<PAGE> 1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
--------
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 May 1, 1998, Registrant had outstanding 11,812,970 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 -
March 31, 1998 (Unaudited) and December 31, 1997 2
Consolidated Statements of Income (Unaudited) -
Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
<PAGE> 4
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net .......................................... $ 130,608 $ 127,240
Cash equivalents ............................................... 11,861 17,237
Investment in unconsolidated subsidiaries ...................... 7,746 7,797
Interest-only strip receivables ................................ 3,597 3,708
Restricted investments ......................................... 3,027 2,798
Real property owned ............................................ 266 296
----------- -----------
TOTAL INVESTMENTS ................................................ 157,105 159,076
----------- -----------
OTHER ASSETS:
Receivable for loans sold ...................................... 1,342 1,346
Due from unconsolidated subsidiaries ........................... 1,841 1,302
Servicing asset ................................................ 1,601 1,607
Deferred charges, deposits and other assets .................... 1,271 1,398
Accrued interest receivable .................................... 653 608
Cash ........................................................... 238 265
Property and equipment, net .................................... 256 237
----------- -----------
TOTAL OTHER ASSETS ............................................... 7,202 6,763
----------- -----------
TOTAL ASSETS ..................................................... $ 164,307 $ 165,839
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ......................................... $ 39,790 $ 41,290
Notes payable .................................................. 35,000 35,000
Accounts payable ............................................... 2,272 3,269
Dividends payable .............................................. 3,895 4,018
Borrower advances .............................................. 1,885 1,678
Accrued interest payable ....................................... 891 1,316
Due to unconsolidated subsidiaries ............................. 340 279
Deferred fee revenue ........................................... 538 571
Other liabilities .............................................. 817 1,252
----------- -----------
TOTAL LIABILITIES ................................................ 85,428 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,
11,795,000 and 11,631,000 shares issued and outstanding
at March 31, 1998 and December 31, 1997, respectively ..... 118 116
Additional paid-in capital ..................................... 70,869 68,555
Undistributed net operating income ............................. 1,329 2,289
Net unrealized depreciation on investments ..................... (437) (794)
----------- -----------
71,879 70,166
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................... $ 164,307 $ 165,839
=========== ===========
NET ASSET VALUE PER COMMON SHARE ................................. $ 6.09 $ 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>
THREE MONTHS ENDED MARCH 31,
--------------------------
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
INVESTMENT INCOME:
Interest ................................................. $ 4,093 $ 3,989
Premium income ........................................... 389 642
Other investment income, net ............................. 170 85
---------- ----------
Total investment income .................................... 4,652 4,716
Equity in income of unconsolidated subsidiaries, net ....... 588 680
Other income, net .......................................... 550 558
---------- ----------
Total income ............................................... 5,790 5,954
---------- ----------
EXPENSES:
Interest ................................................. 1,332 1,375
Salaries and related benefits ............................ 1,016 822
General and administrative ............................... 164 221
Profit sharing plan ...................................... 38 41
Rent ..................................................... 61 59
Legal and accounting ..................................... 71 72
Small Business Administration fees ....................... 29 31
Directors and shareholders expense ....................... 11 9
---------- ----------
Total expenses ............................................. 2,722 2,630
---------- ----------
Net operating income ...................................... 3,068 3,324
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ...................................... (133) (26)
Change in unrealized appreciation
(depreciation) on investments ........................ 357 (31)
---------- ----------
Total realized and unrealized gain (loss) on investments ... 224 (57)
---------- ----------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................... $ 3,292 $ 3,267
========== ==========
PREFERRED DIVIDENDS ........................................ $ 62 $ 62
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 11,731 11,233
========== ==========
BASIC AND DILUTED EARNINGS PER COMMON SHARE ................ $ 0.28 $ 0.29
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net operating income and realized and unrealized gain (loss) on investments .. $ 3,292 $ 3,267
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 ............................................ (2,570) (7,232)
Proceeds from sale of guaranteed loans ................................. 3,308 7,015
Change in unrealized depreciation on investments and loans written-off . (224) 57
Unrealized premium income, net ......................................... (8) 66
Depreciation and amortization .......................................... 254 142
Accretion of loan discount and deferred fees ........................... (189) (261)
Deferred fees collected ................................................ (27) 149
(Gain) loss on sale of assets .......................................... 12 (4)
Equity in income of unconsolidated subsidiaries, net ................... (588) (680)
Net change in operating assets and liabilities:
Accrued interest receivable ........................................ (45) (40)
Other assets ....................................................... 213 (69)
Accrued interest payable ........................................... (424) (517)
Borrower advances .................................................. 206 118
Other liabilities .................................................. (1,433) (1,494)
---------- ----------
Net cash provided by operating activities ...................................... 1,777 517
---------- ----------
Cash flows from investing activities:
Loans funded ................................................................. (8,367) (13,272)
Principal collected and other adjustments .................................... 4,110 2,824
Proceeds from interest-only strip receivables ................................ 316 246
Purchase of furniture and fixtures and other assets .......................... (38) (20)
Proceeds from sale of assets ................................................. 66 98
Proceeds from partnership distributions ...................................... 640 1,042
Release of (investment in) restricted investments ............................ (228) (26)
---------- ----------
Net cash used in investing activities .......................................... (3,501) (9,108)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock ...................................... 2,061 1,313
Payment of dividends on common stock ........................................ (3,702) (3,336)
Payment of dividends on preferred stock ..................................... (61) (60)
Payment of SBA debentures ................................................... (1,500) (2,480)
Advances from (to) unconsolidated affiliates, net ........................... (477) (1,595)
---------- ----------
Net cash used in financing activities .......................................... (3,679) (6,158)
---------- ----------
Net decrease in cash and cash equivalents ...................................... (5,403) (14,749)
Cash and cash equivalents, beginning of period ................................. 17,502 50,017
---------- ----------
Cash and cash equivalents, end of period ....................................... $ 12,099 $ 35,268
========== ==========
Supplemental disclosure:
Interest paid ............................................................... $ 1,746 $ 1,892
========== ==========
Dividends reinvested ........................................................ $ 254 $ 239
========== ==========
Reclassification from loans receivable to real property owned ............... $ 45 $ 70
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 7
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet of PMC Capital, Inc. ("PMC" or "PMC
Capital") and its wholly-owned regulated investment company subsidiaries
(collectively, the "Company") as of March 31, 1998 and the consolidated
statements of income and cash flows for the three months ended March 31, 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 March 31, 1998
and the results of operations and cash flows for the three months ended March
31, 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 months ended March 31, 1998 are not necessarily
indicative of future financial results.
NOTE 2. RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to the 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.
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,
5
<PAGE> 8
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. 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 the prime lending rate ("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) and preferred stock. The SBA subsidy is no longer provided on new
issuances under the SSBIC program.
Western Financial is a licensed small business investment company ("SBIC")
under the SBIA that provides 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 the subsidiaries. These loans are made to borrowers who exceed the
eligibility requirements of the 7(a) Program or SBIC programs.
Unconsolidated Subsidiaries
PMC Advisers, organized in July 1993, acts as the investment advisor for PMC
Commercial Trust ("PMC Commercial" or the "Trust"), a Texas real estate
investment trust and an affiliate of PMC Capital.
PMC Funding is a Florida corporation that holds assets on behalf of the
Company. PMC Capital is the sole shareholder of PMC Funding.
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 5. LONG-TERM DEBT:
During February 1998, the Company repaid a $1,500,000 SBA debenture at
maturity.
NOTE 6. DIVIDENDS PAID AND DECLARED:
During January 1998, the Company paid $0.320 per share in dividends to common
shareholders of record on December 31, 1997 including a special dividend of
$0.02 per common share. During March 1998, the Company declared a $0.325 per
share dividend to common shareholders of record on March 31, 1998 which was
paid on April 13, 1998.
NOTE 7. PMC LIMITED PARTNERSHIP:
As described in Note 4, the accounts of the Partnership are accounted for by
the equity method of accounting in conformity with Federal securities law.
During the three months ended March 31, 1998, the Partnership had $1,110,000 in
total income and net operating income of $611,000.
6
<PAGE> 9
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CONDENSED COMBINED FINANCIAL STATEMENTS:
As described in Note 4, the consolidated financial statements include the
accounts of PMC and its wholly-owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding, the Partnership, PMC Capital Corp.
and PMC Trust 1996-A (the "Unconsolidated Entities") are accounted for by the
equity method of accounting in conformity with Federal securities law. The
following are the condensed combined balance sheets as of March 31, 1998 and
December 31, 1997 and the condensed combined statement of income for the three
months ended March 31, 1998 and 1997 for the Company and the Unconsolidated
Entities.
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(Unaudited)
ASSETS (IN THOUSANDS)
<S> <C> <C>
Investments at value:
Loans receivable, net ........................ $ 161,506 $ 161,215
Cash equivalents ............................. 11,902 17,272
Interest-only strip receivable ............... 3,597 3,708
Restricted investments and real property
owned ................................. 7,138 5,780
---------- ----------
184,143 187,975
Other assets ........................................ 7,193 6,931
---------- ----------
Total assets ................................. $ 191,336 $ 194,906
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ....................... $ 39,790 $ 41,290
Notes payable ................................ 61,865 64,007
Other liabilities ............................ 10,802 12,443
---------- ----------
112,457 117,740
---------- ----------
Cumulative preferred stock of subsidiary ..... 7,000 7,000
---------- ----------
SHAREHOLDERS' EQUITY:
Common Stock ................................. 118 116
Additional paid-in capital ................... 70,869 68,555
Undistributed net operating income ........... 1,329 2,289
Net unrealized depreciation on investments ... (437) (794)
---------- ----------
71,879 70,166
---------- ----------
Total liabilities and shareholders' equity ... $ 191,336 $ 194,906
========== ==========
</TABLE>
7
<PAGE> 10
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
--------- ---------
(Unaudited, in thousands)
<S> <C> <C>
INCOME:
Investment income ............................. $ 5,761 $ 6,073
Other income, net ............................. 585 591
--------- ---------
Total income ........................... 6,346 6,664
--------- ---------
EXPENSES:
Interest ...................................... 1,804 2,019
Salaries and related benefits ................. 1,016 822
General and administrative expenses ........... 249 287
Other ......................................... 209 212
--------- ---------
Total expense .......................... 3,278 3,340
--------- ---------
Net operating income ................................. 3,068 3,324
Realized and unrealized gain (loss) on investments ... 224 (57)
--------- ---------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............. $ 3,292 $ 3,267
========= =========
</TABLE>
NOTE 9. 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
months ended March 31, 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 $61,000 and
$60,000 during the three months ended March 31, 1998 and 1997, respectively.
The weighted average number of shares used in the computations of basic
earnings per common share were 11.7 million and 11.2 million for the three
months ended March 31, 1998 and 1997, respectively.
NOTE 10. 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
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS:
Reporting Comprehensive Income
In June 1997, The Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
and display of comprehensive income and its components. As PMC reports as an
investment company, components of comprehensive income are currently included in
the consolidated statements of income, as such, SFAS No. 130 has no impact on
PMC.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for the way that public companies report
information about segments in annual and interim financial statements.
Presently, the Company only operates in one segment of business. The
requirements of SFAS No. 131 are not required in interim financial statements
in the initial year of adoption.
8
<PAGE> 11
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 advisor which evaluates
and services loans 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 loans originated and retained including the
effect of commitment fees collected at the inception of
the loan.
o Advisory fee income from the management of PMC Commercial.
o Equity in the income of non-investment company subsidiaries.
o Premiums recognized from the sale of the government guaranteed
portion of 7(a) Program loans sold into the secondary market.
o Interest earned on temporary (short-term) investments.
o Other fees, including: late fees, prepayment fees, construction
monitoring and site visit fees.
In order to generate revenues, PMC originates commercial loans. The
following table sets forth information concerning the aggregate gross loans
funded for the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
COMPANY FUNDED FUNDED FUNDED FUNDED
- ------- ----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
PMIC ........................ $ 2.9 $ 5.0 $ 24.1 $ 19.3
Western Financial ........... 4.3 0.7 12.9 7.5
First Western ............... 3.4 10.3 29.5 29.2
PMC Capital ................. 0.3 4.5 19.9 14.2
----------- ----------- ----------- -----------
Total ................ $ 10.9 $ 20.5 $ 86.4 $ 70.2
=========== =========== =========== ===========
</TABLE>
In 1993, the Company organized PMC Advisers which, pursuant to the terms
of an investment management agreement, has acted as the investment advisor for
PMC Commercial. The Company's subsidiary, PMC Advisers, has been the
investment advisor for PMC Commercial since the completion of PMC Commercial's
public offering in December 1993. During the three months ended March 31, 1998
and the year ended December 31,1997, PMC Advisers earned management fees of
approximately $420,000 and $1,600,000, respectively, from PMC Commercial.
The Company also earns income through its equity ownership in the
Unconsolidated Subsidiaries, primarily the Partnership. In November 1996 the
Partnership completed 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
9
<PAGE> 12
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 profit of PMC Capital.
Due to the reduction of loan origination opportunities experienced by
First Western over the past several years for the reasons discussed below, the
Company has actively sought to increase other sources of revenues and thereby
reduce its reliance on the income generated by First Western. During this
period the Company's other lending activities have increased and the Company
has established other revenue sources such as the investment advisory income.
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 over the Prime Rate charged by First Western ranges from
1.0% to 2.75%.
There has been an increasing amount of competitor lending activity at
advance rates and interest rates which are considerably more aggressive than
those offered by the Company. In order to maintain a quality portfolio, the
Company 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 has
instituted the Prime Lending Program as described below. The yield on these
loans (assuming no change in the Prime Rate) is lower than the Company has
historically experienced.
Late in the fourth quarter of 1996 the Company began marketing a
variable-rate lending program (the "Prime Lending Program") which is separate
from the 7(a) Program of First Western, the Company's other variable rate
lending program. The Prime Lending Program 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 that some of these loan
originations have refinanced First Western's loans. These loans have variable
interest rates based on the Prime Rate.
Additionally, the Company has been approved as a licensee under the
Rural Economic Development Business and Industry Loan Program sponsored by the
U.S. Department of Agriculture (the "B & I Loan Program"). Under the B & I
Loan Program, loans are to be originated in rural areas (generally city areas
with a population of less than 50,000) and are partially guaranteed by the U.S.
Government. The U.S. Government guarantees repayment of up to 80% of the
principal amount of loans originated under the B & I Loan Program.
As a result of its working capital requirements for loan originations as
well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, the Company has temporary short-term
investments. In order to minimize its short-term investment positions, the
Company may enter into a bank warehouse facility and 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 three months
ended March 31, 1998 and the year ended December 31,1997 was $170,000 and
$504,000, respectively. The amount earned will vary based on volume of loans
funded, 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 47% and 44% of total income during the three
months ended March 31, 1998 and the year ended December 31, 1997, respectively.
Interest expense was $1,332,000 and $5,548,000 during the three months
ended March 31, 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 3.5 years as of March 31, 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 4.8 years as
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<PAGE> 13
of March 31, 1998. At March 31, 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 of either
the lender's prime rate less 50 basis points or Libor plus 175 basis points, at
the Company's option.
Company overhead was $1,390,000 and $5,054,000 during the three months
ended March 31, 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; Austin, Texas; and Phoenix, Arizona. The largest overhead
expense is the salaries and related benefits which consist of salaries for the
Company's officers and employees who provide for all of the Company's
management and portfolio functions, including marketing, servicing, accounting
and portfolio analysis. Salaries and related benefits were 18% and 14%,
respectively, of total income during the three months ended March 31, 1998 and
the year ended December 31, 1997. It is anticipated that overhead will
continue to increase as the Company's portfolio 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 three months
ended March 31, 1998 and the year ended December 31, 1997. These costs are
anticipated to increase in proportion to the growth of the Company's portfolio
under management.
Profit sharing plan, rent, legal and accounting, SBA fees and directors
and shareholders expense (collectively the "Other Administrative Costs")
aggregated $210,000 and $822,000 during the three months ended March 31, 1998
and the year ended December 31, 1997, respectively. The Other Administrative
Costs were 4% and 3% of total income during the three months ended March 31,
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
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.
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.
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 estimate of the anticipated discounted future cash flows retained
by the Company related to the pool of securitized loans. The discount rate is
a market rate based on interest rate levels at the time of completion of the
transaction considering the risks inherent in 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
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<PAGE> 14
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 three months ended
March 31, 1998 and the year ended December 31, 1997, the Company recorded
unrealized gains (losses) of $255,000 and ($300,000), respectively. As of
March 31, 1998 and December 31, 1997, the unrealized loss relating to the
interest-only strip receivables was $45,000 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, the amount of amortization of the
servicing asset was increased as a result of increased prepayment speeds.
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 sale 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 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) do not have prepayment penalties.
As a result of the general downward trend in interest rates, the Company
has experienced an increased rate in the prepayment of its loans. On such
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 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.
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 represent 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 generally
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.
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. The
model used for purposes of determining future cash flows, the Constant
Prepayment Rate ("CPR"), represents an assumed constant rate of prepayment per
annum relative to the then outstanding
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<PAGE> 15
principal balance of the pool of serviced loans. The CPR is a prediction by
management of the anticipated rate of prepayment of the pool.
Greater than anticipated prepayments of principal will decrease the fair
value attributed to the interest-only strip receivable. Fewer than anticipated
prepayments of principal will increase the fair value attributed to the
interest-only strip receivable. The effect on the Company's yield due to
principal prepayments on the underlying securitized loans occurring at a rate
that is faster (or slower) than the rate anticipated by the Company in the
period immediately following the completion of the securitization will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
principal payments. The weighted average lives of the underlying securitized
loans will also be affected by the amount and timing of delinquencies and
defaults on the underlying securitized loans and the recoveries, if any, on
defaulted underlying securitized loans.
In addition, the Company is required to deposit substantial amounts of
the cash flows generated by its interests in the Company sponsored
securitizations ("restricted cash") into spread accounts which are pledged to
the security holders.
The Company regularly measures its default, prepayment and other
assumptions against the actual performance of securitized receivables including
the guaranteed portion of loans sold. If the Company were to determine, as a
result of such regular review or otherwise, that it underestimated (or
overestimated) defaults and/or prepayments, or that any other material
assumptions were inaccurate, the Company would be required to adjust the
carrying value of its interest-only strip receivable by making a charge to
income and adjusting the carrying value of the interest-only strip receivable
on its balance sheet. An impairment of the interest-only strip receivable
(i.e. reduction of estimated future cash flows) and the corresponding decreases
in earnings and cash flow could limit the Company's ability to service debt and
could affect future securitizations and other financings. Although the Company
believes that it has made reasonable assumptions as to the future cash flows of
the various pools of loans that have been sold in securitization transactions,
actual rates of default or prepayment may differ from those assumed and other
assumptions may be required to be revised upon future events. Generally, the
form of credit enhancement agreement entered into in connection with
securitization transactions contains specified limits on the delinquency,
default and loss rates on the receivables included in each trust. If, at any
measurement date, the delinquency, default or loss rate with respect to any
trust were to exceed the specified limits, provisions of the credit enhancement
agreement would automatically increase the level of credit enhancement
requirements for that trust. During the period in which the specified
delinquency, default or loss rate was exceeded, excess cash flow, if any, from
the trust would be used to fund the increased credit enhancement levels instead
of being distributed to the Company, which would have an adverse effect on the
Company's cash flow.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Net income increased by $25,000 from $3,267,000 during the three months
ended March 31, 1997 to $3,292,000 during the three months ended March 31,
1998. The weighted average common shares outstanding increased by
approximately 4% from 11,233,000 during the three months ended March 31, 1997
to 11,731,000 during the three months ended March 31, 1998 as a result of
shares issued pursuant to the dividend reinvestment and cash purchase plan.
The income for the three months ended March 31, 1998 includes the effect of
reduced interest income earned as a result of the sale by First Western of
$22.8 million of loans in December 1997 and reduced premium income as more
fully described below.
Interest income increased by $104,000 (3%), from $3,989,000 for the
three months ended March 31, 1997 to $4,093,000 for the three months ended
March 31, 1998. This increase was primarily attributable to the loan
originations in 1997 and during the first quarter of 1998 which exceeded the
amount of loan prepayments, loan collections and the sale of $22.8 million of
loans in December 1997. The average retained loan portfolio outstanding during
the first quarter of 1998 and 1997 was $129 million and $99 million,
respectively, a 30% increase. Accordingly, interest income (not including the
Partnership) on loans increased by $446,000, or 13%, from $3,475,000 during
the three months ended March 31, 1997 to $3,921,000 during the three months
ended March 31, 1998. Including the interest earned by the Partnership,
interest income on loans increased by $201,000 (4%) to $4,911,000 during the
three months ended March 31, 1998 compared to $4,710,000 during the three
months ended March 31, 1997.
During the first quarter of 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
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<PAGE> 16
average temporary investments outstanding during the three months ended March
31, 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 March 31, 1998. As a result, during the first quarter
of 1998, average temporary investments outstanding were $17.5 million, a 60%
decrease from $43.6 million during the first quarter of 1997. Accordingly,
interest on temporary investments decreased by $342,000, or 67%, from $514,000
during the three months ended March 31, 1997 to $172,000 during the three
months ended March 31, 1998.
Premium income decreased by $253,000 (39%) from $642,000 for the three
months ended March 31, 1997 to $389,000 for the three months ended March 31,
1998. This decrease was primarily attributable to a $3,707,000 (53%) decrease
in the guaranteed portion of loans held for sale or sold (under the 7(a)
Program) from $7,015,000 during the three months ended March 31, 1997 to
$3,308,000 during the three months ended March 31, 1998. The premium income
earned during the three months ended March 31, 1997 was $151,000 higher than
the previous years comparable quarter. In the opinion of management, it is not
expected that the decrease in premium income of 39% will continue during the
remainder of the year ending December 31, 1998.
Other investment income, net, increased by $85,000 (100%) from $85,000
for the three months ended March 31, 1997 to $170,000 for the three months
ended March 31, 1998. This increase was primarily attributable to an increase
in prepayment fees received on loans during the three months ended March 31,
1998 as compared to the three months ended March 31, 1997 related to fixed-rate
loans which were prepaid in full.
Equity in income (loss) of unconsolidated subsidiaries decreased by
$92,000 (14%), from $680,000 during the three months ended March 31, 1997 to
$588,000 during the three months ended March 31, 1998. 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 three months ended
March 31, 1998 and 1997, the net income from the Partnership includes $98,000
and $68,000, 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 $12,000 during the three months ended March 31, 1997 and a loss of
$22,000 during the three months ended March 31, 1998.
Other income, net, decreased by $8,000 (1%) from $558,000 during the
three months ended March 31, 1997 to $550,000 during the three months ended
March 31, 1998. Other income was stable during the three months ended March
31, 1998 and 1997 and is primarily a result of fee income earned as a result
of investment management fees generated by PMC Advisers.
Operating expenses, not including interest, increased by $135,000 (11%)
from $1,255,000 during the three months ended March 31, 1997 to $1,390,000
during the three months ended March 31, 1998. This increase was a result of an
increase in salaries and related benefits of $194,000 (24%) from $822,000
during the three months ended March 31, 1997, to $1,016,000 during the three
months ended March 31, 1998. 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), 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 March 31, 1998 as compared to the three months ended March 31,
1997. Rent expense increased by $2,000 due to the an increase in the base rent
at the Company's headquarters. General and administrative costs decreased by
$57,000 primarily as a result of (i) increased advertising incurred during the
first quarter of 1997 from mail-outs related to the new Prime Lending Program,
and (ii) a decrease in Texas franchise tax expense.
Interest expense decreased by $43,000 (3%) from $1,375,000 during the
three months ended March 31, 1997 to $1,332,000 during the three months ended
March 31, 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 increased from a loss
of $57,000 during the three months ended March 31, 1997 to a gain of $224,000
during the three months ended March 31, 1998. During both periods, loan losses
were minimal. During the first quarter of 1998, the Company recorded $255,000
in unrealized gains relating to the interest-only strip receivables recoveries
to fair value in accordance with SFAS No. 125. There were no comparable
recoveries during the three months ended March 31, 1997.
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CASH FLOW ANALYSIS
The Company generated $1,777,000 and $517,000 from operating activities
during the three months ended March 31, 1998 and 1997, respectively. The
increase of $1,260,000 (244%) was attributable to several factors including an
increase in sources of funds from the change in other assets, the net source
generated from SBA 7(a) guaranteed loan sales, and depreciation and
amortization. Included in cash flows from operating activities is the lending
activity of First Western relating to the government guaranteed portion of
loans originated which are sold into the secondary market ("Government
Guaranteed Lending"). During the three months ended March 31, 1998 and 1997,
the Company had a net source of cash of $738,000 and a net use of cash of
$217,000, respectively, from Government Guaranteed Lending activities. During
the three months ended March 31, 1998 and 1997, the Company used net cash of
$1,483,000 and $2,002,000, respectively, from the change in operating assets
and liabilities.
The Company used $3,501,000 and $9,108,000 from investing activities
during the three months ended March 31, 1998 and 1997, respectively. The
Company decreased its use of funds for loans originated by $4,905,000 from
$13,272,000 during the three months ended March 31, 1997 to $8,367,000 during
the three months ended March 31, 1998. During the three months ended March
31, 1998 principal collected was $4,110,000 as compared to $2,824,000 during
the three months ended March 31, 1997. This increase of $1,286,000 (45%) was
primarily due to prepayments on larger principal balance fixed-rate loans
during the three months ended March 31, 1998.
The Company had a net use of $3,679,000 and $6,158,000 from financing
activities during the three months ended March 31, 1998 and 1997, respectively.
The decreased use of funds of $2,479,000 (40%) was primarily the result of
$2,061,000 in proceeds received from dividend reinvestment plan stock issuances
during the three months ended March 31, 1998 compared to $1,313,000 during the
three months ended March 31, 1997 and the SBA debenture repayments decreasing by
$980,000 from $2,480,000 during the three months ended March 31, 1997 to
$1,500,000 during the three months ended March 31, 1998 . Dividends paid on
common stock during the three months ended March 31, 1998 were $3,702,000 as
compared to $3,336,000 during the three months ended March 31, 1997, an
increase of $366,000 (11%).
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. 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
and the utilization of its short-term, uncollateralized revolving credit
facility.
The Company has a dividend reinvestment and cash purchase plan ("DRP")
available to its shareholders. During March 1998 the Company temporarily
suspended the optional cash purchase portion of the DRP since the use of
leverage is currently more cost effective than the issuance of additional
equity. Revisions to the DRP have been filed with the Securities and Exchange
Commission on Form N-2. Amendments to the plan include the calculation of the
purchase price of the shares issued related to open market purchases under the
plan and the discontinuation of the 2% discount previously allowed on share
purchases.
Loan commitments outstanding at March 31, 1998 to various prospective
small business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $47.2 million. Of these
commitments, $15.4 million were for loans partially guaranteed by the SBA of
which approximately $13.2 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
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<PAGE> 18
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.
PMC has a $15 million uncollateralized revolving credit facility which
expires in March 2000. At March 31, 1998, PMC had no outstanding borrowings
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 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%. Although the Company did not have any balance outstanding on
this credit facility at March 31, 1998, the Company was in compliance with all
covenants of this facility.
Due to changes in the SBIC program increasing the cost and availability
of SBA debentures and preferred stock, the Company has utilized other sources
of funds to expand its loan portfolio. The cost and terms of these other
sources of funds are not as favorable as those historically achieved on SBA
debentures and SSBIC preferred stock; however, the Company has been able to
issue debt through private placement of notes and generate working capital
through securitization and sale of a portion of its portfolio. Since additional
funds are required in order to meet the Company's current outstanding
commitments, the Company is in the process of structuring a collateralized
financing of its variable-rate loans originated as part of the Prime Lending
Program. There can be no assurance that a securitization or structured
financing will be completed or, if completed, will be on the terms attained on
similar transactions completed by the Company. If additional funds are
required, the Company will attempt to either issue additional unsecured notes
and/or privately or publicly raise equity. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income
In June 1997, The Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
and display of comprehensive income and its components. As PMC reports as an
investment company, components of comprehensive income as currently included in
the consolidated statements of income, as such, SFAS No. 130 has no impact on
PMC.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for the way that public companies report
information about segments in annual and interim financial statements.
Presently, the Company only operates in one segment of business. The
requirements of SFAS No. 131 are not required in interim financial statements
in the initial year of adoption.
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,
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<PAGE> 19
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
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PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 First Amended and Restate Revolving Credit Note
dated as of March 15, 1998.
10.2 Second Amendment to Loan Agreement and Amendment to
Loan Documents and Renewal and Extension of Loan
dated as of March 15, 1998.
27.1 Financial Data Schedule
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Capital, Inc.
Date: 5/14/98 /s/ Lance B. Rosemore
--------------------------- -------------------------------
Lance B. Rosemore
President
Date: 5/14/98 /s/ Barry N. Berlin
-------------------------- -------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 First Amended and Restated Revolving Credit Note dated as of
March 15, 1998.
10.2 Second Amendment to Loan Agreement and Amendment to Loan
Documents and Renewal and Extension of Loan dated as of
March 15, 1998.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$15,000,000.00 March 15, 1998
FOR VALUE RECEIVED, PMC CAPITAL, INC., a Texas corporation ("BORROWER"),
does hereby unconditionally promise to pay to the order of BANK ONE, TEXAS,
NATIONAL ASSOCIATION ("BANK"), at its offices in Dallas County, Texas at 1717
Main Street, Dallas, Texas 75201, Attention: Alan Miller. The principal amount
of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00) ("TOTAL PRINCIPAL
AMOUNT"), or such amount less than the Total Principal Amount which is
outstanding from time to time if the total amount outstanding hereunder is less
than the Total Principal Amount, in lawful money of the United States of
America, together with interest on such portion of the Total Principal Amount
which has been drawn until paid at the rates per annum provided below.
1. Definitions. For purposes of this Note, unless the context
otherwise requires, the following terms shall have the definitions assigned to
such terms as follows:
"ADJUSTED BASE RATE" shall mean a rate equal to the remainder of
(a) the Base Rate, less (b) one-half of one percent (.5%) per annum.
"ADJUSTED LIBOR RATE" shall mean with respect to each Interest
Period, on any day thereof, an amount equal to the sum of (a) one and
three fourths percent (1.75%), plus, (b) the quotient of (i) the LIBOR
Rate with respect to such Interest Period, divided by (ii) the remainder
of 1.0 less the Reserve Requirement in effect on such day. Each
determination by Bank of the Adjusted LIBOR Rate shall, in the absence
of manifest error, be conclusive and binding.
"ADVANCE" shall mean an advance of Loan proceeds made by the Bank
pursuant to the Loan Agreement.
"BASE RATE" shall mean the Prime Rate of interest per annum as
published from time to time in Money Rates in The Wall Street Journal
(or if such Prime Rate is not published in The Wall Street Journal, such
other comparable rate of interest selected by the Bank in its sole
discretion and published in a comparable financial publication).
"BASE RATE BALANCE" shall mean that portion of the principal
balance of this Note bearing interest at a rate based upon the Adjusted
Base Rate.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday
or any other day on which national banking associations are authorized
to be closed.
<PAGE> 2
"CONSEQUENTIAL LOSS" shall mean, with respect to Borrower's
payment of all or any portion of the then outstanding principal amount
of any LIBOR Balance on a day other than the last day of the Interest
Period related thereto, any loss, cost or expense incurred by Bank in
redepositing such principal amount, including the sum of (a) the
interest which, but for such payment, Bank would have earned in respect
of such principal amount so paid, for the remainder of the Interest
Period applicable to such sum, reduced, if Bank is able to redeposit
such principal amount so paid for the balance of such Interest Period,
by the interest earned by Bank as a result of so redepositing such
principal amount plus (b) any expense or penalty incurred by Bank on
redepositing such principal amount.
"CONTRACT RATE" shall mean a rate of interest based upon the
Adjusted LIBOR Rate or Adjusted Base Rate in effect at any time pursuant
to an Interest Notice.
"DEFAULT" shall mean an event which, with the giving of notice or
the passage of time or both, would constitute an Event of Default.
"DEFAULT RATE" shall mean the Base Rate plus five percent (5%)
per annum.
"DOLLARS" shall mean lawful currency of the United States of
America.
"EVENT OF DEFAULT" shall have the meaning ascribed to such term
in the Loan Agreement.
"EXCESS INTEREST AMOUNT" shall mean, on any date, the amount by
which (a) the amount of all interest which would have accrued prior to
such date on the principal of this Note, had the applicable Contract
Rate at all times been in effect without limitation by the Maximum Rate,
exceeds (b) the aggregate amount or interest accrued on this Note on or
prior to such date.
"INTEREST NOTICE" shall mean a notice given by Borrower to Bank
of an Interest Option selected hereunder. Each Interest Notice shall
specify the Interest Option selected, the amount of the unpaid principal
balance of this Note to bear interest at the rate selected and, if the
Adjusted LIBOR Rate is specified, the length of the applicable Interest
Period. An Interest Notice may be written or oral (if promptly
confirmed thereafter in writing), and Bank is hereby authorized and
directed to honor all telephonic Interest Notices from any person
authorized to request advances hereunder.
"INTEREST OPTION" shall have the meaning assigned to such term in
PARAGRAPH 6 hereof.
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<PAGE> 3
"INTEREST PAYMENT DATE" shall mean (a) in the case of the Base
Rate Balance, the first day of each October, January, April and July
occurring prior to the Maturity Date and (b) in the case of any LIBOR
Balance, the last day of the corresponding Interest Period with respect
to such LIBOR Balance and the Maturity Date.
"INTEREST PERIOD" shall mean with respect to any LIBOR Balance, a
period commencing: (a) on any date which, pursuant to an Interest
Notice, the principal amount of such LIBOR Balance begins to accrue
interest at the Adjusted LIBOR Rate, or (b) the Business Day following
the last day of the immediately preceding Interest Period in the case of
a rollover to a successive Interest Period and ending 30, 60 or 90 days
thereafter as Borrower shall elect in accordance with the provisions
hereof; provided, that: (i) any Interest Period which would otherwise
end on a day which is not a LIBOR Business Day shall be extended to the
succeeding LIBOR Business Day; and (ii) any Interest Period which would
otherwise end after the Maturity Date shall end on the Maturity Date.
"LIBOR BALANCE" shall mean any principal balance of this Note
which, pursuant to an Interest Notice, bears interest at a rate based
upon the Adjusted LIBOR Rate for the Interest Period specified in such
Interest Notice.
"LIBOR BUSINESS DAY" shall mean a day on which dealings in
Dollars are carried out in the London interbank Eurodollar market.
"LIBOR RATE" shall mean, with respect to each Interest Period,
the offered rate for U.S. Dollar deposits of not less than $1,000,000.00
as of 11:00 a.m. City of London, England time two (2) LIBOR Business
Days prior to the first date of each Interest Period of this Note as
shown on the display designated as "BRITISH BANKERS ASSOCIATION INTEREST
SETTLEMENT RATES" on the Telerate System ("TELERATE"), Page 3750 or Page
3740, or such other page or pages as may replace such pages on Telerate
for the purposes of displaying such rate. Provided, however, that if
such rate is not available on Telerate then such offered rate shall be
otherwise independently determined by Bank from an alternate,
substantially similar independent source available to Bank or shall be
calculated by Bank by a substantially similar methodology as that
theretofore used to determine such offered rate in Telerate.
"LOAN AGREEMENT" shall mean that certain Loan Agreement dated as
of May 15, 1996, by and between Bank and Borrower, as amended by that
certain Modification of Loan Agreement dated as of August 20, 1996, and
that certain Second Amendment to Loan Agreement and Amendment to Loan
Documents and Renewal and Extension of Loan dated to be effective as of
March 15, 1998, each of which was entered into by the Bank and the
Borrower, as the foregoing may, from time to time hereafter, be further
renewed, extended,
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<PAGE> 4
increased, restated, supplemented, amended or otherwise modified.
"LOAN DOCUMENTS" shall have the meaning ascribed to such term in
the Loan Agreement.
"MATURITY DATE" shall have the meaning ascribed to such term in
the Loan Agreement.
"MAXIMUM RATE" shall mean, with respect to the holder hereof, the
maximum nonusurious interest rate, if any, that at any time, or from
time to time may be contracted for, taken, reserved, charged, or
received on the indebtedness evidenced by this Note under the laws which
are presently in effect in the United States and the State of Texas
applicable to such holder and such indebtedness or, to the extent
permitted by law, under such applicable laws of the United States and
the State of Texas which may hereafter be in effect and which allow a
higher maximum nonusurious interest rate than applicable laws now allow.
To the extent that Chapter 303 of the Texas Finance Code is relevant to
any holder of this Note for the purposes of determining the Maximum
Rate, each such holder elects to determine such applicable legal rate
pursuant to the "weekly ceiling," from time to time in effect, as
specified in Chapter 303 and subject to any right such holder may have
subsequently, under applicable law, to change the method of determining
the Maximum Rate. If no Maximum Rate is established by applicable law,
then the Maximum Rate shall be equal to eighteen percent (18%) per
annum.
"REGULATION D" shall mean Regulation D of the Board of Governors
of the Federal Reserve System from time to time in effect and shall
include any successor or other regulation relating to reserve
requirements applicable to member banks of the Federal Reserve System.
"RESERVE REQUIREMENT" shall, on any day, mean that percentage
(expressed as a decimal fraction) which is in effect on such day, as
provided by the Board of Governors of the Federal Reserve System (or any
successor governmental body) for determining the reserve requirements
(including, without limitation, basic, supplemental, marginal and
emergency reserves) under Regulation D with respect to "Eurocurrency
liabilities" as currently defined in Regulation D, or under any similar
or successor regulation. For purposes of this definition, any LIBOR
Balances hereunder shall be deemed "Eurocurrency liabilities" under
Regulation D without benefit of or credit for prorations, exemptions or
offsets under Regulation D. Bank's determination of the Reserve
Requirement shall be conclusive.
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<PAGE> 5
2. Payments of Interest and Principal. Interest on the unpaid
principal balance of this Note shall be due and payable on each Interest
Payment Date as it accrues. The entire unpaid principal balance of this Note,
and all accrued but unpaid interest hereon, shall be due and payable on the
Maturity Date.
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<PAGE> 6
3. Rates of Interest. The unpaid principal of the Base Rate Balance
shall bear interest at a rate per annum which shall from day to day be equal to
the lesser of (a) the Adjusted Base Rate in effect from day to day, or (b) the
Maximum Rate. The unpaid principal of each LIBOR Balance shall bear interest
at a rate per annum which shall from day to day be equal to the lessor of (i)
the Adjusted LIBOR Rate for the Interest Period in effect with respect to such
LIBOR Balance, or (ii) the Maximum Rate. Each change in the interest rate
applicable to a Base Rate Balance shall become effective without prior notice
to Borrower automatically as of the opening of business on the date of such
change in the Adjusted Base Rate. Interest on this Note shall be calculated on
the basis of the actual days elapsed in a year consisting of 365/366 days.
4. Interest Recapture. If on each Interest Payment Date or any
other date on which interest payments are required hereunder, Bank does not
receive interest on this Note computed at the Contract Rate because such
Contract Rate exceeds or has exceeded the Maximum Rate, then Borrower shall,
upon the written demand of Bank, pay to Bank in addition to the interest
otherwise required to be paid hereunder, on each Interest Payment Date
thereafter, the Excess Interest Amount (calculated as of such later Interest
Payment Date); provided that in no event shall Borrower be required to pay, for
any Interest Period, interest at a rate exceeding the Maximum Rate effective
during such period.
5. Interest on Past Due Amounts. Subject to the limitations on
interest, if applicable, set forth in this Note and the Loan Agreement, to the
extent any interest is not paid on or before the fifth (5) day after it becomes
due and payable, Bank may, at its option, add such accrued but unpaid interest
to the principal of this Note. Notwithstanding anything herein to the
contrary, all past due principal of this Note and, to the extent permitted by
applicable law, past due interest on this Note shall, at the option of Bank,
bear interest at the Default Rate until paid.
6. Interest Option. Subject to the provisions hereof, Borrower
shall have the option (an "INTEREST OPTION") of having designated portions of
the unpaid principal balance of this Note bear interest at a rate based upon
the Adjusted LIBOR Rate or Adjusted Base Rate as provided in PARAGRAPH 3
hereof; provided, however, that the selection of the Adjusted LIBOR Rate for a
particular Interest Period shall not be for less than $100,000.00 of unpaid
principal or an integral multiple thereof. The Interest Option shall be
exercised in the manner provided below:
a. At Time of Borrowing. Contemporaneously with each request
for an advance by Borrower under PARAGRAPH 9 herein, Borrower shall give
Bank an Interest Notice indicating the initial Interest Option selected
with respect to the principal balance of such advance.
b. At Expiration of Interest Periods. On or before the day
of termination of any
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<PAGE> 7
Interest Period, Borrower shall give Bank an Interest Notice indicating
the Interest Option to be applicable to the corresponding LIBOR Balance
upon the expiration of such Interest Period. If the required Interest
Notice shall not have been timely received by Bank prior to the
expiration of the then-relevant Interest Period, Borrower shall be
deemed to have selected a rate based upon the Adjusted Base Rate to be
applicable to such LIBOR Balance upon the expiration of such Interest
Period and to have given Bank notice of such selection.
c. Conversion From Adjusted Base Rate. During any period in
which any portion of the principal hereof bears interest at a rate based
upon the Adjusted Base Rate, Borrower shall have the right, on any
Business Day (the "CONVERSION DATE"), to convert all or a portion of
such principal amount from the Base Rate Balance to a LIBOR Balance by
giving Bank an Interest Notice of such selection on or before such
Conversion Date.
An Interest Notice may be in writing. All written Interest Notices are
effective only upon receipt by Bank. Each Interest Notice shall be irrevocable
and binding upon Borrower.
7. Special Provisions For LIBOR Pricing.
a. Inadequacy of LIBOR Loan Pricing. If Bank determines
that, by reason of circumstances affecting the interbank Eurodollar
market generally, deposits in Dollars (in the applicable amounts) are
not being offered to United States financial institutions in the
interbank Eurodollar market for such Interest Period, or that the rate
at which such Dollar deposits are being offered will not adequately and
fairly reflect the cost to Bank of making or maintaining a LIBOR Balance
for the applicable Interest Period. Bank shall forthwith give notice
thereof to Borrower, whereupon until Bank notifies Borrower that the
circumstances giving rise to such suspension no longer exist, (i) the
right of Borrower to select an Interest Option based upon the LIBOR Rate
shall be suspended, and (ii) Borrower shall be deemed to have converted
each LIBOR Balance to the Base Rate Balance in accordance with the
provisions hereof on the last day of the then-current Interest Period
applicable to such LIBOR Balance.
b. Illegality. If the adoption of any applicable law, rule,
regulation, or any change therein, or any change in the interpretation
or administration thereof by any GOVERNMENTAL AUTHORITY (as such term is
defined in the Loan Agreement), central bank or comparable agency
charged with the interpretation or administration thereof, or compliance
by Bank with any request or directive (whether or not having the force
of law) of any such authority, central bank or comparable agency shall
make it unlawful or impossible for Bank to make or maintain a LIBOR
Balance, Bank shall notify Borrower. Upon receipt of such notice,
Borrower shall be deemed to have converted any LIBOR Balance to the Base
Rate
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<PAGE> 8
Balance, on either (i) the last day of the then-current Interest Period
applicable to such LIBOR Balance if Bank may lawfully continue to
maintain and fund such LIBOR Balance to such day, or (ii) immediately,
if Bank may not lawfully continue to maintain such LIBOR Balance to such
day.
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<PAGE> 9
8. Extension, Place and Application of Payments. Should the
principal of, or any interest on, this Note become due and payable on any day
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day, and interest shall be payable with respect to such
extension. All payments of principal of, and interest on, this Note shall be
made in lawful money of the United States of America in immediately available
funds. Payments made to Bank by Borrower hereunder shall be applied in such
order of priority as Bank, in its sole discretion, may elect including, without
limitation, first to accrued but unpaid interest and then to outstanding
principal.
9. Advances. Subject to the terms of this Note and the Loan
Agreement, Borrower may request Advances hereunder and make payments from time
to time during the term of this Note. The unpaid balance of this Note shall
increase and decrease with each new Advance or payment hereunder as the case
may be. This Note shall not be deemed terminated or cancelled prior to the
Maturity Date although the entire principal balance hereof may from time to
time be paid in full. Subject to the provisions of this Note and the Loan
Agreement, Borrower may borrow, repay and reborrow hereunder from the date
hereof until the Maturity Date. Each Advance hereunder shall be in an amount
not less than $100,000.00 or an integral multiple thereof. Requests for
Advances shall be submitted to Bank in accordance with the Loan Agreement. In
addition to the Request for Advance (as such term is defined in the Loan
Agreement) required by the Loan Agreement, each request for an Advance
hereunder must be accompanied by an Interest Notice for the funds to be
advanced hereunder; provided, however, if an Interest Notice does not accompany
an Advance request, Borrower shall be deemed to have designated the Adjusted
Base Rate. Each request for an Advance by Borrower hereunder shall be
irrevocable and binding on Borrower.
10. Loan Agreement. This Note is subject to the terms and provisions
of the Loan Agreement, which is incorporated herein by reference for all
purposes. The holder of this Note is entitled to the benefits provided in the
Loan Agreement and to all of the liens, benefits, rights and privileges set
forth in or otherwise arising under any and all Loan Documents. Unless
otherwise expressly defined herein, terms that are used in this Note which
begin with an initial capital letter (including, without limitation, the term
"LOAN DOCUMENTS") shall have the meanings ascribed to such terms in the Loan
Agreement. Reference is made to the Loan Agreement for a statement of certain
of the rights of the holder of this Note and for other purposes provided
herein. Reference is also made to the Loan Agreement for a statement of
certain terms and provisions relevant to this Note but not contained herein,
including, without limitation, Events of Default. Neither the reference to the
Loan Agreement nor the reference to any terms or provisions thereof shall,
however, affect or impair the absolute and unconditional obligation of the
Borrower to pay the principal of and interest on this Note when due and
payable.
9
<PAGE> 10
11. Prepayments; Consequential Loss. Any prepayment made hereunder
shall be made together with all interest accrued but unpaid on this Note
through the date of such prepayment. Contemporaneously with each prepayment of
principal, Borrower shall give Bank written notice indicating whether such
prepayment is to be applied to the Base Rate Balance or a particular LIBOR
Balance. If such notice is not timely received by Bank, Borrower shall be
deemed to have selected to prepay the Base Rate Balance and, if any sums remain
after satisfying all of the Base Rate Balance, the remaining sums shall be
applied to any LIBOR Balance(s) that Bank determines in its sole discretion.
If Borrower makes any payment of principal with respect to any LIBOR Balance on
any day prior to the last day of the Interest Period applicable to such LIBOR
Balance, Borrower shall reimburse Bank on demand for the Consequential Loss
incurred by Bank as a result of the timing of such payment. A certificate of
Bank setting forth the basis for the determination of a Consequential Loss
shall be delivered to Borrower and shall, in the absence of manifest error, be
conclusive and binding as to such determination and amount.
12. Additional Costs. Borrower agrees to pay to Bank all Additional
Costs within ten (10) days of receipt by Borrower from Bank of a statement
setting forth the amount or amounts due and the basis for the determination
from time to time of such amount or amounts, which statement shall be
conclusive and binding upon Borrower absent manifest error. Failure on the
part of Bank to demand compensation for any Additional Costs in any Interest
Period shall not constitute a waiver of Bank's right to demand compensation for
any Additional Costs incurred during any such Interest Period or in any other
subsequent or prior Interest Period. The term "ADDITIONAL COSTS" shall mean
such additional amount or amounts as Bank shall reasonably determine will
compensate Bank for actual costs incurred by Bank in maintaining LIBOR Rates on
the LIBOR Balances or any portion thereof as a result of any change after the
date of this Note in any applicable law, rule or regulation or in the
interpretation or administration thereof by, or the compliance by Bank with any
request or directive from any domestic or foreign court changing the basis of
taxation of payments to Bank of the LIBOR Balances or interest on the LIBOR
Balances or any portion thereof at an Adjusted LIBOR Rate or any other fees or
amounts payable under this Note or the Loan Agreement (other than taxes imposed
on all or any portion of the overall net income of Bank by the State of Texas
or the Federal government), or imposing, modifying or applying any reserve,
special deposit or similar requirement against assets of, deposits with or for
the account of, credit extended by, or any other acquisition of funds for loans
by Bank, or imposing on Bank, as the case may be, or on the London interbank
market any other condition affecting this Note, the Loan Agreement or the LIBOR
Balances so as to increase the cost of Bank making or maintaining Adjusted
LIBOR Rates with respect to the LIBOR Balances or any portion thereof or to
reduce the amount or any sum received or receivable by Bank under this Note or
the Loan Agreement (whether of principal, interest or otherwise), by an amount
deemed by Bank in good faith to be material, but without duplication for
Reserve Requirement.
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<PAGE> 11
13. Notices. Except as otherwise specified herein, all notices and
requests required or permitted hereunder shall be given in accordance with
SECTION 9.1 of the Loan Agreement.
14. Legal Fees. If this Note is placed in the hands of any attorney
for collection, or if it is collected through any legal proceeding at law or in
equity or in bankruptcy, receivership or other court proceedings, Borrower
agrees to pay all costs of collection including, but not limited to, court
costs and reasonable attorneys' fees.
15. Waivers. Borrower and each surety, endorser, guarantor and any
other party ever liable for payment of any sums of money payable on this Note,
jointly or severally, waive presentment and demand for payment, protest, notice
of protest, intention to accelerate, acceleration and non-payment, or other
notice of default, and agree that their liability under this Note shall not be
affected by any renewal or extension in the time of payment hereof, or in any
indulgences, or by any release or change in any security for the payment of
this Note, and hereby consent to any and all renewals, extensions, indulgences,
releases or changes, regardless of the number of such renewals, extensions,
indulgences, releases or changes; provided, however, this Note may not be
amended or modified except by a written instrument signed by the Borrower and
the holder hereof. No waiver by Bank of any of its rights or remedies
hereunder or under any other Loan Document or otherwise shall be considered a
waiver of any other subsequent right or remedy of Bank; no delay or omission in
the exercise or enforcement by Bank of any rights or remedies shall ever be
construed as a waiver of any right or remedy of Bank, and no exercise or
enforcement of any such rights or remedies shall ever be held to exhaust any
right or remedy of Bank.
16. Remedies. Upon the occurrence of any Event of Default or event
which, with the giving of notice or the passage of time or both, would
constitute an Event of Default ("DEFAULT") that is not cured within the time,
if any, provided for in the Loan Documents, the holder hereof shall be entitled
to exercise any or all rights and remedies available to the holder under the
Loan Agreement and other Loan Documents and at law and in equity including,
without limitation, at its option, (a) following the occurrence of an Event of
Default, the right to declare the entire unpaid balance of principal and
accrued but unpaid interest on this Note to be immediately due and payable, and
(b) following the occurrence of a Default, the right to refuse to advance
additional amounts under this Note.
17. Spreading. Any provision herein, or in any document securing
this Note, or any other document executed or delivered in connection herewith,
or in any other agreement or commitment, whether written or oral, expressed or
implied, to the contrary notwithstanding, neither Bank nor any holder hereof
shall in any event be entitled to receive or collect, nor shall or may amounts
received hereunder be credited, so that Bank or any holder hereof shall be
paid, as interest, a sum greater than
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<PAGE> 12
the maximum amount permitted by applicable law to be charged to the person,
partnership, firm or corporation primarily obligated to pay this Note at the
time in question. If any construction of this Note or any document securing
this Note, or any and all other papers, agreements or commitments, indicate a
different right given to Bank or any holder hereof to ask for, demand or
receive any larger sum as interest, such is a mistake in calculation or wording
which this clause shall override and control, it being the intention of the
parties that this Note, and all other instruments securing the payment of this
Note or executed or delivered in connection herewith shall in all things comply
with the applicable law and proper adjustments shall automatically be made
accordingly. In the event that Bank or any holder hereof ever receives,
collects or applies as interest, any sum in excess of the Maximum Rate, if any,
such excess amount shall be applied to the reduction of the unpaid principal
balance of this Note, and if this Note is paid in full, any remaining excess
shall be paid to Borrower. In determining whether or not the interest paid or
payable, under any specific contingency, exceeds the Maximum Rate, if any,
Borrower and Bank or any holder hereof shall, to the maximum extent permitted
under applicable law: (a) characterize any non-principal payment as an expense
or fee rather than as interest; (b) exclude voluntary prepayments and the
effects thereof; (c) "spread" the total amount of interest throughout the
entire term of this Note; provided that if this Note is paid and performed in
full prior to the end of the actual period of existence thereof exceeds the
Maximum Rate, if any, Bank or any holder hereof shall refund to Borrower (or to
such other person who may be entitled thereto by law) the amount of such
excess, or credit the amount of such excess against the aggregate unpaid
principal balance of all advances made by the Bank or any holder hereof under
this Note at the time in question.
18. CHOICE OF LAW. THIS NOTE IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED IN THE STATE OF TEXAS. EXCEPT TO THE EXTENT THAT THE
LAWS OF THE UNITED STATES MAY APPLY TO THE TERMS HEREOF, THE SUBSTANTIVE LAWS
OF THE STATE OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF THIS NOTE. IN THE EVENT OF A DISPUTE INVOLVING THIS NOTE OR
ANY OTHER LOAN DOCUMENT, THE UNDERSIGNED IRREVOCABLY AGREES THAT VENUE FOR SUCH
DISPUTE SHALL LIE IN ANY COURT OF COMPETENT JURISDICTION IN DALLAS COUNTY,
TEXAS.
19. Amendment and Restatement. This Note renews and extends the
principal and accrued unpaid interest as of the date hereof under that certain
Promissory Note dated May 12, 1996, executed by Borrower and payable to the
order of Bank in the maximum principal amount of $15,000,000 (the "PRIOR
NOTE"). The first payment of interest under this Note shall include accrued
and unpaid interest which accrued prior to the date hereof under the Prior
Note. This Note amends and restates and is given in substitution and
replacement for the Prior Note but not in extinguishment of or as a novation of
the indebtedness evidenced by the Prior Note.
PMC CAPITAL, INC., a Texas corporation
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
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<PAGE> 1
EXHIBIT 10.2
SECOND AMENDMENT TO LOAN AGREEMENT AND AMENDMENT TO LOAN
DOCUMENTS AND RENEWAL
AND EXTENSION OF LOAN
THIS SECOND AMENDMENT TO LOAN AGREEMENT AND AMENDMENT TO LOAN DOCUMENTS
AND RENEWAL AND EXTENSION OF LOAN (the "AMENDMENT") is made and entered into to
be effective as of the 15th day of March, 1998, by and between PMC CAPITAL,
INC., a Texas corporation (herein referred to with its successors and assigns
as the "BORROWER") and BANK ONE, TEXAS, N.A., a national banking association
(herein referred to with its successors and assigns as the "LENDER").
RECITALS:
A. Borrower and Lender executed that certain Loan Agreement, dated
as of May 15, 1996, as amended by that certain Modification to Loan Agreement
dated as of August 20, 1996, entered into by the Borrower and the Bank (the
"LOAN AGREEMENT") pursuant to which the Lender has made and may hereafter make
loans to the Borrower, as evidenced by that certain Promissory Note executed by
the Borrower and dated as of May 15, 1996, payable to the order of Lender in
the maximum principal amount of $15,000,000.00 (the "EXISTING REVOLVING CREDIT
NOTE"). Except as otherwise expressly provided herein, all capitalized terms
used herein shall have the same meanings assigned to such terms in the Loan
Agreement.
B. The Borrower and Lender have agreed, subject to the terms and
conditions outlined herein and subject to the Borrower's agreement with the
terms and provisions hereof and of each and every other instrument and
agreement executed in connection herewith, to restructure the credit facilities
made available pursuant to the Loan Agreement and Existing Revolving Credit
Note.
AGREEMENTS
In consideration of the premises, which are made a part hereof, and the
mutual covenants and agreements contained herein and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby amend the Loan Agreement and Loan
Documents as follows:
SECTION I
AMENDMENTS TO THE LOAN AGREEMENT
The Loan Agreement is hereby amended in the following respects:
1.1 AMENDMENT TO PARAGRAPH 1. PARAGRAPH 1 of the Loan Agreement
shall be and
<PAGE> 2
is hereby amended to add the following sentence to the end thereof:
"Borrower agrees that for a period of not less than thirty (30)
consecutive days during each calendar year, Borrower shall have repaid
the entire outstanding principal balance of the Revolving Line of
Credit, together with all accrued but unpaid interest thereon."
1.2 AMENDMENT TO PARAGRAPH 2. PARAGRAPH 2 of the Loan Agreement
shall be and is hereby amended to delete the same in its entirety and to
substitute the following in lieu thereof:
"2. PROMISSORY NOTE. The Loan shall be evidenced by that
certain First Amended and Restated Revolving Credit Note dated as of
March 15, 1998, executed by the Borrower and payable to the order of the
Bank in the maximum principal amount of $15,000,000.00 (herein referred
to with all renewals, extensions, increases, restatements, amendments
and other modifications as the "REVOLVING CREDIT NOTE")".
1.3 AMENDMENT TO PARAGRAPH 5. PARAGRAPH 5 of the Loan Agreement
shall be and is hereby further amended to add the following as additional
subparagraphs thereto:
"(l) Fees. Subject to the limitations set forth in
PARAGRAPH 17 of the Revolving Credit Note, Borrower shall pay to
Bank in arrears an unused facility fee (the "UNUSED FACILITY
FEE"). The Unused Facility Fee shall be due and payable quarterly
on the 15th day of each June, September, December and March of
each calendar year which occurs prior to the Maturity Date of the
Revolving Credit Note, with a final payment being due and payable
on said Maturity Date. The Unused Facility Fee due and payable on
each Unused Facility Fee payment date shall be an amount equal to
twenty-five percent (25%) of the product obtained by multiplying
.00125 times the amount by which the sum of (a) $15,000,000.00
exceeds the average daily principal balance outstanding on the
Revolving Credit Note during the three (3) month period which ends
on the applicable Unused Facility Fee payment date (the "AVERAGE
BALANCE"). If any Unused Facility Fee payment date occurs prior
to the lapse of three (3) full calendar months since the
immediately preceding Unused Facility Fee Payment Date, the Unused
Facility Fee shall be determined prorata, based upon the portion
of the three (3) month period occurring prior to such date,
prorated in accordance with the actual number of days elapsing
during such period (including the first day of such period but
excluding the last day). In the event
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that interest accrued and paid on the Revolving Credit Note during
the consecutive twelve (12) month period which follows March 15,
1998 (or during any consecutive twelve (12) month period which
follows any anniversary date of March 15, 1998) exceeds
$250,000.00, provided that no Default [other than a Default
described in SECTION 9(B)] or Event of Default is then existing,
then the Bank shall within thirty (30) days following written
request by Borrower, refund to Borrower the full amount of Unused
Facility Fees paid by Borrower with respect to such twelve (12)
month period."
(m) Pari Passu Rank. Maintain the rank of the Revolving
Line of Credit on a pari passu basis with other Senior Debt (as
hereinafter defined). In illustration, without implied
limitation, of the foregoing agreement, Borrower covenants (i)
that it will not voluntarily prepay any portion of principal or
interest on the Senior Debt; and (ii) if Borrower creates or
assumes a lien to secure any Senior Debt, Borrower will make
effective provisions whereby the Revolving Credit Note will be
secured by such lien equally and ratably with any other Senior
Debt secured thereby. As used herein, the term "SENIOR DEBT"
shall mean (i) the Revolving Line of Credit, (ii) all obligations
of Borrower issued to certain insurance companies per attached
SCHEDULE "I", (iii) all other obligations of Borrower for borrowed
money, and (iv) all liabilities of Borrower under any guarantee or
endorsement of borrowed money."
1.4 AMENDMENT TO PARAGRAPH 7. PARAGRAPH 7 of the Loan Agreement is
hereby deleted and the following is substituted in lieu thereof:
"(a) Net Worth. Borrower will maintain, at all times, Net
Worth of not less than $68,000,000.00."
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1.5 AMENDMENT TO PARAGRAPH 11. PARAGRAPH 11 of the Loan Agreement
shall be and is hereby amended to delete the definition of "MATURITY DATE" in
its entirety and to substitute the following in lieu thereof:
" 'MATURITY DATE' means May 15, 2000 (unless this Agreement
is extended in accordance with PARAGRAPH 23, in which event, such
date shall be the extended Maturity Date) or such earlier date on
which the Revolving Credit Note, both principal and interest,
shall become due and payable whether the same results from
acceleration or otherwise."
1.6 EXHIBITS. The form of EXHIBIT "B" to the Loan Agreement is
hereby amended to delete the form of the Promissory Note attached thereto as
EXHIBIT "B" and to substitute the form of the Revolving Credit Note which is
attached to this Amendment as EXHIBIT "A" and made a part hereof for all
purposes, and said form of the Revolving Credit Note shall be, and hereby does
become, a part of the Loan Agreement. SCHEDULE "I" which is attached to this
Amendment as EXHIBIT "B" and made a part hereof for all purposes, is hereby
added to the Loan Agreement.
SECTION II
AMENDMENT TO THE REVOLVING CREDIT NOTE
2.1 Third Amended and Restated Revolving Credit Note.
Contemporaneously with the execution hereof, Borrower shall execute and deliver
to Bank a First Amended and Restated Revolving Credit Note (herein so called)
dated as of March 15, 1998, in the maximum principal amount of $15,000,000.00
which shall, from and after March 15, 1998, constitute the "REVOLVING CREDIT
NOTE" contemplated by the Loan Agreement and Loan Documents.
SECTION III
AMENDMENT TO LOAN DOCUMENTS
3.1 Reference to the Loan Agreement. Each of the Loan Documents is
hereby amended so that any reference in any Loan Document to the Loan Agreement
or to any other Loan Document shall mean a reference to the Loan Agreement or
such other Loan Document as amended hereby, and any reference in the Loan
Agreement or any other Loan Document to the Revolving Credit Note shall mean a
reference to the First Amended and Restated Revolving Credit Note executed
contemporaneously herewith.
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SECTION IV
MISCELLANEOUS
4.1 Authority. The Borrower hereby represents and warrants that the
execution, delivery and performance of this Amendment, all instruments,
agreements and other documents executed in connection herewith and all other
instruments, agreements and documents executed in connection with the Loan
Agreement have been duly authorized by all necessary action of the Borrower
and do not and will not: (a) violate any provisions of any agreement, law,
rule, regulation, order, writ, judgment, injunction, decree, determination or
award presently in effect to which Borrower is a party or to which it or any of
its assets may be subject; (b) result in, or require the creation or imposition
of any lien upon or with respect to any asset now owned by Borrower or any
collateral; or (c) result in a breach of or constitute a default by Borrower
(and Borrower is not in default) under any indenture, loan or credit agreement
or any other agreement or instrument to which it is a party or by which it or
any of its assets is bound or affected. Borrower further warrants and
represents that no approval, authorization, order, license, permit, franchise
or consent of or registration, declaration, qualification or filing with any
governmental authority is required in connection with the execution, delivery
or performance by Borrower of this Amendment or any other Loan Document. Such
instruments and agreements constitute the legal, valid and binding obligations
of the Borrower, enforceable against Borrower in accordance with their
respective terms, subject only to the applicable debtor relief laws.
4.2 Ratification. Borrower hereby ratifies and confirms the Loan
Agreement and Loan Documents, as renewed, extended, modified and otherwise
amended hereby, in all respects, and acknowledges and agrees that all of the
terms, provisions and covenants thereof, as renewed, extended, modified and
otherwise amended hereby and by the First Amended and Restated Revolving Credit
Note, do and shall remain and continue in full force and effect, enforceable
against the Borrower and its assets in accordance with their terms.
4.3 Further Assurances. The Borrower covenants and agrees from time
to time to promptly execute, assign, endorse, and deliver to Lender all
documents, instruments, notices, agreements, assignments, pledges, statements,
and writings, and to do all other acts and things as the Lender may reasonable
request in order to more fully evidence and/or to carry out more fully the
intent and purposes of this Amendment, the Loan Agreement and other Loan
Documents.
4.4 Multiple Counterparts. Multiple counterparts of this Amendment
may be signed by the parties, each of which shall be an original but all of
which together shall constitute one and the same instrument.
4.5 Representations and Warranties. The Borrower hereby represents
and warrants that
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all representations and warranties contained in the Loan Agreement and other
Loan Documents are and continue to be true and correct in all material
respects, as if made on the date hereof, and nothing is omitted therefrom that
would cause the same to be misleading in any material respect.
4.6 Applicable Laws. THIS AMENDMENT SHALL BE CONSTRUED, INTERPRETED
AND ENFORCEABLE UNDER AND PURSUANT TO THE LAWS OF THE STATE OF TEXAS AND
APPLICABLE LAWS OF THE UNITED STATES.
4.7 No Oral Agreements. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Amendment to be executed effective as of the date specified above.
BORROWER:
PMC CAPITAL, INC., a Texas corporation
By:
---------------------------------------
Printed Name:
-----------------------------
Title:
------------------------------------
LENDER:
BANK ONE TEXAS, N.A.
By:
---------------------------------------
Printed Name:
-----------------------------
Title:
------------------------------------
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EXHIBIT "A"
TO
SECOND AMENDMENT TO LOAN AGREEMENT
AND AMENDMENT TO LOAN DOCUMENTS AND RENEWAL
AND EXTENSION OF LOAN
EXHIBIT "B"
TO
LOAN AGREEMENT
FIRST AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$15,000,000.00 March 15, 1998
FOR VALUE RECEIVED, PMC CAPITAL, INC., a Texas corporation ("BORROWER"),
does hereby unconditionally promise to pay to the order of BANK ONE, TEXAS,
NATIONAL ASSOCIATION ("BANK"), at its offices in Dallas County, Texas at 1717
Main Street, Dallas, Texas 75201, Attention: Alan Miller. The principal amount
of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00) ("TOTAL PRINCIPAL
AMOUNT"), or such amount less than the Total Principal Amount which is
outstanding from time to time if the total amount outstanding hereunder is less
than the Total Principal Amount, in lawful money of the United States of
America, together with interest on such portion of the Total Principal Amount
which has been drawn until paid at the rates per annum provided below.
1. Definitions. For purposes of this Note, unless the context
otherwise requires, the following terms shall have the definitions assigned to
such terms as follows:
"ADJUSTED BASE RATE" shall mean a rate equal to the remainder of
(a) the Base Rate, less (b) one-half of one percent (.5%) per annum.
"ADJUSTED LIBOR RATE" shall mean with respect to each Interest
Period, on any day thereof, an amount equal to the sum of (a) one and
three fourths percent (1.75%), plus, (b) the quotient of (i) the LIBOR
Rate with respect to such Interest Period, divided by (ii) the remainder
of 1.0 less the Reserve Requirement in effect on such day. Each
determination by Bank of the Adjusted LIBOR Rate shall, in the absence
of manifest error, be conclusive and binding.
"ADVANCE" shall mean an advance of Loan proceeds made by the Bank
pursuant to the Loan Agreement.
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"BASE RATE" shall mean the Prime Rate of interest per annum as
published from time to time in Money Rates in The Wall Street Journal
(or if such Prime Rate is not published in The Wall Street Journal, such
other comparable rate of interest selected by the Bank in its sole
discretion and published in a comparable financial publication).
"BASE RATE BALANCE" shall mean that portion of the principal
balance of this Note bearing interest at a rate based upon the Adjusted
Base Rate.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday
or any other day on which national banking associations are authorized
to be closed.
"CONSEQUENTIAL LOSS" shall mean, with respect to Borrower's
payment of all or any portion of the then outstanding principal amount
of any LIBOR Balance on a day other than the last day of the Interest
Period related thereto, any loss, cost or expense incurred by Bank in
redepositing such principal amount, including the sum of (a) the
interest which, but for such payment, Bank would have earned in respect
of such principal amount so paid, for the remainder of the Interest
Period applicable to such sum, reduced, if Bank is able to redeposit
such principal amount so paid for the balance of such Interest Period,
by the interest earned by Bank as a result of so redepositing such
principal amount plus (b) any expense or penalty incurred by Bank on
redepositing such principal amount.
"CONTRACT RATE" shall mean a rate of interest based upon the
Adjusted LIBOR Rate or Adjusted Base Rate in effect at any time pursuant
to an Interest Notice.
"DEFAULT" shall mean an event which, with the giving of notice or
the passage of time or both, would constitute an Event of Default.
"DEFAULT RATE" shall mean the Base Rate plus five percent (5%)
per annum.
"DOLLARS" shall mean lawful currency of the United States of
America.
"EVENT OF DEFAULT" shall have the meaning ascribed to such term
in the Loan Agreement.
"EXCESS INTEREST AMOUNT" shall mean, on any date, the amount by
which (a) the amount of all interest which would have accrued prior to
such date on the principal of this Note, had the applicable Contract
Rate at all times been in effect without limitation by the Maximum
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<PAGE> 9
Rate, exceeds (b) the aggregate amount or interest accrued on this Note
on or prior to such date.
"INTEREST NOTICE" shall mean a notice given by Borrower to Bank
of an Interest Option selected hereunder. Each Interest Notice shall
specify the Interest Option selected, the amount of the unpaid principal
balance of this Note to bear interest at the rate selected and, if the
Adjusted LIBOR Rate is specified, the length of the applicable Interest
Period. An Interest Notice may be written or oral (if promptly
confirmed thereafter in writing), and Bank is hereby authorized and
directed to honor all telephonic Interest Notices from any person
authorized to request advances hereunder.
"INTEREST OPTION" shall have the meaning assigned to such term in
PARAGRAPH 6 hereof.
"INTEREST PAYMENT DATE" shall mean (a) in the case of the Base
Rate Balance, the first day of each October, January, April and July
occurring prior to the Maturity Date and (b) in the case of any LIBOR
Balance, the last day of the corresponding Interest Period with respect
to such LIBOR Balance and the Maturity Date.
"INTEREST PERIOD" shall mean with respect to any LIBOR Balance, a
period commencing: (a) on any date which, pursuant to an Interest
Notice, the principal amount of such LIBOR Balance begins to accrue
interest at the Adjusted LIBOR Rate, or (b) the Business Day following
the last day of the immediately preceding Interest Period in the case of
a rollover to a successive Interest Period and ending 30, 60 or 90 days
thereafter as Borrower shall elect in accordance with the provisions
hereof; provided, that: (i) any Interest Period which would otherwise
end on a day which is not a LIBOR Business Day shall be extended to the
succeeding LIBOR Business Day; and (ii) any Interest Period which would
otherwise end after the Maturity Date shall end on the Maturity Date.
"LIBOR BALANCE" shall mean any principal balance of this Note
which, pursuant to an Interest Notice, bears interest at a rate based
upon the Adjusted LIBOR Rate for the Interest Period specified in such
Interest Notice.
"LIBOR BUSINESS DAY" shall mean a day on which dealings in
Dollars are carried out in the London interbank Eurodollar market.
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"LIBOR RATE" shall mean, with respect to each Interest Period,
the offered rate for U.S. Dollar deposits of not less than $1,000,000.00
as of 11:00 a.m. City of London, England time two (2) LIBOR Business
Days prior to the first date of each Interest Period of this Note as
shown on the display designated as "BRITISH BANKERS ASSOCIATION INTEREST
SETTLEMENT RATES" on the Telerate System ("TELERATE"), Page 3750 or Page
3740, or such other page or pages as may replace such pages on Telerate
for the purposes of displaying such rate. Provided, however, that if
such rate is not available on Telerate then such offered rate shall be
otherwise independently determined by Bank from an alternate,
substantially similar independent source available to Bank or shall be
calculated by Bank by a substantially similar methodology as that
theretofore used to determine such offered rate in Telerate.
"LOAN AGREEMENT" shall mean that certain Loan Agreement dated as
of May 15, 1996, by and between Bank and Borrower, as amended by that
certain Modification of Loan Agreement dated as of August 20, 1996, and
that certain Second Amendment to Loan Agreement and Amendment to Loan
Documents and Renewal and Extension of Loan dated to be effective as of
March 15, 1998, each of which was entered into by the Bank and the
Borrower, as the foregoing may, from time to time hereafter, be further
renewed, extended, increased, restated, supplemented, amended or
otherwise modified.
"LOAN DOCUMENTS" shall have the meaning ascribed to such term in
the Loan Agreement.
"MATURITY DATE" shall have the meaning ascribed to such term in
the Loan Agreement.
"MAXIMUM RATE" shall mean, with respect to the holder hereof, the
maximum nonusurious interest rate, if any, that at any time, or from
time to time may be contracted for, taken, reserved, charged, or
received on the indebtedness evidenced by this Note under the laws which
are presently in effect in the United States and the State of Texas
applicable to such holder and such indebtedness or, to the extent
permitted by law, under such applicable laws of the United States and
the State of Texas which may hereafter be in effect and which allow a
higher maximum nonusurious interest rate than applicable laws now allow.
To the extent that Chapter 303 of the Texas Finance Code is relevant to
any holder of this Note for the purposes of determining the Maximum
Rate, each such holder elects to determine such applicable legal rate
pursuant to the "weekly ceiling," from time to time in effect, as
specified in Chapter 303 and subject to any right such holder may have
subsequently, under applicable law, to change the method of determining
the Maximum Rate. If no Maximum Rate is
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<PAGE> 11
established by applicable law, then the Maximum Rate shall be equal to
eighteen percent (18%) per annum.
"REGULATION D" shall mean Regulation D of the Board of Governors
of the Federal Reserve System from time to time in effect and shall
include any successor or other regulation relating to reserve
requirements applicable to member banks of the Federal Reserve System.
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"RESERVE REQUIREMENT" shall, on any day, mean that percentage
(expressed as a decimal fraction) which is in effect on such day, as
provided by the Board of Governors of the Federal Reserve System (or any
successor governmental body) for determining the reserve requirements
(including, without limitation, basic, supplemental, marginal and
emergency reserves) under Regulation D with respect to "Eurocurrency
liabilities" as currently defined in Regulation D, or under any similar
or successor regulation. For purposes of this definition, any LIBOR
Balances hereunder shall be deemed "Eurocurrency liabilities" under
Regulation D without benefit of or credit for prorations, exemptions or
offsets under Regulation D. Bank's determination of the Reserve
Requirement shall be conclusive.
2. Payments of Interest and Principal. Interest on the unpaid
principal balance of this Note shall be due and payable on each Interest
Payment Date as it accrues. The entire unpaid principal balance of this Note,
and all accrued but unpaid interest hereon, shall be due and payable on the
Maturity Date.
3. Rates of Interest. The unpaid principal of the Base Rate Balance
shall bear interest at a rate per annum which shall from day to day be equal to
the lesser of (a) the Adjusted Base Rate in effect from day to day, or (b) the
Maximum Rate. The unpaid principal of each LIBOR Balance shall bear interest
at a rate per annum which shall from day to day be equal to the lessor of (i)
the Adjusted LIBOR Rate for the Interest Period in effect with respect to such
LIBOR Balance, or (ii) the Maximum Rate. Each change in the interest rate
applicable to a Base Rate Balance shall become effective without prior notice
to Borrower automatically as of the opening of business on the date of such
change in the Adjusted Base Rate. Interest on this Note shall be calculated on
the basis of the actual days elapsed in a year consisting of 365/366 days.
4. Interest Recapture. If on each Interest Payment Date or any
other date on which interest payments are required hereunder, Bank does not
receive interest on this Note computed at the Contract Rate because such
Contract Rate exceeds or has exceeded the Maximum Rate, then Borrower shall,
upon the written demand of Bank, pay to Bank in addition to the interest
otherwise required to be paid hereunder, on each Interest Payment Date
thereafter, the Excess Interest Amount (calculated as of such later Interest
Payment Date); provided that in no event shall Borrower be required to pay, for
any Interest Period, interest at a rate exceeding the Maximum Rate effective
during such period.
5. Interest on Past Due Amounts. Subject to the limitations on
interest, if applicable, set forth in this Note and the Loan Agreement, to the
extent any interest is not paid on or before the
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<PAGE> 13
fifth (5) day after it becomes due and payable, Bank may, at its option, add
such accrued but unpaid interest to the principal of this Note.
Notwithstanding anything herein to the contrary, all past due principal of this
Note and, to the extent permitted by applicable law, past due interest on this
Note shall, at the option of Bank, bear interest at the Default Rate until
paid.
6. Interest Option. Subject to the provisions hereof, Borrower
shall have the option (an "INTEREST OPTION") of having designated portions of
the unpaid principal balance of this Note bear interest at a rate based upon
the Adjusted LIBOR Rate or Adjusted Base Rate as provided in PARAGRAPH 3
hereof; provided, however, that the selection of the Adjusted LIBOR Rate for a
particular Interest Period shall not be for less than $100,000.00 of unpaid
principal or an integral multiple thereof. The Interest Option shall be
exercised in the manner provided below:
a. At Time of Borrowing. Contemporaneously with each request
for an advance by Borrower under PARAGRAPH 9 herein, Borrower shall give
Bank an Interest Notice indicating the initial Interest Option selected
with respect to the principal balance of such advance.
b. At Expiration of Interest Periods. On or before the day
of termination of any Interest Period, Borrower shall give Bank an
Interest Notice indicating the Interest Option to be applicable to the
corresponding LIBOR Balance upon the expiration of such Interest Period.
If the required Interest Notice shall not have been timely received by
Bank prior to the expiration of the then-relevant Interest Period,
Borrower shall be deemed to have selected a rate based upon the Adjusted
Base Rate to be applicable to such LIBOR Balance upon the expiration of
such Interest Period and to have given Bank notice of such selection.
c. Conversion From Adjusted Base Rate. During any period in
which any portion of the principal hereof bears interest at a rate based
upon the Adjusted Base Rate, Borrower shall have the right, on any
Business Day (the "CONVERSION DATE"), to convert all or a portion of
such principal amount from the Base Rate Balance to a LIBOR Balance by
giving Bank an Interest Notice of such selection on or before such
Conversion Date.
An Interest Notice may be in writing. All written Interest Notices are
effective only upon receipt by Bank. Each Interest Notice shall be irrevocable
and binding upon Borrower.
7. Special Provisions For LIBOR Pricing.
a. Inadequacy of LIBOR Loan Pricing. If Bank determines
that, by reason of
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<PAGE> 14
circumstances affecting the interbank Eurodollar market generally,
deposits in Dollars (in the applicable amounts) are not being offered to
United States financial institutions in the interbank Eurodollar market
for such Interest Period, or that the rate at which such Dollar deposits
are being offered will not adequately and fairly reflect the cost to
Bank of making or maintaining a LIBOR Balance for the applicable
Interest Period. Bank shall forthwith give notice thereof to Borrower,
whereupon until Bank notifies Borrower that the circumstances giving
rise to such suspension no longer exist, (i) the right of Borrower to
select an Interest Option based upon the LIBOR Rate shall be suspended,
and (ii) Borrower shall be deemed to have converted each LIBOR Balance
to the Base Rate Balance in accordance with the provisions hereof on the
last day of the then- current Interest Period applicable to such LIBOR
Balance.
b. Illegality. If the adoption of any applicable law, rule,
regulation, or any change therein, or any change in the interpretation
or administration thereof by any GOVERNMENTAL AUTHORITY (as such term is
defined in the Loan Agreement), central bank or comparable agency
charged with the interpretation or administration thereof, or compliance
by Bank with any request or directive (whether or not having the force
of law) of any such authority, central bank or comparable agency shall
make it unlawful or impossible for Bank to make or maintain a LIBOR
Balance, Bank shall notify Borrower. Upon receipt of such notice,
Borrower shall be deemed to have converted any LIBOR Balance to the Base
Rate Balance, on either (i) the last day of the then-current Interest
Period applicable to such LIBOR Balance if Bank may lawfully continue to
maintain and fund such LIBOR Balance to such day, or (ii) immediately,
if Bank may not lawfully continue to maintain such LIBOR Balance to such
day.
8. Extension, Place and Application of Payments. Should the
principal of, or any interest on, this Note become due and payable on any day
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day, and interest shall be payable with respect to such
extension. All payments of principal of, and interest on, this Note shall be
made in lawful money of the United States of America in immediately available
funds. Payments made to Bank by Borrower hereunder shall be applied in such
order of priority as Bank, in its sole discretion, may elect including, without
limitation, first to accrued but unpaid interest and then to outstanding
principal.
9. Advances. Subject to the terms of this Note and the Loan
Agreement, Borrower may request Advances hereunder and make payments from time
to time during the term of this Note. The unpaid balance of this Note shall
increase and decrease with each new Advance or payment
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<PAGE> 15
hereunder as the case may be. This Note shall not be deemed terminated or
cancelled prior to the Maturity Date although the entire principal balance
hereof may from time to time be paid in full. Subject to the provisions of
this Note and the Loan Agreement, Borrower may borrow, repay and reborrow
hereunder from the date hereof until the Maturity Date. Each Advance hereunder
shall be in an amount not less than $100,000.00 or an integral multiple
thereof. Requests for Advances shall be submitted to Bank in accordance with
the Loan Agreement. In addition to the Request for Advance (as such term is
defined in the Loan Agreement) required by the Loan Agreement, each request for
an Advance hereunder must be accompanied by an Interest Notice for the funds to
be advanced hereunder; provided, however, if an Interest Notice does not
accompany an Advance request, Borrower shall be deemed to have designated the
Adjusted Base Rate. Each request for an Advance by Borrower hereunder shall be
irrevocable and binding on Borrower.
10. Loan Agreement. This Note is subject to the terms and provisions
of the Loan Agreement, which is incorporated herein by reference for all
purposes. The holder of this Note is entitled to the benefits provided in the
Loan Agreement and to all of the liens, benefits, rights and privileges set
forth in or otherwise arising under any and all Loan Documents. Unless
otherwise expressly defined herein, terms that are used in this Note which
begin with an initial capital letter (including, without limitation, the term
"LOAN DOCUMENTS") shall have the meanings ascribed to such terms in the Loan
Agreement. Reference is made to the Loan Agreement for a statement of certain
of the rights of the holder of this Note and for other purposes provided
herein. Reference is also made to the Loan Agreement for a statement of
certain terms and provisions relevant to this Note but not contained herein,
including, without limitation, Events of Default. Neither the reference to the
Loan Agreement nor the reference to any terms or provisions thereof shall,
however, affect or impair the absolute and unconditional obligation of the
Borrower to pay the principal of and interest on this Note when due and
payable.
11. Prepayments; Consequential Loss. Any prepayment made hereunder
shall be made together with all interest accrued but unpaid on this Note
through the date of such prepayment. Contemporaneously with each prepayment of
principal, Borrower shall give Bank written notice indicating whether such
prepayment is to be applied to the Base Rate Balance or a particular LIBOR
Balance. If such notice is not timely received by Bank, Borrower shall be
deemed to have selected to prepay the Base Rate Balance and, if any sums remain
after satisfying all of the Base Rate Balance, the remaining sums shall be
applied to any LIBOR Balance(s) that Bank determines in its sole discretion.
If Borrower makes any payment of principal with respect to any LIBOR Balance on
any day prior to the last day of the Interest Period applicable to such LIBOR
Balance, Borrower shall reimburse Bank on demand for the Consequential Loss
incurred by Bank as a result of the timing of such payment. A certificate of
Bank setting forth the basis for the determination of a
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<PAGE> 16
Consequential Loss shall be delivered to Borrower and shall, in the absence of
manifest error, be conclusive and binding as to such determination and amount.
12. Additional Costs. Borrower agrees to pay to Bank all Additional
Costs within ten (10) days of receipt by Borrower from Bank of a statement
setting forth the amount or amounts due and the basis for the determination
from time to time of such amount or amounts, which statement shall be
conclusive and binding upon Borrower absent manifest error. Failure on the
part of Bank to demand compensation for any Additional Costs in any Interest
Period shall not constitute a waiver of Bank's right to demand compensation for
any Additional Costs incurred during any such Interest Period or in any other
subsequent or prior Interest Period. The term "ADDITIONAL COSTS" shall mean
such additional amount or amounts as Bank shall reasonably determine will
compensate Bank for actual costs incurred by Bank in maintaining LIBOR Rates on
the LIBOR Balances or any portion thereof as a result of any change after the
date of this Note in any applicable law, rule or regulation or in the
interpretation or administration thereof by, or the compliance by Bank with any
request or directive from any domestic or foreign court changing the basis of
taxation of payments to Bank of the LIBOR Balances or interest on the LIBOR
Balances or any portion thereof at an Adjusted LIBOR Rate or any other fees or
amounts payable under this Note or the Loan Agreement (other than taxes imposed
on all or any portion of the overall net income of Bank by the State of Texas
or the Federal government), or imposing, modifying or applying any reserve,
special deposit or similar requirement against assets of, deposits with or for
the account of, credit extended by, or any other acquisition of funds for loans
by Bank, or imposing on Bank, as the case may be, or on the London interbank
market any other condition affecting this Note, the Loan Agreement or the LIBOR
Balances so as to increase the cost of Bank making or maintaining Adjusted
LIBOR Rates with respect to the LIBOR Balances or any portion thereof or to
reduce the amount or any sum received or receivable by Bank under this Note or
the Loan Agreement (whether of principal, interest or otherwise), by an amount
deemed by Bank in good faith to be material, but without duplication for
Reserve Requirement.
13. Notices. Except as otherwise specified herein, all notices and
requests required or permitted hereunder shall be given in accordance with
SECTION 9.1 of the Loan Agreement.
14. Legal Fees. If this Note is placed in the hands of any attorney
for collection, or if it is collected through any legal proceeding at law or in
equity or in bankruptcy, receivership or other court proceedings, Borrower
agrees to pay all costs of collection including, but not limited to, court
costs and reasonable attorneys' fees.
16
<PAGE> 17
15. Waivers. Borrower and each surety, endorser, guarantor and any
other party ever liable for payment of any sums of money payable on this Note,
jointly or severally, waive presentment and demand for payment, protest, notice
of protest, intention to accelerate, acceleration and non-payment, or other
notice of default, and agree that their liability under this Note shall not be
affected by any renewal or extension in the time of payment hereof, or in any
indulgences, or by any release or change in any security for the payment of
this Note, and hereby consent to any and all renewals, extensions, indulgences,
releases or changes, regardless of the number of such renewals, extensions,
indulgences, releases or changes; provided, however, this Note may not be
amended or modified except by a written instrument signed by the Borrower and
the holder hereof. No waiver by Bank of any of its rights or remedies
hereunder or under any other Loan Document or otherwise shall be considered a
waiver of any other subsequent right or remedy of Bank; no delay or omission in
the exercise or enforcement by Bank of any rights or remedies shall ever be
construed as a waiver of any right or remedy of Bank, and no exercise or
enforcement of any such rights or remedies shall ever be held to exhaust any
right or remedy of Bank.
17
<PAGE> 18
16. Remedies. Upon the occurrence of any Event of Default or event
which, with the giving of notice or the passage of time or both, would
constitute an Event of Default ("DEFAULT") that is not cured within the time,
if any, provided for in the Loan Documents, the holder hereof shall be entitled
to exercise any or all rights and remedies available to the holder under the
Loan Agreement and other Loan Documents and at law and in equity including,
without limitation, at its option, (a) following the occurrence of an Event of
Default, the right to declare the entire unpaid balance of principal and
accrued but unpaid interest on this Note to be immediately due and payable, and
(b) following the occurrence of a Default, the right to refuse to advance
additional amounts under this Note.
17. Spreading. Any provision herein, or in any document securing
this Note, or any other document executed or delivered in connection herewith,
or in any other agreement or commitment, whether written or oral, expressed or
implied, to the contrary notwithstanding, neither Bank nor any holder hereof
shall in any event be entitled to receive or collect, nor shall or may amounts
received hereunder be credited, so that Bank or any holder hereof shall be
paid, as interest, a sum greater than the maximum amount permitted by
applicable law to be charged to the person, partnership, firm or corporation
primarily obligated to pay this Note at the time in question. If any
construction of this Note or any document securing this Note, or any and all
other papers, agreements or commitments, indicate a different right given to
Bank or any holder hereof to ask for, demand or receive any larger sum as
interest, such is a mistake in calculation or wording which this clause shall
override and control, it being the intention of the parties that this Note, and
all other instruments securing the payment of this Note or executed or
delivered in connection herewith shall in all things comply with the applicable
law and proper adjustments shall automatically be made accordingly. In the
event that Bank or any holder hereof ever receives, collects or applies as
interest, any sum in excess of the Maximum Rate, if any, such excess amount
shall be applied to the reduction of the unpaid principal balance of this Note,
and if this Note is paid in full, any remaining excess shall be paid to
Borrower. In determining whether or not the interest paid or payable, under
any specific contingency, exceeds the Maximum Rate, if any, Borrower and Bank
or any holder hereof shall, to the maximum extent permitted under applicable
law: (a) characterize any non-principal payment as an expense or fee rather
than as interest; (b) exclude voluntary prepayments and the effects thereof;
(c) "spread" the total amount of interest throughout the entire term of this
Note; provided that if this Note is paid and performed in full prior to the end
of the actual period of existence thereof exceeds the Maximum Rate, if any,
Bank or any holder hereof shall refund to Borrower (or to such other person who
may be entitled thereto by law) the amount of such excess, or credit the amount
of such excess against the aggregate unpaid principal balance of all advances
made by the Bank or any holder hereof under this Note at the time in question.
18
<PAGE> 19
18. CHOICE OF LAW. THIS NOTE IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED IN THE STATE OF TEXAS. EXCEPT TO THE EXTENT THAT THE
LAWS OF THE UNITED STATES MAY APPLY TO THE TERMS HEREOF, THE SUBSTANTIVE LAWS
OF THE STATE OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF THIS NOTE. IN THE EVENT OF A DISPUTE INVOLVING THIS NOTE OR
ANY OTHER LOAN DOCUMENT, THE UNDERSIGNED IRREVOCABLY AGREES THAT VENUE FOR SUCH
DISPUTE SHALL LIE IN ANY COURT OF COMPETENT JURISDICTION IN DALLAS COUNTY,
TEXAS.
19. Amendment and Restatement. This Note renews and extends the
principal and accrued unpaid interest as of the date hereof under that certain
Promissory Note dated May 12, 1996, executed by Borrower and payable to the
order of Bank in the maximum principal amount of $15,000,000 (the "PRIOR
NOTE"). The first payment of interest under this Note shall include accrued
and unpaid interest which accrued prior to the date hereof under the Prior
Note. This Note amends and restates and is given in substitution and
replacement for the Prior Note but not in extinguishment of or as a novation of
the indebtedness evidenced by the Prior Note.
PMC CAPITAL, INC., a Texas corporation
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
19
<PAGE> 20
EXHIBIT "B"
TO
SECOND AMENDMENT TO LOAN AGREEMENT
AND AMENDMENT TO LOAN DOCUMENTS AND
RENEWAL AND EXTENSION OF LOAN
SCHEDULE "I"
TO LOAN AGREEMENT
Senior Note dated July 19, 1993, for $6,000,000.00 with Columbine Life
Insurance Company.
Senior Note dated July 19, 1993, for $9,000,000.00 with Columbine Life
Insurance Company.
Senior Note dated July 19, 1993, for $5,000,000.00 with SouthLand Life
Insurance Company.
Senior Note dated December 15, 1993, for $2,000,000.00 with Peerless
Insurance Company.
Senior Note dated December 15, 1993, for $3,000,000.00 with Security
Life of Denver Insurance Company.
Senior Note dated April 19, 1995, for $5,000,000.00 with Security Life
of Denver Insurance Company.
Senior Note dated April 19, 1995, for $2,000,000.00 with Peerless
Insurance Company.
Senior Note dated April 19, 1995, for $2,000,000.00 with Indiana
Insurance Company.
Senior Note dated April 19, 1995, for $1,000,000.00 with Security Life
of Denver Insurance Company.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 238
<SECURITIES> 11,861
<RECEIVABLES> 133,040<F1>
<ALLOWANCES> (437)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 590
<DEPRECIATION> (334)
<TOTAL-ASSETS> 164,307<F2>
<CURRENT-LIABILITIES> 8,943<F3>
<BONDS> 74,790
4,000<F4>
3,000<F4>
<COMMON> 70,987
<OTHER-SE> 892
<TOTAL-LIABILITY-AND-EQUITY> 164,307<F5>
<SALES> 0
<TOTAL-REVENUES> 5,790<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,390
<LOSS-PROVISION> (224)
<INTEREST-EXPENSE> 1,332
<INCOME-PRETAX> 3,292
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,292
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
<FN>
<F1>Includes current and long-term portion of all loans receivable - before
reserve, interest receivable on loans and receivable for loans sold. Does not
include receivable from affiliate.
<F2>Includes the following items not included above.
(i) Interest - only strip receivable $ 3,597
(ii) Restricted investments 3,027
(iii) Real property owned 266
(iv) Due from unconsolidated subsidiaries 1,841
(v) Deferred charges, deposits and
other assets, net 1,271
(vi) Investment in unconsolidated subsidiaries 7,746
(vii) Servicing asset 1,601
---------
$ 19,349
=========
<F3>Includes the following:
(i) Accrued interest payable $ 891
(ii) Borrower advances 1,885
(iii) Dividends payable 3,895
(iv) Accounts payable 2,272
--------
$ 8,943
========
<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 $ 538
(ii) other liabilities 817
(iii) Due to unconsolidated subsidiaries 340
------
$1,695
======
<F6>Revenues consist primarily of interest, other yield on investments, premium
income and equity in income of unconsolidated subsidiaries.
</FN>
</TABLE>
