market ("Government Guaranteed Lending"). During the nine months
ended September 30, 1998 and 1997, the Company had a net source of cash of
$2,532,000 and $3,057,000, respectively, from Government Guaranteed Lending
activities.
The Company used $12,287,000 and $37,892,000 from investing activities
during the nine months ended September 30, 1998 and 1997, respectively. The
Company decreased its use of funds for loans originated by $14,311,000 from
$47,525,000 during the nine months ended September 30, 1997 to $33,214,000
during the nine months ended September 30, 1998. During the nine months ended
September 30, 1998 principal collected was $18,514,000 as compared to
$6,884,000 during the nine months ended September 30, 1997. This increase of
$11,630,000 (169%) was primarily due to prepayments on larger principal balance
loans during the nine months ended September 30, 1998.
The Company had a net use of $10,932,000 and $9,346,000 from
financing activities during the nine months ended September 30, 1998 and 1997,
respectively. The use of funds increased by $1,586,000 (17%). Dividends paid
on common stock during the nine months ended September 30, 1998 were
$11,128,000 as compared to $9,826,000 during the nine months ended September
30, 1997, an increase of $1,302,000 (13%). The Company also had a decrease in
funds received from the issuance of common stock of $1,474,000 (40%) from
$3,731,000 during the nine months ended September 30, 1997 to $2,257,000 during
the nine months ended September 30, 1998. SBA debenture repayments decreased
by $1,780,000 from $3,280,000 during the nine months ended September 30, 1997
to $1,500,000 during the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The primary use of the Company's funds is to originate loans. The
Company also uses funds to acquire loans from governmental agencies and/or
their agents, for the payment of financing costs, dividends to shareholders,
general and administrative expenses, capital expenditures, advances on loan
liquidations and principal due on borrowing facilities. Approximately $3.2
million of the Company's SBA debentures was paid in full at maturity during
1997 and $1.5 million was paid in full at maturity in February 1998. 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 (See "Dividends"). 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 borrowings under its credit facility, (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 ( see "Leverage" ) and the utilization of its
short-term, uncollateralized revolving credit facility.
Loan commitments outstanding at September 30, 1998 to various
prospective small business companies, including the unfunded portion of projects
in the construction phase, amounted to approximately $70.0 million. Through
October 31, 1998, the Company had funded approximately $17.5 million of such
commitments through utilization of the Company's revolving credit facility. Of
the remaining commitments, approximately $12.6 million are for loans partially
guaranteed by the SBA of which approximately $10.4 million would be sold (when
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. The Company intends to fund the remaining commitments through; (i)
use of the Company's credit facility, (ii) the issuance of SBA debentures, (iii)
the sale of the SBA guaranteed portion of SBA 7(a) Program loans and/or (iv) a
structured financing.
PMC has a $25 million uncollateralized revolving credit facility, as
amended, $10 million of which expires in December 1998 or upon completion of a
structured financing and $15 million of which expires in March 2000. At
October 31, 1998, PMC had approximately $19 million of borrowings outstanding
under this credit facility. Advances pursuant to the credit facility bear
interest at the Company's option at either the lender's prime rate less 50 basis
points or LIBOR plus 175
16
<PAGE> 19
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 135%, as
amended. The Company is in compliance with all covenants of this facility.
Since additional funds are required in order to meet the Company's
current outstanding commitments, the Company is in the process of structuring a
collateralized financing of its variable-rate loans primarily originated as
part of the Prime Lending Program ( see "Leverage" ). As a result of the
current volatile market conditions for asset backed securities such as the
security to be offered by the Company, there can be no assurance that the
securitization or structured financing will be completed or, if completed, will
be on the terms attained on similar transactions completed by the Company.
Additionally, PMC has applied to the SBA to issue up to $15 million in
debentures which, if approved by the SBA, would be available for issuance during
the fourth quarter of 1998.
If additional funds are required, the Company will attempt to either
issue unsecured notes, increase its credit facility, privately or publicly raise
equity and/or sell assets. Management believes that through utilization of one
or more of these sources of debt or equity capital, the Company should meet its
liquidity needs for the foreseeable future.
PMC Capital is in compliance with the requirement to maintain a
minimum of 200% asset coverage of debt as defined in sections 18 and 61 of the
1940 Act as modified by exemptive orders obtained by the Company from the
Securities and Exchange Commission.
DIVIDENDS
PMC Capital has historically paid out 100% of its investment company
taxable income and not paid any return of capital. There are certain timing
differences between book and tax income, most notably the recognition of
commitment fees received. For tax purposes, those fees are recognized as
income when received while for book purposes such fees have historically been
deferred and recognized over the life of the loan. A portion of dividends paid
during 1998 pertains to earnings in 1997 including the effect of the gain from
a securitization and sale of certain loans originated by First Western
completed in December 1997 (these amounts being the "Carry-Forward Amounts").
As a result of these timing differences and the Carry-Forward Amounts, the
payment of dividends does not necessarily coincide with the Company's earnings.
Based on current year's anticipated earnings and the anticipated utilization
during the current year of substantially all of the Carry-Forward Amounts, it
is expected that the current dividend of $0.325 per quarter will be reduced
during the fourth quarter to a dividend in the range of $0.25 to $0.27 per
share. This reduction is to reflect the anticipated investment company taxable
income of the Company during subsequent periods.
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.
The transfer of assets that qualify 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.
17
<PAGE> 20
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 available for sale under SFAS No. 115. As of the date
a securitization is completed, an asset is established and classified as an
"interest-only strip receivable". This receivable is initially valued based on
management's then current estimate of the anticipated discounted future cash
flows retained by the Company related to the pool of securitized loans. The
discount rate considers the risks inherent in the transaction and is a market
rate based on interest rate levels at the time of completion of the
transaction.
On a quarterly basis thereafter, income generated by the interest-only
strip receivable is recognized based on an "internal rate of return" (the
"IRR") which during the initial reporting period after completion of the
securitization is the market rate used in valuing the interest-only strip
receivable. Management updates the anticipated future cash flows on a
quarterly basis and determines a revised IRR based on the recorded
interest-only strip receivable at such balance sheet date. If during any
evaluation of the value of the interest-only strip receivable it is determined
that the IRR is lower than a "risk free" rate for an asset of similar duration,
a realized loss will be incurred which adjusts the recorded value of the
interest-only strip receivable to the current market value.
In addition, on a quarterly basis, the Company measures the fair value
of the interest-only strip receivables based upon the future anticipated cash
flows discounted to reflect the current market interest rates for investments
of this type. Any appreciation (depreciation) of the interest-only strip
receivable is reflected on the accompanying consolidated statements of income
as an unrealized gain (loss) on investments. During the nine months ended
September 30, 1998 and the year ended December 31, 1997, the Company recorded
an unrealized gain of $145,000 and an unrealized loss of ($300,000),
respectively. As of September 30, 1998 and December 31, 1997, the unrealized
loss relating to the interest-only strip receivables was $155,000 and $300,000,
respectively.
The estimated net servicing income and the investment in the
interest-only strip receivable are based in part upon management's estimate of
prepayment speeds, including default rates. There can be no assurance of the
accuracy of these estimates. If the prepayment speeds occur at a faster rate
than anticipated, the amortization of the servicing asset will be accelerated
and the value of the interest-only strip receivable will decline. If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and total income in future periods would be enhanced. Commencing
during the year ended December 31, 1997 as a result of increased prepayment
speeds, the amount of amortization of the servicing asset was increased.
LEVERAGE
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 have loans with both variable and fixed interest rates and the
borrowed funds of these companies are typically long-term and at fixed interest
rates. First Western originates variable-rate loans and has utilized equity
capital of PMC Capital and through structured sales of its portfolio in 1994
and 1997 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 future 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
dividend distributions at existing levels. First Western's loans (all variable
interest rate) based on SBA regulations do not have prepayment penalties.
Since December 1994, the Company has relied upon its ability to
aggregate and sell portions of its loan portfolio in the asset-backed
securities market to generate cash proceeds for funding additional loans.
Further, gains on sales generated by the Company's securitizations represented
a material portion of the Company's revenues. Accordingly, adverse changes in
the Company's "Asset-Backed Securities Program" or in the asset-backed
securities market for the type of product generated by the Company could
materially adversely affect the Company's ability to originate and securitize
loans on a timely basis and upon terms reasonably favorable to the Company.
18
<PAGE> 21
The Company retains a substantial portion of the default and
prepayment risk associated with the loan portfolio that is sells pursuant to
the Asset-Backed Securities Program. A large component of the gain recognized
on such sales and the corresponding asset recorded on the Company's balance
sheet is an interest-only strip receivable which is based on the present value
of estimated future excess cash flows which will be received by the Company
from the securitized loans. Accordingly, the interest-only strip receivable is
calculated on the basis of management's assumptions concerning, among other
things, defaults and prepayments. Actual defaults and prepayments may vary
from management's assumptions, possibly to a material degree. Prepayments on
loans are commonly measured relative to a prepayment standard or model.
YEAR 2000 COMPLIANCE UPDATE
The Year 2000 issue concerns the potential impact of historic computer
software code that only utilized two digits to represent the calendar year
(e.g. "98" for "1998"). Software so developed, and not corrected, could
produce inaccurate or unpredictable results commencing upon January 1, 2000,
when current and future dates present a lower two digit year number than dates
in the prior century. The Company, similar to most financial services
providers, is subject to the potential impact of the Year 2000 issue due to the
nature of financial information. Potential impacts to the Company may arise
from software, computer hardware, and other equipment both within the Company's
direct control and outside of the Company's ownership, yet with which the
Company electronically or operationally interfaces. Regulators have
intensively focused upon Year 2000 exposures, issuing guidance concerning the
responsibilities of senior management and directors. Year 2000 testing and
certification is being addressed as a key safety and soundness issue in
conjunction with these regulatory concerns.
During 1998, the Company formed an internal review team to address,
identify and resolve any Year 2000 issues that encompasses operating and
administrative areas of the Company. In addition, executive management
monitors the status of the Company's Year 2000 remediation plans, where
necessary, as they relate to internally used software, computer hardware and
use of computer applications in the Company's servicing processes. In
addition, the Company is engaged in assessing the Year 2000 issue with
significant suppliers.
The assessment process relating to the Company's loan receivable
servicing operations has commenced. In addition, the Company has initiated
formal communications with its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company intends to use internal resources to test the software for
Year 2000 modifications. The Company plans to substantially complete its Year
2000 assessment and remediation by the first quarter of 1999. The total
project cost (while not considered to be material) has not yet been determined.
However, based on preliminary information, the majority of the project cost
will be attributable to employee time necessary to test the present system and
to meet future industry requirements and will accordingly be expensed. To
date, the Company has not incurred any material costs related to the assessment
of, and preliminary efforts in connection with its Year 2000 issues. The Costs
of the project and the date on which the Company plans to complete its Year
2000 assessment and remediation are based on management's estimates, which were
derived utilizing assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ significantly from those plans.
Specific factors that might cause differences from management's estimates
include, but are not limited to, completion by third parties (primarily the
Company's bank) of their Year 2000 evaluations and their required
modifications. Management believes that the Company is devoting the necessary
resources to identify and resolve significant Year 2000 issues in a timely
manner.
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, dividends 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 "believes,"
"anticipates,"
19
<PAGE> 22
"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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
20
<PAGE> 23
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
27.1 Financial Data Schedule
B. Forms 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1998.
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Capital, Inc.
Date: 11/16/98 \s\ Lance B. Rosemore
------------------- ----------------------------------------
Lance B. Rosemore
President
Date: 11/16/98 \s\ Barry N. Berlin
-------------------- ----------------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
22
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
SEPTEMBER 30, 1998 FORM 10-Q OF PMC CAPITAL, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 247
<SECURITIES> 3,215
<RECEIVABLES> 142,177<F1>
<ALLOWANCES> (625)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 605
<DEPRECIATION> (406)
<TOTAL-ASSETS> 163,307<F2>
<CURRENT-LIABILITIES> 8,327<F3>
<BONDS> 74,790
4,000<F4>
3,000<F4>
<COMMON> 71,428
<OTHER-SE> (126)
<TOTAL-LIABILITY-AND-EQUITY> 163,307<F5>
<SALES> 0
<TOTAL-REVENUES> 18,280<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,062
<LOSS-PROVISION> 143
<INTEREST-EXPENSE> 3,993
<INCOME-PRETAX> 10,082
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,082
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
<FN>
<F1>Includes current and long-term portion of all loans receivable - before
reserve, interest receivable on loans and receivable for loans sold. Does not
include receivable from affiliate.
<F2>Includes the following items not included above.
(i) Interest - only strip receivable, less $155,000 reserve $ 3,021
(ii) restricted investments 2,800
(iii) Real property owned 45
(iv) Due from unconsolidated subsidiaries 1,828
(v) Deferred charges, deposits and
other assets, net 1,061
(vi) investment in unconsolidated subsidiaries 8,009
(vii) Servicing asset 1,330
---------
$ 18,094
=========
<F3>Includes the following:
(i) Accrued interest payable $ 891
(ii) Borrower advances 1,251
(iii) Dividends payable 3,907
(iv) Accounts payable 2,278
---------
$ 8,327
=========
<F4>Preferred stock of subsidiary held by SBA. See footnotes to the Company's
Annual Report filed on Form 10-k for the year ended December 31, 1997.
<F5>Includes the following items not included above:
(i) Deferred fee revenue $ 720
(ii) Other liabilities 740
(iii) Due to unconsolidated subsidiaries 428
--------
$ 1,888
========
<F6>Revenues consist primarily of interest, other yield on investments,premium
income and equity in income of unconsolidated subsidiaries.
</FN>
</TABLE>
