<PAGE> 1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 1, 1998, Registrant had outstanding 11,829,116 shares of Common
Stock, par value $.01 per share.
<PAGE> 2
PMC CAPITAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 (Unaudited) and December 31, 1997 2
Consolidated Statements of Income (Unaudited) -
Six Months Ended June 30, 1998 and 1997 3
Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
1
<PAGE> 4
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
( In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
INVESTMENTS AT VALUE:
Loans receivable, net........................................................$ 132,594 $ 127,240
Cash equivalents............................................................. 10,544 17,237
Investment in unconsolidated subsidiaries.................................... 7,771 7,797
Interest-only strip receivables.............................................. 3,033 3,708
Restricted investments....................................................... 4,222 2,798
Real property owned.......................................................... 45 296
----------------- ------------------
TOTAL INVESTMENTS.............................................................. 158,209 159,076
----------------- ------------------
OTHER ASSETS:
Receivable for loans sold.................................................... 605 1,346
Due from unconsolidated subsidiaries......................................... 2,686 1,302
Servicing asset.............................................................. 1,534 1,607
Deferred charges, deposits and other assets.................................. 1,048 1,398
Accrued interest receivable.................................................. 570 608
Cash ........................................................................ 561 265
Property and equipment, net.................................................. 256 237
----------------- ------------------
TOTAL OTHER ASSETS............................................................. 7,260 6,763
----------------- ------------------
TOTAL ASSETS...................................................................$ 165,469 $ 165,839
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable.......................................................$ 39,790 $ 41,290
Notes payable................................................................ 35,000 35,000
Accounts payable............................................................. 3,213 3,269
Dividends payable............................................................ 3,902 4,018
Borrower advances............................................................ 2,021 1,678
Accrued interest payable..................................................... 1,266 1,316
Due to unconsolidated subsidiaries........................................... 536 279
Deferred fee revenue......................................................... 599 571
Other liabilities............................................................ 588 1,252
----------------- ------------------
TOTAL LIABILITIES.............................................................. 86,915 88,673
----------------- ------------------
Commitments and contingencies
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY....................................... 7,000 7,000
----------------- ------------------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares of $.01 par value, 11,812,000 and
11,631,000 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively.................... 118 116
Additional paid-in capital .................................................. 71,116 68,555
Undistributed net operating income........................................... 1,236 2,289
Net unrealized depreciation on investments................................... (916) (794)
----------------- ------------------
71,554 70,166
----------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.....................................$ 165,469 $ 165,839
================= ==================
NET ASSET VALUE PER COMMON SHARE...............................................$ 6.06 $ 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 share and per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest..................................................................... $ 8,256 $ 8,155
Premium income............................................................... 527 1,229
Other investment income, net................................................. 483 225
---------- ----------
Total investment income........................................................ 9,266 9,639
Equity in income of unconsolidated subsidiaries, net........................... 1,175 1,329
Other income, net.............................................................. 1,790 1,089
---------- ----------
Total income................................................................... 12,231 12,057
---------- ----------
EXPENSES:
Interest..................................................................... 2,653 2,744
Salaries and related benefits................................................ 1,962 1,657
General and administrative................................................... 338 443
Profit sharing plan.......................................................... 78 78
Rent......................................................................... 118 122
Legal and accounting......................................................... 134 114
Small Business Administration fees.......................................... 49 53
Directors and shareholders expense........................................... 43 34
---------- ----------
Total expenses................................................................. 5,375 5,245
---------- ----------
Net operating income........................................................... 6,856 6,812
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off........................................................... (111) (71)
Change in unrealized appreciation
(depreciation) on investments.............................................. (122) 52
---------- ----------
Total realized and unrealized gain (loss) on investments....................... (233) (19)
---------- ----------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS................................................... $ 6,623 6,793
========== ==========
PREFERRED DIVIDENDS............................................................ $125 $125
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..................................... 11,772 11,291
========== ==========
BASIC AND DILUTED EARNINGS PER COMMON SHARE.................................... $0.55 $0.59
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
--------- ----------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest.............................................................. $ 4,163 $ 4,166
Premium income........................................................ 138 587
Other investment income, net.......................................... 313 170
--------- ----------
Total investment income................................................. 4,614 4,923
Equity in income of unconsolidated subsidiaries, net.................... 587 649
Other income, net....................................................... 1,240 531
--------- ----------
Total income............................................................ 6,441 6,103
--------- ----------
EXPENSES:
Interest.............................................................. 1,321 1,369
Salaries and related benefits......................................... 946 835
General and administrative............................................ 174 222
Profit sharing plan................................................... 40 37
Rent.................................................................. 57 63
Legal and accounting.................................................. 63 42
Small Business Administration fees.................................... 20 22
Directors and shareholders expense.................................... 32 25
--------- ----------
Total expenses.......................................................... 2,653 2,615
--------- ----------
Net operating income................................................... 3,788 3,488
--------- ----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off (23) (45)
Change in unrealized appreciation
(depreciation) on investments..................................... (434) 83
--------- ----------
Total realized and unrealized gain (loss) on investments................ (457) 38
--------- ----------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS............................................ $ 3,331 $ 3,526
========= ==========
PREFERRED DIVIDENDS..................................................... $ 63 $ 63
========= ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.............................. 11,812 11,345
========= ==========
BASIC AND DILUTED EARNINGS PER COMMON SHARE............................. $0.28 $0.31
========= ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 7
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments......... $ 6,622 $ 6,793
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................................................... (4,967) (12,546)
Proceeds from sale of guaranteed loans........................................ 6,404 14,532
Change in unrealized depreciation on investments and loans written-off........ 233 19
Unrealized premium income, net................................................ - (145)
Depreciation and amortization................................................. 639 601
Accretion of loan discount and deferred fees.................................. (495) (657)
Deferred fees collected....................................................... 49 501
(Gain) loss on sale of assets................................................. 5 (4)
Equity in income of unconsolidated subsidiaries, net.......................... (1,174) (1,329)
Net change in operating assets and liabilities:
Accrued interest receivable............................................... 38 (31)
Other assets.............................................................. 404 (234)
Accrued interest payable.................................................. (50) (99)
Borrower advances......................................................... 342 (492)
Other liabilities......................................................... (721) (3,226)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. 7,329 3,683
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded........................................................................ (17,709) (29,734)
Principal collected and other adjustments........................................... 11,616 6,067
Proceeds from interest-only strip receivables....................................... 450 486
Purchase of furniture and fixtures and other assets................................. (54) (56)
Proceeds from sale of assets........................................................ 171 102
Proceeds from partnership distributions............................................. 1,200 1,685
Release of (investment in) restricted investments................................... (1,424) 183
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES................................................. (5,750) (21,267)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................................. 2,064 2,491
Payment of dividends on common stock............................................... (7,289) (6,542)
Payment of dividends on preferred stock............................................ (124) (123)
Payment of SBA debentures.......................................................... (1,500) (2,480)
Advances to unconsolidated affiliates, net......................................... (1,127) (1,141)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES................................................. (7,976) (7,795)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................. (6,397) (25,379)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 17,502 50,017
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..............................................$ 11,105 $ 24,638
============ ============
SUPPLEMENTAL DISCLOSURE:
Interest paid......................................................................$ 2,681 $ 2,843
============ ============
Dividends reinvested...............................................................$ 499 $ 471
============ ============
Reclassification from loans receivable to real property owned......................$ 45 $ 102
============ ============
Loans to facilitate sale of real property owned....................................$ 122 $ -
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 8
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet of PMC Capital, Inc. ("PMC" or "PMC
Capital") and its wholly-owned regulated investment company subsidiaries
(collectively, the "Company") as of June 30, 1998 and the consolidated
statements of income for the three and six months ended June 30, 1998 and 1997
and cash flows for the six months ended June 30, 1998 and 1997 have not been
audited by independent accountants. In the opinion of the Company's management,
the financial statements reflect all adjustments necessary to present fairly the
Company's financial position at June 30, 1998, the results of operations for the
three and six months ended June 30, 1998 and 1997, and the cash flows for the
six months ended June 30, 1998 and 1997. These adjustments are of a normal
recurring nature.
Certain notes and other information have been omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q. Therefore, these
financial statements should be read in conjunction with the Company's 1997
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results for the six months ended June 30, 1998 are not necessarily
indicative of future financial results.
NOTE 2. BUSINESS:
PMC Capital is a diversified, closed-end management investment company that has
elected to operate as a business development company under the Investment
Company Act of 1940 (the "1940 Act"). PMC engages in the business of originating
loans to small businesses either directly or through its three principal
subsidiaries: First Western SBLC Inc. ("First Western"), PMC Investment
Corporation ("PMIC") and Western Financial Capital Corporation ("Western
Financial"). First Western, PMIC and Western Financial are registered under the
1940 Act as diversified, closed-end management investment companies. In
addition, PMC is directly or indirectly either the sole shareholder or partner
of PMC Advisers, Ltd. ("PMC Advisers"), PMC Funding Corp. ("PMC Funding"), PMC
Capital Corp. 1996-A ("PMC Capital Corp."), PMC Trust 1996-A and PMC Capital
Limited Partnership ( the "Partnership"). PMC has elected to be taxed as a
regulated investment company and consequently distributes substantially all of
its taxable income as dividends to shareholders.
NOTE 3. BASIS FOR CONSOLIDATION:
The consolidated financial statements include the accounts of PMC and its
wholly-owned regulated investment company subsidiaries. Intercompany
transactions have been eliminated in consolidation.
The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A
and the Partnership are accounted for by the equity method of accounting in
conformity with Federal securities laws.
Consolidated Subsidiaries
First Western is a small business lending company ("SBLC") that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration ("SBA") pursuant to its Section 7(a) Program (the "7(a)
Program").
PMIC is a licensed specialized small business investment company ("SSBIC") under
the Small Business Investment Act of 1958, as amended ("SBIA"). PMIC uses
long-term funds provided by the SBA, together with its own capital,
6
<PAGE> 9
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BASIS FOR CONSOLIDATION: (CONTINUED)
to provide long-term collateralized loans to eligible small businesses owned by
"disadvantaged" persons, as defined under the regulations of the SBA. The
interest rates on loans originated by PMIC are either fixed rate or a variable
rate which is based on 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). 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, either directly or through a subsidiary
acts as the investment manager for PMC Commercial Trust ("PMC Commercial" or the
"Trust"), a Texas real estate investment trust and an affiliate of PMC Capital.
PMC Funding is a Florida corporation that holds assets on behalf of the Company.
PMC Capital is the sole shareholder of PMC Funding.
The Partnership was formed as a Delaware limited partnership in November 1996 to
act as a special purpose affiliate of the Company. The Partnership was
established to acquire loans from the Company and to issue fixed-rate debt (the
"Notes") through a private placement (the "Structured Financing").
PMC Capital Corp. is a Delaware corporation formed in November 1996 to be the
independent trustee of the general partner of the Partnership. PMC Trust 1996-A
is a Delaware business trust formed in November 1996 to be the general partner
of the Partnership.
NOTE 4. LONG-TERM DEBT:
During February 1998, the Company repaid a $1,500,000 SBA debenture at maturity.
NOTE 5. DIVIDENDS PAID AND DECLARED:
During January 1998, the Company paid $0.340 per share in dividends to common
shareholders of record on December 31, 1997 which included a special dividend of
$0.02 per common share. During April 1998, the Company paid a $0.325 per share
dividend to common shareholders of record on March 31, 1998. During June 1998,
the Company declared a $0.325 per share dividend to common shareholders of
record on June 30, 1998 which was paid on July 13, 1998.
NOTE 6. PMC LIMITED PARTNERSHIP:
As described in Note 3, the accounts of the Partnership are accounted for by the
equity method of accounting in conformity with Federal securities law. During
the six months ended June 30, 1998 and 1997, the Partnership had $2,173,000 and
$2,641,000 in total income, respectively, and net operating income of $1,232,000
and $1,351,000, respectively.
7
<PAGE> 10
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS:
As described in Note 3, the consolidated financial statements include the
accounts of PMC and its wholly-owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding, the Partnership, PMC Capital Corp.
and PMC Trust 1996-A (the "Unconsolidated Entities") are accounted for by the
equity method of accounting in conformity with Federal securities law. The
following are the condensed combined balance sheets as of June 30, 1998 and
December 31, 1997 and the condensed combined statement of income for the three
and six months ended June 30, 1998 and 1997 for the Company and the
Unconsolidated Entities.
CONDENSED COMBINED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS (IN THOUSANDS)
Investments at value:
Loans receivable, net ............................. $159,320 $ 161,215
Cash equivalents .................................. 10,583 17,272
Interest-only strip receivable .................... 2,966 3,708
Restricted investments and real property owned .... 7,406 5,780
-------- ------------
180,275 187,975
Other assets ........................................... 7,137 6,931
-------- ------------
Total assets ...................................... $187,412 $ 194,906
======== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ............................ $ 39,790 $ 41,290
Notes payable ..................................... 57,017 64,007
Other liabilities ................................. 12,051 12,443
-------- -----------
108,858 117,740
-------- ------------
Cumulative preferred stock of subsidiary .......... 7,000 7,000
-------- ------------
SHAREHOLDERS' EQUITY:
Common Stock ...................................... 118 116
Additional paid-in capital ........................ 71,116 68,555
Undistributed net operating income ................ 1,236 2,289
Net unrealized depreciation on investments ........ (916) (794)
-------- ------------
71,554 70,166
-------- ------------
Total liabilities and shareholders' equity ........ $187,412 $ 194,906
======== ============
</TABLE>
8
<PAGE> 11
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited, in thousands)
<S> <C> <C> <C> <C>
INCOME:
Investment income......................... $ 11,439 $ 12,280 $ 5,678 $ 6,207
Other income, net......................... 1,812 1,130 1,227 539
-------- -------- -------- --------
Total income........................... 13,251 13,410 6,905 6,746
-------- -------- -------- --------
EXPENSES:
Interest.................................. 3,540 4,007 1,736 1,988
Salaries and related benefits............. 1,962 1,657 946 835
General and administrative
expenses............................... 471 533 222 246
Other..................................... 422 401 213 189
-------- -------- -------- -------
Total expense.......................... 6,395 6,598 3,117 3,258
-------- -------- -------- -------
Net operating income.......................... 6,856 6,812 3,788 3,488
Realized and unrealized gain (loss) on
investments............................ (233) (19) (457) 38
-------- -------- -------- -------
NET OPERATING INCOME AND REALIZED AND
UNREALIZED GAIN (LOSS) ON INVESTMENTS.. $ 6,623 $ 6,793 $ 3,331 $ 3,526
======== ======== ======== =======
</TABLE>
NOTE 8. EARNINGS PER COMMON SHARE COMPUTATIONS:
The computations of basic earnings per common share are based on the weighted
average number of shares outstanding of the Company. For the purposes of
determining the diluted earnings per share, there was no change in the weighted
average shares outstanding for the effect of stock options during the three and
six months ended June 30, 1998 since the stock options were anti-dilutive. The
Company did not issue any stock options prior to June 1997. Earnings are defined
as the net operating income and realized and unrealized gain (loss) on
investments and are reduced by the preferred stock dividend requirements of
PMIC. Preferred stock dividend requirements were approximately $65,000 during
each of the three months ended June 30, 1998 and 1997 and $125,000 during each
of the six months ended June 30, 1998 and 1997, respectively. The weighted
average number of shares used in the computations of basic earnings per common
share were 11.8 million and 11.3 million for the three months ended June 30,
1998 and 1997, respectively and 11.8 million 11.3 million during the six months
ended June 30, 1998 and 1997, respectively.
NOTE 9. CHANGE IN ACCOUNTING:
Deferred fees consist of non-refundable fees less direct loan origination costs.
For loans originated prior to January 1, 1998, these fees are being recognized
over the expected life of the related loan. For loans originated subsequent to
December 31, 1997, these fees are being recognized currently. The change did not
materially impact the Company's financial statements.
9
<PAGE> 12
PART I
FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
GENERAL
The Company's operations include originating and servicing commercial loans for
its own account as well as operating as an investment manager which evaluates
properties and loans and services loans and lease contracts under a fee
arrangement for PMC Commercial. The Company sells the guaranteed portion of its
loans originated under the SBA 7(a) Program. In addition, during November 1996,
the Company securitized a portion of its fixed-rate portfolio as part of the
Structured Financing as an additional source of working capital and in December
1997 sold the unguaranteed portion of its loans originated under the SBA 7(a)
Program as part of a securitization and sale. Historically, the Company has
retained servicing and residual interests in all loans sold.
The Company's revenue sources include the following:
o Interest earned on loans originated and retained including the
effect of commitment fees collected at the inception of the loan.
o Management fee income from the management of PMC Commercial.
o Equity in the income of non-investment company subsidiaries.
o Premiums recognized from the sale of the government guaranteed
portion of SBA 7(a) Program loans 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, the Company originates commercial loans.
The following table sets forth information concerning the aggregate gross loans
funded for the Company:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS YEARS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31,
-------------- -------------- --------------
COMPANY 1998 1997 1998 1997 1997 1996
- ------- ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PMIC ............ $ 6.5 $10.2 $ 3.6 $ 5.2 $24.1 $19.3
Western Financial 7.1 3.3 2.8 2.6 12.9 7.5
First Western ... 6.6 17.9 3.2 7.6 29.5 29.2
PMC Capital ..... 2.5 10.8 2.2 6.3 19.9 14.2
----- ----- ----- ----- ----- -----
Total .. $22.7 $42.2 $11.8 $21.7 $86.4 $70.2
===== ===== ===== ===== ===== =====
</TABLE>
In 1993, the Company organized PMC Advisers which, either directly or
through its wholly owned subsidiary, has acted as the investment manager for PMC
Commercial since the completion of PMC Commercial's initial public offering in
December 1993. During the six months ended June 30, 1998 and the year ended
December 31,1997, PMC Advisers earned management fees from PMC Commercial of
approximately $1,505,000 and $1,600,000, respectively. The fees during the six
months ended June 30, 1998 includes fees earned related to completed financings
and acquisitions by PMC Commercial during the three months ended June 30, 1998.
PMC Advisers will earn fees pursuant to an investment management
agreement entered into during June 1998 with PMC Commercial relating to property
acquisitions by PMC Commercial (the "Property Management Agreement").
10
<PAGE> 13
The Property Management Agreement provides for a one time fee of 0.75% of the
purchase price paid by PMC Commercial to Amerihost Properties, Inc. and its
subsidiaries ("Amerihost") (the "Amerihost Purchase Price") in connection with
the purchase of 30 hotels from Amerihost and an annual management fee equal to
the product of 0.70% multiplied by the Amerihost Purchase Price (the "Amerihost
Fee"). In connection with the consummation of a proposed merger (the "Merger")
by PMC Commercial with Supertel Hospitality, Inc. ("Supertel"), PMC Advisers
will earn a one time fee equal to the product of 1.0% multiplied by the dollar
value of the number of PMC Commercial Common Shares issued to Supertel
stockholders in connection with the Merger and PMC Advisers will earn an annual
management fee of $200,000 plus 1.0% of the gross revenues (as defined in the
master lease between PMC Commercial and the operators of the Supertel
properties) up to and including $50,000,000 and 2.0% of gross revenues in excess
of $50,000,000 (the "Supertel Fee"). In the event the investment management
agreement with PMC Advisers is terminated or not renewed by PMC Commercial
(other than as a result of a material breach by PMC Advisers) or by PMC Advisers
(as a result of a material breach by PMC Commercial), PMC Advisers would be
entitled to receive the Amerihost Fee and the Supertel Fee for a period of five
years from the termination date.
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
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.
As a result of several factors, the number and dollar volume of loans
originated by First Western under the SBA 7(a) guaranteed loan program have
decreased. The factors which contributed to this decrease included an increase
in guarantee fees, increased competition for 7(a) loans, and more alternative
loan products. These other products often provide prospective borrowers with
fixed interest rates at less than the floating interest rates available through
the SBA 7(a) program. Accordingly, premiums earned have been significantly
reduced. For the six months ended June 30, 1998 and 1997, revenues generated by
such loan sales were $527,000 and $1,229,000, respectively. Because of the above
factors resulting in a trend of borrowers requesting fixed-rate financing, the
Company believes that revenues generated from such loan sales will continue at
present diminished levels for the foreseeable future. The Company has attempted
to offset First Western's decreased revenues through emphasizing the Company's
other lending activities. In addition, other revenue sources such as investment
management income has been increasing.
The current lower interest rate environment and increased lending
competition have reduced the spread between the rate at which the Company lends
funds and the cost of such funds. There can be no assurance that the Company
will experience increased spreads in the foreseeable future. In some cases, the
increased level of lending competition has resulted in advance rates and
interest rates considerably more aggressive than those offered by the Company.
In order to maintain a quality portfolio, the Company has and will continue to
adhere to its historical underwriting criteria and, as a result, certain loan
origination opportunities have and will not be funded by the Company. In
response to this competition, the Company is in the process of instituting a new
lower fixed-rate lending program and has instituted the Prime Lending Program as
described below. The interest rate on these loans (assuming no change in the
prime rate) is lower than the Company has historically experienced and the
results of the new lending programs (defined below) have, to date, not met the
Company's initial expectations.
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 SBA 7(a) Program of First Western, the Company's other variable rate
lending program. The Prime Lending Program provides funds to refinance existing
real estate secured commercial loans with borrowers who have proven timely
payment histories and loan-to-value and debt coverage ratios within the
Company's underwriting criteria. Several of the loans refinanced under this
program were originally SBA 7(a) Program loans and some of these loan
originations have refinanced First Western's loans. These loans have variable
interest rates based on the Prime Rate.
On loan prepayments, to the extent the loans were on a fixed-rate of
interest, the Company received the immediate benefit of the prepayment charge,
however, the proceeds from the prepayments were invested initially in
11
<PAGE> 14
temporary investments and have been reloaned or committed to be reloaned at
lower rates, which has an adverse effect on the Company's future results of
operations and may have an impact on its ability to maintain distributions at
current levels. The impact of the lower lending rates is partially offset (based
on current market conditions) by the reduced cost of the Company's borrowings.
As a result of the general downward trend in interest rates and
increased competition, the Company has experienced an increased rate in the
repayment of its loans. For the six months ended June 30, 1998 and the year
ended December 31, 1997, principal collections including prepayments (as an
annualized percentage of the Company's total loan portfolio including serviced
loans), were 27% and 23%, respectively, as compared to principal collections
including prepayment percentages of 22% and 21%, respectively, for the six month
period ended June 30, 1997 and the year ended December 31, 1996. The Company
believes that the prepayments may continue at these accelerated levels in the
near term.
The Company's working capital requirements for loan originations, as
well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, require it to maintain temporary
short-term investments. In order to minimize its short-term investment
positions, the Company may enter into a bank warehouse facility and expects to
more fully utilize its revolving credit facility to fund these working capital
requirements.
The Company receives other investment income from various sources
including late fees, prepayment fees, construction monitoring and site visit
fees. The net amount of other investment income earned during the six months
ended June 30, 1998 and the year ended December 31,1997 was $483,000 and
$504,000, respectively. The amount earned will vary based on volume of loans
funded, volume of loans which prepay, the mix of loans (construction versus
non-construction), the rate on loans originated (whether fixed or variable) as
well as the general level of interest rates.
Expenses primarily consist of interest expense and company overhead as
described below. Expenses were 44% of total income during both the six months
ended June 30, 1998 and the year ended December 31, 1997.
Interest expense was $2,653,000 and $5,548,000 during the six months
ended June 30, 1998 and the year ended December 31, 1997, respectively. Interest
expense is primarily a result of (i) $35 million of unsecured notes with a
weighted average interest rate of 7.4% and weighted average remaining maturity
of 3.3 years as of June 30, 1998, and (ii) $39,790,000 of debentures due to the
SBA as a result of borrowings made by the Company's SBIC subsidiaries, with a
weighted average interest rate of approximately 6.7% and weighted average
remaining maturity of 4.6 years as of June 30, 1998. At June 30, 1998, the
Company had no borrowings outstanding pursuant to its revolving credit facility,
and had availability of $15 million. Any borrowings thereunder would bear
interest at a rate 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 $2,722,000 and $5,054,000 during the six months
ended June 30, 1998 and the year ended December 31, 1997, respectively, and is
comprised of salaries and related benefits, general and administrative, profit
sharing plan, rent, legal and accounting, SBA fees and directors and
shareholders expense. The Company's operations are centralized in its Dallas,
Texas headquarters. The Company presently has other marketing offices located in
Atlanta, Georgia; and Phoenix, Arizona. The largest overhead expense is the
salaries and related benefits which consist of salaries for the Company's
officers and employees who provide for all of the Company's management,
advisory, and portfolio functions, including marketing, servicing, accounting
and portfolio analysis. Salaries and related benefits were 16% and 14%,
respectively, of total income during the six months ended June 30, 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 six months ended
June 30, 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
12
<PAGE> 15
the "Other Administrative Costs") aggregated $422,000 and $822,000 during the
six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. The Other Administrative Costs were 3% of total income during both
the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. These costs are anticipated to increase in proportion to the
increase in salaries and general administrative expense as a result of the
anticipated growth of the Company's portfolio under management.
DIVIDENDS
PMC Capital has historically paid out 100% of its investment company
taxable income and not paid any return of capital. There are certain timing
differences between book and tax income, most notably the recognition of
commitment fees received. For tax purposes, those fees are recognized as income
when received while for book purposes such fees have historically been deferred
and recognized over the life of the loan. A portion of dividends paid during
1998 pertains to earnings in 1997 including the effect of the gain from a
securitization and sale of certain loans originated by First Western completed
in December 1997 (these amounts being the "Carry-Forward Amounts"). As a result
of these timing differences and the Carry-Forward Amounts, the payment of
dividends does not necessarily coincide with the Company's earnings. Based on
current year's anticipated earnings and the anticipated utilization during the
current year of substantially all of the Carry-Forward Amounts, it is expected
that the current dividend of $0.325 per quarter may be reduced to reflect the
anticipated taxable earnings of the Company during subsequent periods unless
earnings increase.
CERTAIN ACCOUNTING CONSIDERATIONS
Effective January 1, 1997, the Company adopted as required, SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides for the accounting and
reporting of transfers and servicing of financial assets based on a
financial-components approach.
The transfer of assets that qualify for sale treatment under SFAS No.
125 is generally accounted for by the seller by: (i) derecognizing all assets
sold, (ii) recognizing all assets obtained and liabilities incurred at their
relative fair value, and (iii) recognizing all assets retained at their
allocated previous carrying amount based on relative fair values. The Company
typically receives cash and retains the right to receive contractual servicing
fees and the right to receive future interest income on loans sold that exceed
the contractually specified servicing fee (the interest-only strip receivable)
in exchange for a portion of the loan, typically the guaranteed portion of an
SBA 7(a) loan. The difference between (i) the carrying value of the portion of
loans sold and (ii) the sum of (a) cash received, (b) the relative fair values
of the servicing rights and (c) the interest-only strip receivable retained,
constitutes the gain on sale.
In accordance with SFAS No. 125, the servicing asset is amortized in
proportion to and over the period of estimated net servicing income and is
evaluated for impairment by stratifying the servicing assets by one or more of
the predominant risk characteristics of the underlying financial assets. The
interest-only strip receivable is accounted for as an investment in debt
securities classified as available for sale under SFAS No. 115. As of the date a
securitization is completed, an asset is established and classified as an
"interest-only strip receivable". This receivable is initially valued based on
management's then current estimate of the anticipated discounted future cash
flows retained by the Company related to the pool of securitized loans. The
discount rate 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 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
13
<PAGE> 16
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 six months ended June 30, 1998 and the
year ended December 31, 1997, the Company recorded an unrealized gain of $5,000
and an unrealized loss of ($300,000), respectively. As of June 30, 1998 and
December 31, 1997, the unrealized loss relating to the interest-only strip
receivables was $295,000 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.
LEVERAGE
Net income of the Company is effected by the spread between the rate at
which it borrows funds and the rate at which it loans these funds. The
portfolios of PMC Capital, Western Financial and PMIC have typically been
long-term and have loans with both variable and fixed interest rates and the
borrowed funds of these companies are typically long-term and at fixed interest
rates. First Western originates variable-rate loans and has utilized equity
capital of PMC Capital and through structured 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) based on SBA regulations do not have prepayment penalties.
Since December 1994, the Company has relied upon its ability to
aggregate and sell portions of its loan portfolio in the asset-backed securities
market to generate cash proceeds for funding additional loans. Further, gains on
sales generated by the Company's securitizations represented a material portion
of the Company's revenues. Accordingly, adverse changes in the Company's
"Asset-Backed Securities Program" or in the asset-backed securities market for
the type of product generated by the Company could materially adversely affect
the Company's ability to originate and securitize loans on a timely basis and
upon terms reasonably favorable to the Company.
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 principal balance of the pool of serviced loans. The CPR
utilized is a prediction by management of the anticipated rate of prepayment of
the loan pool which has been securitized.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Net income decreased by $170,000 from $6,793,000 during the six months
ended June 30, 1997 to $6,623,000 during the six months ended June 30, 1998. The
weighted average common shares outstanding increased by approximately 4% from
11,291,000 during the six months ended June 30, 1997 to 11,772,000 during the
six months ended June 30, 1998 as a result of shares issued pursuant to the
dividend reinvestment and cash purchase plan. The
14
<PAGE> 17
income for the six months ended June 30, 1998 includes the effect of the
following, as more fully described below: (i) reduced interest income earned as
a result of the sale by First Western of $22.8 million of loans in December
1997, (ii) reduced premium income, (iii) increased investment management fees
and (iv) increased valuation reserves.
Interest income increased by $101,000 (1%), from $8,155,000 for the six
months ended June 30, 1997 to $8,256,000 for the six months ended June 30, 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 six months ended June 30,
1998 and 1997 was $130 million and $104 million, respectively, a 25% increase.
Accordingly, interest income (not including the Partnership) on loans increased
by $696,000, or 10%, from $7,220,000 during the six months ended June 30, 1997
to $7,916,000 during the six months ended June 30, 1998.
During the six months ended June 1998, the Company earned a reduced
amount of interest on short-term investments due to the funds received from the
Structured Financing (net proceeds of approximately $37.5 million) increasing
the average temporary investments outstanding during the six months ended June
30, 1997 by a greater amount than the securitized sale (net proceeds of
approximately $20 million) increased the average temporary investments during
the six months ended June 30, 1998. As a result, during the first half of 1998,
average temporary investments outstanding were $16.6 million, a 56% decrease
from $37.5 million during the first half of 1997. Accordingly, interest on
temporary investments decreased by $595,000, or 64%, from $935,000 during the
six months ended June 30, 1997 to $340,000 during the six months ended June 30,
1998.
Premium income decreased by $702,000 (57%) from $1,229,000 for the six
months ended June 30, 1997 to $527,000 for the six months ended June 30, 1998.
This decrease was primarily attributable to an $8,128,000 (56%) decrease in the
guaranteed portion of loans held for sale or sold (under the 7(a) Program) from
$14,532,000 during the six months ended June 30, 1997 to $6,404,000 during the
six months ended June 30, 1998. The premium income earned during the six months
ended June 30, 1997 was $231,000 higher than the previous years comparable
period.
Other investment income, net, increased by $228,000 (89%) from $255,000
for the six months ended June 30, 1997 to $483,000 for the six months ended June
30, 1998. This increase was primarily attributable to an increase in prepayment
fees received related to fixed-rate loans which were prepaid in full and
forfeited commitment fees during the six months ended June 30, 1998 as compared
to the six months ended June 30, 1997.
Equity in income (loss) of unconsolidated subsidiaries decreased by
$154,000 (12%), from $1,329,000 during the six months ended June 30, 1997 to
$1,175,000 during the six months ended June 30, 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 six months ended June 30, 1998 and
1997, the net income from the Partnership includes $252,000 and $78,000,
respectively, in prepayment fees received on paid-off loans. Offsetting a
portion of the Partnership income was the operations of PMC Funding which had a
loss of $22,000 during the six months ended June 30, 1997 and a loss of $59,000
during the six months ended June 30, 1998.
Other income, net, increased by $701,000 (64%) from $1,089,000 during
the six months ended June 30, 1997 to $1,790,000 during the six months ended
June 30, 1998. Other income increased during the six months ended June 30, 1998
primarily as a result of fee income earned as a result of investment management
fees generated by PMC Advisers related to the completion of a structured
financing by PMC Commercial (approximately $165,000) and fees related to the
acquisition by PMC Commercial of the Amerihost hotel properties (approximately
$466,000).
Operating expenses, not including interest, increased by $178,000 (7%)
from $2,501,000 during the six months ended June 30, 1997 to $2,679,000 during
the six months ended June 30, 1998. This increase was a result of an increase in
salaries and related benefits of $305,000 (18%) from $1,657,000 during the six
months ended June 30, 1997, to $1,962,000 during the six months ended June 30,
1998. The increase in salaries and related benefits was attributable to an
increased number of employees (due to the increase in portfolio under management
including the assets of PMC Commercial and the complexity of the financing
transactions undertaken by the Company), a general increase in the level of
salaries for employees during 1997 and 1998 and a decrease in the salaries and
related benefits which were capitalized
15
<PAGE> 18
relating to loans closed during the six months ended June 30, 1998 as compared
to the six months ended June 30, 1997. General and administrative costs
decreased by $105,000 primarily as a result of (i) an increased level of
advertising during the first quarter of 1997, and (ii) a decrease in Texas
franchise tax expense during 1998.
Interest expense decreased by $91,000 (3%) from $2,744,000 during the
six months ended June 30, 1997 to $2,653,000 during the six months ended June
30, 1998. The decrease was primarily attributable to the repayment at maturity
of approximately $2.5 million in SBA debentures during February 1997 and $1.5
million in February 1998.
Realized and unrealized gain (loss) on investments increased from a
loss of $19,000 during the six months ended June 30, 1997 to a loss of $233,000
during the six months ended June 30, 1998. The Company has a problem loan in
Atlanta, GA (with an outstanding balance of approximately $800,000), the
collateral of which has been identified to contain certain environmental
contaminents. Prior to foreclosing on the property, the Company has been
procuring studies to identify the extent of the environmental contamination, the
potential remedies and the cost of the clean-up. Based on the analysis provided
by environmental specialists, it appears that the net realized recoveries
related to property would be approximately $450,000. Accordingly, the Company
has established a $370,000 reserve against this loan as of June 30, 1998. During
the six months ended June 30, 1998, the Company recorded $5,000 in unrealized
gains relating to the interest-only strip receivables in accordance with SFAS
No. 125. There were no comparable reserves during the six months ended June 30,
1997.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1997
Net income decreased by $195,000 from $3,526,000 during the three
months ended June 30, 1997 to $3,331,000 during the three months ended June 30,
1998. The weighted average common shares outstanding increased by approximately
4% from 11,345,000 during the three months ended June 30, 1997 to 11,812,000
during the three months ended June 30, 1998 as a result of shares issued
pursuant to the dividend reinvestment and cash purchase plan. The income for the
three months ended June 30, 1998 includes the effect of the following, as more
fully described below: (i) reduced interest income earned as a result of the
sale by First Western of $22.8 million of loans in December 1997, (ii) reduced
premium income, (iii) increased investment management fees and (iv) increased
valuation reserves.
Interest income decreased by $3,000, from $4,166,000 for the three
months ended June 30, 1997 to $4,163,000 for the three months ended June 30,
1998. This constant level of interest income was primarily attributable to a
reduction in interest rates on new originations which offset the increase in
weighted average loans receivable related to 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 second quarter of 1998
and 1997 was $131.8 million and $108.9 million, respectively, a 21% increase.
Accordingly, interest income (not including the Partnership) on loans increased
by $249,000, or 7%, from $3,745,000 during the three months ended June 30, 1997
to $3,995,000 during the three months ended June 30, 1998.
During the three months ended June 30, 1998, the Company earned a
reduced amount of interest on short-term investments due to the funds received
from the Structured Financing (net proceeds of approximately $37.5 million)
increasing the average temporary investments outstanding during the three months
ended June 30, 1997 by a greater amount than the securitized sale (net proceeds
of approximately $20 million) increased the average temporary investments during
the three months ended June 30, 1998. As a result, during the second quarter of
1998, average temporary investments outstanding were $14.8 million, a 52%
decrease from $30.8 million during the second quarter of 1997. Accordingly,
interest on temporary investments decreased by $252,000, or 60%, from $421,000
during the three months ended June 30, 1997 to $168,000 during the three months
ended June 30, 1998.
Premium income decreased by $449,000 (76%) from $587,000 for the three
months ended June 30, 1997 to $138,000 for the three months ended June 30, 1998.
This decrease was primarily attributable to a $3.8 million (55%) decrease in the
guaranteed portion of loans held for sale or sold (under the SBA 7(a) Program)
from $6.9 million during the three months ended June 30, 1997 to $3.1 million
during the three months ended June 30, 1998. The premium income earned during
the three months ended June 30, 1997 was $80,000 higher than the previous years
comparable quarter.
16
<PAGE> 19
Other investment income, net, increased by $143,000 (84%) from $170,000
for the three months ended June 30, 1997 to $313,000 for the three months ended
June 30, 1998. This increase was primarily attributable to an increase in
prepayment fees received related to fixed-rate loans which were prepaid in full
and forfeited commitment fees during the three months ended June 30, 1998 as
compared to the three months ended June 30, 1997.
Equity in income (loss) of unconsolidated subsidiaries decreased by
$62,000 (10%), from $649,000 during the three months ended June 30, 1997 to
$587,000 during the three months ended June 30, 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 June 30, 1998 and
1997, the net income from the Partnership includes $154,000 and $10,000,
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 $10,000
during the three months ended June 30, 1997 and a loss of $37,000 during the
three months ended June 30, 1998.
Other income, net, increased by $709,000 (134%) from $531,000 during
the three months ended June 30, 1997 to $1,240,000 during the three months ended
June 30, 1998. Other income increased during the three months ended June 30,
1998 primarily as a result of fee income earned as a result of investment
management fees generated by PMC Advisers related to the completion of a
structured financing by PMC Commercial (approximately $165,000) and fees
related to the acquisition by PMC Commercial of the Amerihost hotel properties
(approximately $466,000).
Operating expenses, not including interest, increased by $86,000 (7%)
from $1,246,000 during the three months ended June 30, 1997 to $1,332,000 during
the three months ended June 30, 1998. This increase was a result of an increase
in salaries and related benefits of $111,000 (13%) from $835,000 during the
three months ended June 30, 1997, to $946,000 during the three months ended June
30, 1998. The increase in salaries and related benefits was attributable to an
increased number of employees (due to the increase in portfolio under management
including the assets of PMC Commercial and the complexity of the financing
transactions undertaken by the Company), a general increase in the level of
salaries for employees during 1997 and 1998 and a decrease in the salaries and
related benefits which were capitalized relating to loans closed during the
three months ended June 30, 1998 as compared to the three months ended June 30,
1997. Rent expense decreased by $6,000 due to the cancellation of a lease.
General and administrative costs decreased by $48,000 primarily as a result of a
decrease in Texas franchise tax expense.
Interest expense decreased by $48,000 (4%) from $1,369,000 during the
three months ended June 30, 1997 to $1,321,000 during the three months ended
June 30, 1998. The decrease was primarily attributable to the repayment at
maturity of approximately $1.5 million in February 1998.
Realized and unrealized gain (loss) on investments changed from a gain
of $38,000 during the three months ended June 30, 1997 to a loss of $457,000
during the three months ended June 30, 1998. During the second quarter of 1998,
the Company recorded $250,000 in unrealized losses relating to the interest-only
strip receivables in accordance with SFAS No. 125. There were no comparable
losses during the three months ended June 30, 1997. Additionally, the Company
has a problem loan in Atlanta, GA (with an outstanding balance of approximately
$800,000) the collateral of which has been identified to contain certain
environmental contaminants. Prior to foreclosing on the property, the Company
has been procuring studies to identify the extent of the environmental
contamination, the potential remedies and the cost of the clean-up. Based on the
analysis provided by environmental specialists, it appears the net realized
recoveries related to the property would be approximately $450,000. Accordingly,
the Company has established an increase of $250,000 in reserves against this
loan during the three months ended June 30, 1998.
CASH FLOW ANALYSIS
The Company generated $7,329,000 and $3,683,000 from operating
activities during the six months ended June 30, 1998 and 1997, respectively. The
increase of $3,647,000 (99%) was attributable to several factors including an
increase in sources of funds from the change in other assets. During the six
months ended June 30, 1998 and 1997, the Company used net cash of $13,000 and
$4,082,000, respectively, from the change in operating assets and liabilities.
Included in cash flows from operating activities is the lending activity of
First Western relating to the government guaranteed portion of the SBA 7(a)
Program loans originated which are sold into the secondary market ("Government
17
<PAGE> 20
Guaranteed Lending"). During the six months ended June 30, 1998 and 1997, the
Company had a net source of cash of $1,437,000 and $1,986,000, respectively,
from Government Guaranteed Lending activities.
The Company used $5,750,000 and $21,267,000 from investing activities
during the six months ended June 30, 1998 and 1997, respectively. The Company
decreased its use of funds for loans originated by $12,025,000 from $29,734,000
during the six months ended June 30, 1997 to $17,709,000 during the six months
ended June 30, 1998. During the six months ended June 30, 1998 principal
collected was $11,616,000 as compared to $6,067,000 during the six months ended
June 30, 1997. This increase of $5,549,000 (91%) was primarily due to
prepayments on larger principal balance loans during the six months ended June
30, 1998.
The Company had a net use of $7,976,000 and $7,795,000 from financing
activities during the six months ended June 30, 1998 and 1997, respectively. The
use of funds decreased by $181,000 (2%). SBA debenture repayments decreased by
$980,000 from $2,480,000 during the six months ended June 30, 1997 to $1,500,000
during the six months ended June 30, 1998 while dividends paid on common stock
during the six months ended June 30, 1998 were $7,289,000 as compared to
$6,542,000 during the six months ended June 30, 1997, an increase of $747,000
(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 (See "Dividends"). To sustain growth in the size of its
investment portfolio, the Company continually reviews the need for obtaining
additional funds from either: (i) debt offerings and borrowings under its credit
facility, (ii) securitization and sale of a portion of the loan portfolio and/or
(iii) equity offerings. Historically, the Company's primary sources of capital
and liquidity have been debentures issued through programs of the SBA, private
and public issuances of common stock, the issuance of senior unsecured notes,
the securitization and sale of its loan portfolio 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 June 30, 1998 to various prospective
small business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $62.8 million. Of these
commitments, $15.5 million were for loans partially guaranteed by the SBA of
which approximately $13.3 million would be sold (when fully funded) into the
secondary market. Such commitments are made in the ordinary course of the
Company's business. Commitments to extend credit are agreements to lend to a
customer provided that the terms established in the contract are met.
Commitments generally have fixed expiration dates and require payment of a fee.
Since some commitments expire without the proposed loan closing, the total
commitment amounts do not necessarily represent future cash requirements.
PMC has a $15 million uncollateralized revolving credit facility which
expires in March 2000. At June 30, 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 June 30, 1998, the Company was in compliance with all covenants of
this facility.
18
<PAGE> 21
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 primarily 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 structured financings, 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.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which are intended to be
covered by the safe harbors created thereby. These statements include the plans
and objectives of management for future operations, including plans and
objectives relating to future growth of the loan portfolio, dividends and
availability of funds. The forward-looking statements included herein are based
on current expectations that involve numerous risks and uncertainties and in
most instances are identified through the use of words such as "anticipates,"
"expects," and "should". Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Quarterly Report on Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
19
<PAGE> 22
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 10,
1998, the following members were re-elected to the Board of
Directors:
Irvin M. Borish
Thomas Hamill
Barry A. Imber
Other members of the Board of Directors are as follows:
Fredric M. Rosemore
Andrew S. Rosemore
Lance B. Rosemore
Martha R. Greenberg
Robert Diamond
Lee Ruwitch
The following proposal was approved at the Company's Annual
Meeting:
<TABLE>
<CAPTION>
Abstentions
Affirmation Negative and Broker
Votes Votes Non-Votes
----------- -------- -----------
<S> <C> <C> <C>
1. To ratify the appointment of PricewaterhouseCoopers
LLP as the independent public accountants of the 8,511,246 15,285 103,654
Company
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
27.1 Financial Data Schedule
B. Forms 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1998.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Capital, Inc.
Date: 8/13/98 \s\ Lance B. Rosemore
------------------------- -------------------------------
Lance B. Rosemore
President
Date: 8/13/98 \s\ Barry N. Berlin
------------------------- -------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
21
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 FORM 10-Q OF PMC CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 561
<SECURITIES> 10,544
<RECEIVABLES> 134,390<F1>
<ALLOWANCES> (621)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 606
<DEPRECIATION> (350)
<TOTAL-ASSETS> 165,469<F2>
<CURRENT-LIABILITIES> 10,402<F3>
<BONDS> 74,790
4,000<F4>
3,000<F4>
<COMMON> 71,234
<OTHER-SE> 320
<TOTAL-LIABILITY-AND-EQUITY> 165,469<F5>
<SALES> 0
<TOTAL-REVENUES> 12,231<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,722
<LOSS-PROVISION> 233
<INTEREST-EXPENSE> 2,653
<INCOME-PRETAX> 6,623
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,623
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
<FN>
<F1>Includes current and long-term portion of all loans receivable - before
reserve, interest receivable on loans and receivable for loans sold. Does not
include receivable from affiliate.
<F2>Includes the following items not included above.
(i) Interest - only strip receivable, less $295,000 reserve $ 3,033
(ii) Restricted investments 4,222
(iii) Real property owned 45
(iv) Due from unconsolidated subsidiaries 2,686
(v) Deferred charges, deposits and
other assets, net 1,048
(vi) Investment in unconsolidated subsidiaries 7,771
(vii) Servicing asset 1,534
---------
$ 20,339
=========
<F3>Includes the following:
(i) Accrued interest payable $ 1,266
(ii) Borrower advances 2,021
(iii) Dividends payable 3,902
(iv) Accounts payable 3,213
--------
$ 10,402
========
<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 $ 599
(ii) Other liabilities 588
(iii) Due to unconsolidated subsidiaries 536
-------
$ 1,723
=======
<F6>Revenues consist primarily of interest, other yield on investments, premium
income and equity in income of unconsolidated subsidiaries.
</FN>
</TABLE>
