<PAGE> 1
As filed with the Securities and Exchange Commission on April 21, 1998
Registration No. 333-3315
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
(Check appropriate box or boxes)
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PMC CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
-------------
17290 PRESTON ROAD
DALLAS, TEXAS 75252
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 349-3200
-------------
LANCE B. ROSEMORE
17290 PRESTON ROAD
DALLAS, TEXAS 75252
(NAME AND ADDRESS OF AGENT FOR SERVICE)
With a Copy to:
KENNETH L. BETTS, ESQ.
WINSTEAD SECHREST & MINICK P.C.
1201 ELM STREET, SUITE 5400
DALLAS, TEXAS 75270
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
-------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price per Aggregate Offering Amount of
Securities to be Registered Registered Share(1) Price(1) Registration Fee(2)
--------------------------- ------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Common Stock
$.01 par value ......... 1,500,000 $14.25 $21,375,000 $6,306
=====================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(f) of the Securities Act of 1933, as
amended, based upon the average of the reported high and low sales
prices of a share of Common Stock on the American Stock Exchange on
April 16, 1998.
(2) $4,311 of such fee was previously paid in connection with the
Registrant's initial filing of this Registration Statement.
-------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PMC CAPITAL, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBERS FORM N-2 CAPTION IN PROSPECTUS
- --------------------- ---------------------
<S> <C> <C>
1.,14. Outside Front Cover Page Cover Page
2. Inside Front and Outside Back Cover Page
Cover Page
3. Fee Table and Synopsis Fund Expenses; Synopsis
4. Financial Highlights Not Applicable
5. Plan of Distribution Description of the Plan
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8.,16. General Description of the Registrant; Cover Page; Synopsis; Certain
General Information and History Considerations; Market Price of Common
Stock; Business; Investment Objectives
and Policies
9.,18. Management Management
10. Capital Stock, Long-Term Debt, and Other Description of Capital Stock and Long-Term Debt;
Securities Senior Securities; Financial Statements
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13.,15. Table of Contents Table of Contents
17. Investment Objectives and Policies Investment Objectives and Policies
19. Control Persons and Principal Holders of Holdings of Principal Shareholders; Management
Securities
20. Investment Advisory and Other Services Not Applicable
21. Brokerage Allocation and Other Practices Brokerage Allocation and Other Practices
22. Tax Status Tax Status
23. Financial Statements Financial Statements
</TABLE>
(i)
<PAGE> 3
PART I
PROSPECTUS
PMC CAPITAL, INC.
17290 PRESTON ROAD
DALLAS, TEXAS 75252
(972) 349-3200
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Dividend Reinvestment and Cash Purchase Plan (the "Plan") of PMC
Capital, Inc. ("PMC Capital" or the "Company") provides Participants in the
Plan with a simple and convenient method of purchasing shares of common stock
without payment of any brokerage commissions. PMC Capital is a diversified,
closed-end management investment company, that has elected to be regulated as a
business development company ("BDC") under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). PMC Capital is engaged in the
business of originating loans to small businesses, either directly or through
its three principal subsidiaries, primarily under certain programs of the Small
Business Administration (the "SBA").
Investment options offered under the Plan are:
FULL DIVIDEND REINVESTMENT -- Reinvest dividends on all shares of
common stock held. Participants may also make optional payments of not less
than $50 per payment or more than $5,000 in the aggregate per calendar month to
purchase shares of common stock.
PARTIAL DIVIDEND REINVESTMENT -- Reinvest dividends on a portion of
common stock held. Participants may also make optional payments of not less
than $50 per payment or more than $5,000 in the aggregate per calendar month to
purchase shares of common stock.
OPTIONAL PAYMENT ONLY -- Current shareholders may invest by making
optional payments at any time of not less than $50 per payment or more than
$5,000 in the aggregate per calendar month to purchase shares of common stock.
The price of shares purchased by Participants either with reinvested
dividends or optional payments will be (i) the average of the mean of the high
and low prices of the common stock, as published in The Wall Street Journal -
American Stock Exchange listings, for the five days in which trading of such
shares takes place, immediately prior to the applicable investment date, if the
shares are purchased from the Company or (ii) the weighted average price of the
shares, if such shares are acquired in the open market.
This Prospectus relates to shares of the common stock of PMC Capital
registered for purchase under the Plan, which shares, at the option of PMC
Capital, will be newly issued shares, shares repurchased in the open market,
treasury shares or any combination thereof. No commissions or underwriters
fees or discounts are to be paid in connection with this offering. This
Prospectus sets forth the information an investor should know about the Company
before investing. Please read this Prospectus carefully and retain it for
future reference.
----------------
THE SHARES BEING OFFERED HEREBY ARE SUBJECT TO CERTAIN RISKS WHICH SHOULD BE
CAREFULLY CONSIDERED BY POTENTIAL INVESTORS. (SEE "CERTAIN CONSIDERATIONS.")
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is April _____, 1998.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FUND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DESCRIPTION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
CERTAIN CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
MARKET PRICE OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
REMUNERATION OF OFFICERS AND DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
HOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
</TABLE>
-2-
<PAGE> 5
SYNOPSIS
This Prospectus relates to 1,500,000 shares of the common stock, $.01
par value per share ("Common Stock"), of PMC Capital being offered for sale
through PMC Capital, Inc.'s Dividend Reinvestment and Cash Purchase Plan (the
"Plan"). The minimum cash payment for the purchase of shares through the Plan
shall be $50.00. The Common Stock is traded on the American Stock Exchange
("AMEX"). On March 31, 1998, the closing price of the Common Stock on the AMEX
was $14.38.
PMC Capital, Inc. ("PMC Capital" or "PMC" and, together with its
subsidiaries, the "Company") is a diversified closed-end management investment
company that operates as a business development company ("BDC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The common stock
of the Company (the "Common Stock") is traded on the American Stock Exchange
under the symbol "PMC." The Company engages in the business of originating
loans to small businesses either directly or through its three principal
subsidiaries: First Western SBLC, Inc. ("First Western"), PMC Investment
Corporation ("PMIC") and Western Financial Capital Corporation ("Western
Financial"). First Western, PMIC and Western Financial are registered under
the 1940 Act as diversified closed-end management investment companies. In
addition, PMC Capital is either directly or indirectly the sole shareholder or
partner of PMC Advisers, Ltd. ("PMC Advisers"), PMC Funding Corp. ("PMC
Funding"), PMC Capital Corp. 1996-A ("PMC Capital Corp."), PMC Trust 1996-A,
and PMC Capital Limited Partnership (the "Partnership"). PMC Advisers is an
investment advisor who evaluates and services loans and other investment
alternatives pursuant to a fee arrangement. PMC Capital has elected to be
taxed as a regulated investment company and distributes substantially all its
taxable income as dividends to its shareholders, thereby incurring no Federal
income tax liability on such income.
The Company primarily originates loans to individuals and small
business concerns in the lodging industry. The Company also targets the
medical, food service, service, retail and commercial real estate industries.
The Company primarily lends to businesses in the Southwest and Southeast
regions of the United States. A majority of the Company's loans in the lodging
industry are to owner-operated facilities generally operating under national
franchises. The Company believes that franchise operations offer attractive
lending opportunities because such businesses employ proven business concepts,
have consistent product quality, are screened and monitored by franchisors and
generally have a higher rate of success as compared to other independently
operated businesses.
During the five years ended December 31, 1997, the Company originated
loans in the aggregate principal amount of approximately $383.5 million and
sold approximately $141.7 million aggregate principal amount of loans
originated under the SBA's 7(a) lending program ("SBA 7(a) Program Loans") into
the secondary market and approximately $25 million and $23 million through
structured sales in 1994 and 1997, respectively, and $46 million through a
structured financing in 1996. For the year ended December 31, 1997, the
Company originated loans in the aggregate principal amount of approximate $86.3
million and sold approximately $21.6 million of its SBA 7(a) Program Loans in
the secondary market. The Company has
-3-
<PAGE> 6
historically serviced substantially all the loans that it originated and at
December 31, 1997 had a serviced loan portfolio outstanding of approximately
$297.4 million.
FUND EXPENSES(1)
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) . . . . . . . . . . . . . . None
Dividend Reinvestment and Cash Purchase Plan Fees(2) . . . . . . . . . . . None
ANNUAL EXPENSES
(as a percentage of net assets attributable to common shares)(3)
Management Fee(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.32%
Interest Payments on Borrowed Funds (5) . . . . . . . . . . . . . . . . . . 7.58%
All Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.59%
Total Annual Expenses(6) . . . . . . . . . . . . . . . . . . . . . . . . . 14.49%
</TABLE>
EXAMPLE
You would pay the following expenses over the indicated period
on a hypothetical $1,000 investment, assuming a 5% annual
return on total assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 152 $ 441 $ 693 $1,188
</TABLE>
- ---------------------
(1) The purpose of the above table, including the example, is to assist
investors in understanding various costs and
expenses that investors in the Company may bear directly or indirectly.
See "Selected Consolidated Financial Data" and "Management." The table and
the example are based on the Company's fiscal year ended December 31, 1997.
THE HYPOTHETICAL EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN IN THE TABLE AND THE EXAMPLE.
(2) All costs of the Plan are borne by the Company and are included in the fees
paid to the transfer agent for the monthly services provided thereby. Such
expenses are reflected in "All Other Expenses" above.
(3) Net assets attributable to common shares equals net assets (i.e., total
assets less total liabilities and redeemable preferred stock outstanding)
as of December 31, 1997.
(4) The Company is internally managed and does not have an investment advisor.
Accordingly, the Company directly incurs all costs with respect to the
selection, research and supervision of all investments. For purposes of
this Fund Expenses table, the Company has done an internal valuation of its
expenses allocable to the research, selection and supervision of its
investments. Management's good faith estimate of such costs is
approximately $3.2 million, representing 4.32% of net assets attributable
to common shares.
(5) The Company had outstanding borrowings of $76.3 million at December 31,
1997.
(6) Total Annual Expenses as a percentage of consolidated net assets
attributable to common shares are higher than most closed-end management
investment companies due to the Company's consolidated outstanding
borrowings of $76.3 million and consolidated preferred stock of $7.0
million at December 31, 1997, which significantly reduce the consolidated
net assets attributable to common shares on which the Annual Expenses
percentage is calculated. If the total annual expenses were calculated as
a percentage of total assets, such percentage would be 6.39%.
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<PAGE> 7
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of Selected Consolidated Financial Data of the
Company as of and for the five years in the period ended December 31, 1997.
The following data should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto and "Management's
Discussion and Analysis of the Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus. The selected financial data presented
below has been derived from the consolidated financial statements of the
Company, audited by Coopers & Lybrand L.L.P., independent public accountants,
whose report with respect thereto is included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -------
(in thousands, except per share information)
<S> <C> <C> <C> <C> <C>
Operating:
Operating income . . . . . . . . . $ 24,406 $ 23,821 $ 21,262 $ 16,450 $ 15,670
Operating expenses . . . . . . . . $ (10,602) $ (10,454) $ (9,541) $ (7,578) $ (5,933)
Realized and unrealized gain (loss)
on investments . . . . . . . . . $ 1,818 $ (147) $ (359) $ 3,151 $ (404)
Net operating income and realized
and unrealized gain (loss) on
investments . . . . . . . . . . $ 15,622 $ 13,220 $ 11,362 $ 12,023 $ 9,333
Dividends declared, common . . . . $ 14,543 $ 12,853 $ 11,600 $ 11,244 $ 9,367
Earnings per common share . . . . $ 1.35 $ 1.18 $ 1.03 $ 1.12 $ 0.87
Dividends per common share . . . . $ 1.27 $ 1.16 $ 1.08 $ 1.06 $ 0.89
Weighted average common
shares outstanding . . . . . . 11,411 11,002 10,768 10,650 10,579
Loans funded . . . . . . . . . . . . . $ 86,361 $ 70,154 $ 77,567 $ 75,349 $ 74,091
At end of period:
Loans receivable, net . . . . . . $ 127,240 $ 93,354 $ 110,499 $ 75,264 $ 71,528
Total assets . . . . . . . . . . . $ 165,839 $ 163,431 $ 159,002 $ 125,416 $ 112,515
SBA debentures payable . . . . . . $ 41,290 $ 44,570 $ 43,540 $ 26,280 $ 20,280
Notes payable . . . . . . . . . . $ 35,000 $ 35,000 $ 35,001 $ 25,001 $ 25,001
Preferred stock of consolidated
subsidiary . . . . . . . . . . $ 7,000 $ 7,000 $ 7,000 $ 5,000 $ 3,000
Common shareholders' equity . . . $ 70,166 $ 62,903 $ 59,088 $ 57,371 $ 55,524
Number of common shares
outstanding . . . . . . . . . . 11,631 11,162 10,871 10,684 10,603
Ratios:
Return on average assets . . . . . 9.7% 8.3% 8.0% 10.3% 9.4%
Return on average common
shareholders' equity . . . . . . 23.3% 21.3% 19.2% 21.2% 16.8%
</TABLE>
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<PAGE> 8
SENIOR SECURITIES
(At End of Fiscal Year, Consolidated)
<TABLE>
<CAPTION>
Total Amount
Outstanding Involuntary
Exclusive of Asset Liquidating Average Market
Treasury Coverage Per Preference Per Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
------------------------------------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
SENIOR NOTES
December 31, 1988 . . . . . . . . . $ -- $ -- -- N/A
December 31, 1989 . . . . . . . . . -- -- -- N/A
December 31, 1990 . . . . . . . . . -- -- -- N/A
December 31, 1991 . . . . . . . . . -- -- -- N/A
December 31, 1992 . . . . . . . . . -- -- -- N/A
December 31, 1993 . . . . . . . . . 25,000,000 2,292 -- N/A
December 31, 1994 . . . . . . . . . 25,000,000 2,216 -- N/A
December 31, 1995 . . . . . . . . . 35,000,000 1,841 -- N/A
December 31, 1996 . . . . . . . . 35,000,000 1,878 -- N/A
December 31, 1997 . . . . . . . . 35,000,000 2,012 __ N/A
BANK LOAN
(revolving line of credit)
December 31, 1988 . . . . . . . . . $ -- $ -- -- N/A
December 31, 1989 . . . . . . . . . 3,000,000 1,711 -- N/A
December 31, 1990 . . . . . . . . . 2,891,500 1,759 -- N/A
December 31, 1991 . . . . . . . . . 4,251,000 1,987 -- N/A
December 31, 1992 . . . . . . . . . 1,000 3,596 -- N/A
December 31, 1993 . . . . . . . . . 1,000 2,292 -- N/A
December 31, 1994 . . . . . . . . . 1,000 2,216 -- N/A
December 31, 1995 . . . . . . . . . 1,000 1,841 -- N/A
December 31, 1996 . . . . . . . . __ __ -- N/A
December 31, 1997 . . . . . . . . __ __ -- N/A
</TABLE>
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<PAGE> 9
<TABLE>
<CAPTION>
Total Amount
Outstanding Involuntary
Exclusive of Asset Liquidating Average Market
Treasury Coverage Per Preference Per Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
------------------------------------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
SBA DEBENTURES(5)
December 31, 1988 . . . . . . . . . $ 14,140,000 $ 1,752 -- N/A
December 31, 1989 . . . . . . . . . 16,640,000 1,711 -- N/A
December 31, 1990 . . . . . . . . . 23,140,000 1,759 -- N/A
December 31, 1991 . . . . . . . . . 23,140,000 1,987 -- N/A
December 31, 1992 . . . . . . . . . 22,280,000 3,596 -- N/A
December 31, 1993 . . . . . . . . . 20,280,000 2,292 -- N/A
December 31, 1994 . . . . . . . . . 26,280,000 2,216 -- N/A
December 31, 1995 . . . . . . . . . 43,540,000 1,841 -- N/A
December 31, 1996 . . . . . . . . 44,570,000 1,878 -- N/A
December 31, 1997 . . . . . . . . 41,290,000 2,012 -- N/A
NON-REDEEMABLE CUMULATIVE PREFERRED
STOCK(5)
December 31, 1988 . . . . . . . . . $ 1,000,000 $ 164 $ 100 N/A
December 31, 1989 . . . . . . . . . 3,000,000 148 100 N/A
December 31, 1990 . . . . . . . . . 3,000,000 158 100 N/A
December 31, 1991 . . . . . . . . . 3,000,000 179 100 N/A
December 31, 1992 . . . . . . . . . 3,000,000 317 100 N/A
December 31, 1993 . . . . . . . . . 3,000,000 215 100 N/A
December 31, 1994 . . . . . . . . . 3,000,000 202 100 N/A
December 31, 1995 . . . . . . . . . 3,000,000 169 100 N/A
December 31, 1996 . . . . . . . . 3,000,000 173 100 N/A
December 31, 1997 . . . . . . . . 3,000,000 184 100 N/A
</TABLE>
-7-
<PAGE> 10
<TABLE>
<CAPTION>
Total Amount
Outstanding Involuntary
Exclusive of Asset Liquidating Average Market
Treasury Coverage Per Preference Per Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
------------------------------------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
REDEEMABLE
CUMULATIVE PREFERRED
STOCK(5)
December 31, 1988 . . . . . . . . . $ -- $ -- $ -- N/A
December 31, 1989 . . . . . . . . . -- -- -- N/A
December 31, 1990 . . . . . . . . . -- -- -- N/A
December 31, 1991 . . . . . . . . . -- -- -- N/A
December 31, 1992 . . . . . . . . . -- -- -- N/A
December 31, 1993 . . . . . . . . . -- -- -- N/A
December 31, 1994 . . . . . . . . . 2,000,000 202 100 N/A
December 31, 1995 . . . . . . . . . 4,000,000 169 100 N/A
December 31, 1996 . . . . . . . . . 4,000,000 173 100 N/A
December 31, 1997 . . . . . . . . . 4,000,000 184 100 N/A
</TABLE>
- ---------------------
(1) Total amount of each class of senior securities outstanding at the end
of the year presented.
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as the Company's consolidated total assets
less all liabilities and indebtedness not represented by senior
securities, divided by senior securities representing indebtedness.
This asset coverage ratio is multiplied by $1,000 to determine the
Asset Coverage Per Unit. The asset coverage ratio for a class of
senior securities that is preferred stock is calculated as the
Company's consolidated total assets less all liabilities and
indebtedness not represented by senior securities, divided by senior
securities representing indebtedness, plus the involuntary liquidation
preference of the preferred stock (see footnote 3). The Asset
Coverage Per Unit is expressed in terms of dollar amounts per share.
(3) The amount to which such class of senior security would be entitled
upon the voluntary liquidation of the issuer in preference to any
security junior to it.
(4) Not applicable, as senior securities are not registered for public
trading.
(5) Issued by the Company's small business investment company subsidiaries
to the U. S. Small Business Administration. These categories of
senior securities are not subject to the asset coverage requirements
of the Investment Company Act.
-8-
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Company's operations include originating and servicing commercial loans for
its own account as well as operating as an investment advisor who evaluates and
services loans under a fee arrangement for PMC Commercial. The Company sells
the guaranteed portion its loans originated under the SBA 7(a) Lending 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) Lending 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 SBA 7(a) Lending Program loans sold into the
secondary market.
o Interest earned on temporary (short-term) investments.
o Other fees, including: late fees, prepayment fees,
construction monitoring and site visit fees.
In order to generate revenues, PMC originates commercial loans. The
following table sets forth information concerning the aggregate gross loans
funded for the Company and the respective changes from previous years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1997 1996 1995
------------------------ --------------------- ----------------------
(In millions)
Increase Increase Increase
Company Funded (Decrease) Funded (Decrease) Funded (Decrease)
- ------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
PMIC . . . . . $ 24.1 25% $ 19.3 (9%) $ 21.2 108%
Western
Financial . . 12.9 72% 7.5 (6%) 8.0 11
First Western . 29.5 1% 29.2 (28%) 40.6 (2%)
PMC Capital . . 19.9 40% 14.2 84% 7.7 (53%)
------- ------ ------
Total . . . . . $ 86.4 23% $ 70.2 (9%) $ 77.5 3%
======= ====== ======
</TABLE>
-9-
<PAGE> 12
In 1993, the Company organized an investment advisor which pursuant to
the terms of an investment management agreement acts as the investment advisor
for PMC Commercial. The Company's subsidiary, PMC Advisers, has been the
investment advisor for PMC Commercial since the completion of PMC Commercial's
public offering in December 1993 (see footnote 14 to the accompanying
consolidated financial statements). During 1997 PMC Advisers earned management
fees of approximately $1.6 million from PMC Commercial.
The Company also earns income through its equity ownership in its
non-investment company subsidiaries, primarily the Partnership. In November
1996 the Partnership completed the Private Placement of approximately $40.7
million of Notes which were issued at par and have an interest rate of 6.725%.
The Notes were originally collateralized by approximately $45.7 million of
loans contributed to the Partnership by PMC Capital. The net proceeds of the
issuance of the Notes, approximately $37.5 million were distributed to PMC
Capital utilized to originate additional loans. The differential between the
interest received on the collateralized loans (originally $45.7 million at an
average yield of 11.5%) and the interest paid on the Notes (originally $40.7
million at 6.725%), less any loan losses and amortization of transaction fees,
contribute to the profit of PMC Capital.
Due to the reduction of loan origination opportunities experienced by
First Western over the past several years, the Company has actively sought to
increase other sources of revenues and thereby reduce its reliance on the
income generated by First Western. During this period the Company's other
lending activities have increased and the Company has established other revenue
sources such as the investment advisory income.
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%.
Prime rates utilized by First Western were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
First Quarter 8.25% 8.50% 8.50%
Second Quarter 8.50% 8.25% 9.00%
Third Quarter 8.50% 8.25% 9.00%
Fourth Quarter 8.50% 8.25% 8.75%
</TABLE>
Due to the decline in interest rates since 1995 and the increased
availability of either fixed rate loans or variable rate loans with interest
rates less than that on the outstanding portfolio of First Western, prepayments
have increased.
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
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<PAGE> 13
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 loans of First Western's. These loans have
variable interest rates based on the Prime Rate.
As a result of the Prime Lending Program, the Company experienced a
23% increase in loans originated from $70.2 million during the year ended
December 31, 1996 to $ 86.4 million during the year ended December 31, 1997.
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 anticipates greater
utilization of its revolving credit facility.
The Company receives other investment income from various sources
including late fees, prepayment fees, construction monitoring and site visit
fees. The net amount of other investment income earned during 1997 was
$504,000. The amount earned will vary based on volume funded, the mix of loans
(construction versus non-construction), the rate on loans originated (whether
fixed or floating) as well as the general level of interest rates.
Expenses primarily consist of interest expense and company overhead.
Expenses were 44% of total income during the year ended December 31, 1997
compared to 43% during the year ended December 31, 1996.
Interest expense was $5.5 million during 1997. Interest expense is
primarily derived from (i) $35 million of unsecured notes with a weighted
average interest rate of 7.4% and weighted average remaining maturity of 3.8
years as of December 31, 1997, and (ii) $41,290,000 of debentures due to the
SBA as a result of borrowings made by the Company's SBIC subsidiaries, with a
weighted average interest rate of 6.7% and weighted average remaining maturity
of 5.1
-11-
<PAGE> 14
years as of December 31, 1997. At December 31, 1997, the Company had no
borrowings outstanding pursuant to its revolving credit facility, and had
availability of $15 million. Any borrowings thereunder would bear interest at
a rate based on either the prime rate or Libor.
Company overhead was $5.1 million in 1997 and is comprised of salaries
and related benefits, general and administrative, profit sharing plan, rent,
legal and accounting, SBA fees and directors and shareholders expense. The
Company's operations are centralized from its headquarters in Dallas, Texas.
The Company presently has other marketing offices located in 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 14% and 13%, respectively, of
total income during the years ended December 31, 1997 and 1996. 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 the year ended December
31, 1997 compared to 4% during the year ended December 31, 1996. These costs
are anticipated to increase in proportion to the growth of the Company's
portfolio under management. During the year ended December 31, 1997, the
Company expensed approximately $40,000 relating to the Texas franchise tax.
Profit sharing plan, rent, legal and accounting, SBA fees and
directors and shareholders expense (collectively the "Other Administrative
Costs") aggregated $822,000 for the year ended December 31, 1997. The Other
Administrative Costs were 3% of total income for each of the years ended
December 31, 1997 and 1996. These costs are anticipated to increase in
proportion to the increase in salaries and general administrative expense as a
result of the anticipated growth of the Company's portfolio under management.
CERTAIN ACCOUNTING CONSIDERATIONS
Effective January 1, 1997, the Company adopted as required, SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides for the accounting and
reporting of transfers and servicing of financial assets based on a
financial-components approach.
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
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<PAGE> 15
portion of an SBA 7(a) loan. The difference between (i) the carrying value of
the portion of loans sold and (ii) the sum of (a) cash received, (b) the
relative fair values of the servicing rights and (c) the interest-only strip
receivable retained, constitutes the gain on sale.
SFAS No. 125 also requires that amounts carried previously as excess
servicing assets be reclassified between a servicing asset and an interest-only
strip receivable, as defined. Accordingly, the Company reclassified its excess
servicing asset (net of an allowance for credit losses on loans sold) of
$4,896,000 at December 31, 1996 to $1,753,000 of a servicing asset and
$3,143,000 of an interest-only strip receivable.
In accordance with SFAS No. 125, the servicing asset is amortized in
proportion to and over the period of estimated net servicing income and is
evaluated for impairment by stratifying the servicing assets by one or more of
the predominant risk characteristics of the underlying financial assets. The
interest-only strip receivable is accounted for as an investment in debt
securities classified as 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 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 market value.
In addition, on a quarterly basis, the Company measures the fair
value of the interest-only strip receivable based upon the future anticipated
cash flows discounted to reflect the current market interest rates for
investments of this type. Any appreciation (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 year ended
December 31, 1997, the Company provided for an unrealized loss and
corresponding valuation allowance of $300,000 related to the interest- only
strip receivable.
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
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<PAGE> 16
be enhanced. During the year ended December 31, 1997 as compared to the prior
year, the amount of amortization of the servicing asset was increased as a
result of increased prepayment speeds. (See - Securitization and Structured
Financing Programs)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Interest income decreased by $1,435,000 (8%), from $18,571,000 for the
year ended December 31, 1996 to $17,136,000 for the year ended December 31,
1997. This decrease was primarily attributable to a reduction in PMC Capital's
loan portfolio resulting from the Structured Financing completed during
November 1996 and the First Western Securitization in December 1997 and a
reduction in interest rates on loan originations in 1997. The average retained
loan portfolio outstanding decreased 9% from $124.9 million during the year
ended December 31, 1996 to $113.8 million during the year ended December 31,
1997. Accordingly, interest income on loans (not including the Partnership)
decreased by $1,725,000, or 10%, from $17,504,000 during the year ended
December 31, 1996 to $15,779,000 during the year ended December 31, 1997.
Including the interest earned by the Partnership of $591,000 and $4,662,000
during the years ended December 31, 1996 and 1997, respectively, interest
income on loans increased by $2,346,000 (13%) to $20,441,000 for the year ended
December 31, 1997 as compared to $18,095,000 during the year ended December 31,
1996. During the year ended December 31, 1997, the Company earned increased
interest on short-term investments due to the funds received from the
Structured Financing and the First Western Securitization in December 1997. As
a result, during the year ended December 31, 1997, average temporary
investments outstanding were $28.9 million, a 36% increase from $21.3 million
during the year ended December 31, 1996. Accordingly, interest on temporary
investments increased by $291,000, or 27%, from $1,067,000 during the year
ended December 31, 1996 to $1,358,000 during the year ended December 31, 1997.
Premium income decreased by $166,000 (9%), from $1,942,000 for the
year ended December 31, 1996 to $1,776,000 for the year ended December 31,
1997. This decrease was primarily attributable to lower premium percentages
paid for the loans sold during the year ended December 31, 1997 as compared to
December 31, 1996. The primary reason for the lower premium percentages is
that the spread above Prime for loans originated and sold was lower in 1997
than 1996. When the lower interest rate loans are sold, the percentage premium
paid is usually less, accordingly, the income recognized from loan sales
decreased even though the loans sold increased from $20.0 million during the
year ended December 31, 1996 to $21.6 million during the year ended December
31, 1997.
Other investment income, net, decreased by $104,000 (17%), from
$608,000 for the year ended December 31, 1996 to $504,000 for the year ended
December 31, 1997. This decrease was primarily attributable to a decrease in
prepayment fees on the fixed-rate loan portfolio received during the year ended
December 31, 1997 as compared to the year ended December 31, 1996.
Equity in income (loss) of unconsolidated subsidiaries increased by
$2,191,000, from income, net, of $369,000 during the year ended December 31,
1996 to income, net, of $2,560,000
-14-
<PAGE> 17
during the year ended December 31, 1997. The increase is primarily due to the
formation of the Partnership in November 1996 which had net profits of
$2,608,000 during the year ended December 31, 1997 compared to $328,000 during
the year ended December 31, 1996. The Partnership profits include all yield
generated from the loans contributed by PMC Capital less the cost of the Notes
issued by the Partnership. Offsetting a portion of the Partnership income were
the operations of PMC Funding which had a decrease in revenues from charter
services of its airplane which resulted in a reduction in profits from a net
income of $41,000 during the year ended December 31, 1996 to a net loss of
$48,000 during the year ended December 31, 1997.
Other income, net, increased by $99,000 (4%), from $2,331,000 during
the year ended December 31, 1996 to $2,430,000 during the year ended December
31, 1997. This increase was primarily a result of an increase in advisory fees.
This increase was achieved even though a $251,000 fee was generated by PMC
Advisers during the year ended December 31, 1996 related to an equity offering
of PMC Commercial for which there was no comparable transaction in 1997.
Operating expenses, not including interest, increased by $308,000
(6%), from $4,746,000 during the year ended December 31, 1996 to $5,054,000
during the year ended December 31, 1997. This increase was a result of an
increase in salaries and related benefits of 255,000 (8%), from $3,180,000
during the year ended December 31, 1996, to $3,435,000 during the year ended
December 31, 1997. The increase in salaries and related benefits was
attributable to an increased number of employees (due to the increase in
portfolio under management, the complexity of the financing transactions
undertaken by the Company and an increase in marketing personnel), and a
general increase in the level of salaries for employees during 1996 and 1997.
Rent expense increased by $16,000 (8%) during the year ended December 31, 1997
as compared to the year ended December 31, 1996 due to the opening of a new
office during 1997 (Phoenix, Arizona) and the expansion of the Company's space
occupied and an increase in the base rent at its headquarters. Legal and
accounting increased by $43,000 (29%) during the year ended December 31, 1997
as compared to the year ended December 31, 1996 due to the increased cost of
the annual audit (primarily attributable to the formation of the Partnership)
and increases in general corporate legal services. General and administrative
costs decreased by $46,000 during the year ended December 31, 1997 as compared
to the year ended December 31, 1996 due to reductions in state franchise taxes.
Interest expense decreased by $160,000 (3%), from $5,708,000 during
the year ended December 31, 1996 to $5,548,000 during the year ended December
31, 1997. The decrease was primarily attributable to the repayment at maturity
of approximately $2.5 million and $1.0 million in SBA debentures during
February 1997 and September 1997, respectively.
Realized and unrealized gain (loss) on investments (not including the
sale of assets) changed from a loss of $147,000 during the year ended December
31, 1996 to a loss of $542,000 during the year ended December 31, 1997. The
period ended December 31, 1997 includes the effect of the $300,000 unrealized
loss related to the interest-only strip receivables. During both periods, loan
losses were minimal. During the year ended December 31, 1996, the Company
recognized $35,000 in recoveries from previously written-off loans which
reduced the net loss
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<PAGE> 18
during the period. There were no comparable recoveries during the year ended
December 31, 1997. During the year ended December 31, 1997, the Company
recognized approximately $100,000 in reversal of reserves on loans that paid in
full or have become amortizing loans and the likelihood of collection has
significantly increased which reduced the net loss during the period. There
were no comparable adjustments during the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Interest income increased by $2,241,000 (14%) from $16,330,000 for the
year ended December 31, 1995, to $18,571,000 for the year ended December 31,
1996. This increase was primarily attributable to the growth in the Company's
portfolio. The average loan portfolio outstanding during the year ended
December 31, 1996 was $124.9 million, a 33% increase from $94.1 million in the
comparable period of 1995. Accordingly, interest income on loans increased by
$3,076,000 (21%) from $14,428,000 during the year ended December 31, 1995, to
$17,504,000 during the year ended December 31, 1996. Average temporary
investments outstanding during the year ended December 31, 1996 were $21.3
million, a 34% decrease from $32.4 million for the year ended December 31,
1995. Accordingly, interest income on temporary investments decreased by
$835,000 (44%) from $1,902,000 during the year ended December 31, 1995 to
$1,067,000 during the year ended December 31, 1996.
Premium income decreased by $905,000 (32%) from $2,847,000 for the
year ended December 31, 1995, to $1,942,000 for the year ended December 31,
1996. This decrease was primarily attributable to a 33% decrease in the
guaranteed portion of loans held for sale or sold (under the 7(a) Program)
during the year ended December 31, 1996 ($20.0 million) as compared to the year
ended December 31, 1995 ($29.9 million).
Other investment income, net, increased by $240,000 (65%) from
$368,000 for the year ended December 31, 1995, to $608,000 for the year ended
December 31, 1996. This increase was primarily attributable to an increase of
$200,000 in fees received on loans which prepaid during the year ended December
31, 1996 as compared to the year ended December 31, 1995. The Company
experienced a greater number of loan prepayments in 1996 as compared to 1995
because of the general decline in interest rates and the increased competition
for financing in the lodging industry.
Equity in income (loss) of unconsolidated subsidiaries increased by
$447,000, from a loss of $78,000 during the year ended December 31, 1995 to
income of $369,000 during the year ended December 31, 1996. The increase is
primarily due to the formation of the Partnership in November 1996 which had
net profits of $328,000. The Partnership profits include all yield generated
from the loans contributed by PMC Capital less the cost of the Notes issued by
the Partnership. The net income from the Partnership included $80,000 in fees
received on prepaid loans. In addition, PMC Funding realized an increase in
revenues from charter services of its airplane which resulted in a change in
profits from a loss of $78,000 during the year ended December 31, 1995 to a
profit of $41,000 during the year ended December 31, 1996.
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<PAGE> 19
Other income, net, increased by $536,000 (30%) from $1,795,000 during
the year ended December 31, 1995, to $2,331,000 during the year ended December
31, 1996. This increase was primarily a result of investment management fees
generated by PMC Advisers which increased by approximately $400,000 (33%) from
$1.2 million during the year ended December 31, 1995 to $1.6 million during the
year ended December 31, 1996.
Operating expenses, excluding interest, increased by $255,000 (6%)
from $4,492,000 during the year ended December 31, 1995, to $4,747,000 during
the year ended December 31, 1996. This increase was a result of an increase in
salaries and related benefits of $402,000 (15%) from $2,778,000 during the year
ended December 31, 1995, to $3,180,000 during the year ended December 31, 1996.
The increase in salaries and related benefits was a result of increased number
of employees (due to the increase in portfolio under management and the
complexity of the financing transactions undertaken by the Company), and a
general increase in the level of salaries for employees during 1996. This
increase was offset partially by a $210,000 decrease in administrative and
general costs. During the third quarter of 1995, the Company expensed
approximately $106,000 of costs pertaining to its decision not to pursue an
offering of common stock of PMIC. Also, the Company had reductions in
advertising, telephone and travel expenses when comparing the year ended
December 31, 1996 to the year ended December 31, 1995. Advertising reductions
were due to fewer newspaper ad placements, telephone reductions were due to a
change in long distance carriers and travel reductions were due to increased
use of PMC Funding's airplane.
Interest expense increased by $659,000 (13%) from $5,049,000 during
the year ended December 31, 1995, to $5,708,000 during the year ended December
31, 1996. The increase was primarily attributable to: (i) the interest expense
on approximately $17.3 million of SBA debentures which were issued or assumed
during the year ended December 31, 1995 by PMIC and Western Financial, (ii) the
assumption of $1,030,000 of SBA debentures in June 1996, (iii) the scheduled
increase in the interest rate on $2.0 million of PMIC's SBA debentures during
June 1995 and (iv) the issuance of $10.0 million of unsecured notes by PMC
Capital in April 1995.
Realized and unrealized gain (loss) on investments changed from a loss
of $359,000 during the year ended December 31, 1995 to a loss of $147,000
during the year ended December 31, 1996. The decrease in the aggregate losses
on a dollar amount and a percentage basis was due to continued steady
performance of the lodging portion of the portfolio. In addition, to the extent
loans were deemed non-performing or were liquidated or foreclosed upon, the
percentage recovery has generally been substantial due to the high
concentration of real estate collateral on such loans. Realized and unrealized
gain (loss) on investments as a percentage of average loans receivable for the
years ended December 31, 1996 and 1995 were 0.12% and 0.38%, respectively.
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<PAGE> 20
CASH FLOW ANALYSIS
The Company generated $10.6 million and $14.1 million from operating
activities during the years ended December 31, 1997 and 1996, respectively.
The decrease of $3.5 million (25%) was primarily attributable to the equity in
the income of the unconsolidated subsidiaries which is an adjustment to net
income and classified as an investing activity to the extent of dividends paid
to PMC (see discussion of investing activities below). Included in cash flows
from operating activities is the lending activity of First Western relating to
the government guaranteed portion of loans originated which are sold into the
secondary market ("Government Guaranteed Lending"). During the years ended
December 31, 1997 and 1996, the Company had a net source of cash of $1,016,000
and a net use of cash of $1,927,000, respectively, from Government Guaranteed
Lending activities. During the year ended December 31, 1997 the Company used
net cash of $2.1 million from the change in operating assets and liabilities as
compared to a source of cash of $2.1 million during the year ended December 31,
1996.
The Company used $30.4 million and $26.1 million from investing
activities during the years ended December 31, 1997 and 1996, respectively.
The Company increased its use of funds for loans originated by $17.5 million
from $48.2 million during the year ended December 31, 1996 to $65.7 million
during the year ended December 31, 1997. During the year ended December 31,
1997 principal collected was $10.0 million as compared to $22.6 million during
the year ended December 31, 1996. This decrease of $12.6 million (56%) was
primarily due to prepayments on larger principal balance fixed rate loans
during 1996 primarily in the portfolios of PMC Capital and PMIC. This trend
did not continue primarily as a result of the loan sale pursuant to the
Structured Financing. The Company also had increased prepayment activity on
the variable rate portfolio of First Western during both 1996 and 1997 (which
loans have no prepayment fees).
The Company had a net use of $12.7 million from financing activities
during the year ended December 31, 1997. The Company generated $30.4 million
from financing activities during the year ended December 31, 1996. The source
of funds in 1996 were primarily the net proceeds from the issuance of Notes by
the Partnership ($37.5 million) which were distributed to PMC Capital and $2.8
million from dividend reinvestment plan stock issuances. There was no
comparable transaction during the year ended December 31, 1997. Dividends paid
during the year ended December 31, 1997 were $13.2 million as compared to $11.9
million during the year ended December 31, 1996, an increase of $1.3 million
(11.0%).
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
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<PAGE> 21
to pay out substantially all of its net investment company taxable income to
the common shareholders. To sustain growth in the size of its investment
portfolio, the Company continually reviews the need for obtaining additional
funds from either: (i) debt offerings and additional credit facilities, (ii)
securitization and sale of a portion of the loan portfolio and/or (iii) equity
offerings. Historically, the Company's primary sources of capital and
liquidity have been debentures issued through programs of the SBA, private and
public issuances of common stock, the issuance of senior unsecured notes, the
securitization and sale of its loan portfolio and the utilization of its
short-term, uncollateralized revolving credit facility.
The Company has a dividend reinvestment and cash purchase plan ("DRP")
available to its shareholders (see Note 10 to the accompanying financial
statements). 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 are currently
in process which amend the calculation of the purchase price of the shares
issued related to open market purchases under the plan.
Loan commitments outstanding at December 31, 1997 to various
prospective small business companies, including the unfunded portion of
projects in the construction phase, amounted to approximately $49.6 million.
Of these commitments, $17.1 million were for loans partially guaranteed by the
SBA of which approximately $12.0 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.
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<PAGE> 22
In order to meet its working capital requirements and increase the
size of its investment portfolio, the Company and the Partnership have
completed the First Western Securitization in December 1997 and the Company
completed the following transactions since the beginning of 1995:
<TABLE>
<CAPTION>
STATED
MATURITY
DATE AMOUNT RATE DATE DESCRIPTION
---- ------ ---- ------------ -----------
<S> <C> <C> <C> <C>
April, 1995 $ 5,000,000 8.600% April, 2003 Unsecured note
April, 1995 $ 5,000,000 Libor + 1.300% April, 2004 Unsecured note
May, 1995 $ 2,000,000 4.000% May, 2010 Preferred Stock - PMIC
May, 1995 (1) $ 2,260,000 7.500% to 10.400% Up to December, 2002 SBA Debentures
March, 1995 $ 3,000,000 4.840% (2) March, 2005 SBA Debentures
June, 1995 $ 5,000,000 3.690% (2) June, 2005 SBA Debentures
September, 1995 $ 7,000,000 3.875% (2) September, 2005 SBA Debentures
May, 1996 (1) $ 1,030,000 9.300% June, 2000 SBA Debentures
November, 1996 $ 40,746,000 7.080% August, 2011 Structured Financing(3)
</TABLE>
(1) Assumed debentures from a non-affiliated SBIC.
(2) Rate increases 3% five years from the date of issuance until
maturity.
(3) Fixed rate loan-backed notes issued by the Partnership.
PMC has a $15 million uncollateralized revolving credit facility which
expires May 1998. Advances pursuant to the credit facility bear interest at
the Company's option at 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%.
At December 31, 1997, the Company did not have any balance outstanding on this
credit facility. At December 31, 1997, 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
securitized sale or structured 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.
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<PAGE> 23
PMC Capital is in compliance with the requirement to maintain a
minimum of 200% asset coverage of debt as defined in sections 18 and 61 of the
1940 Act as modified by exemptive orders obtained by the Company from the
Securities and Exchange Commission.
RECENT ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income (SFAS 130)
In June 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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.
Disclosures about Segments of an Enterprise and Related Information (SFAS 131)
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 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.
YEAR 2000 COMPLIANCE
The Company is in the final stages of identifying those computer
applications where program changes will be required in order for the
applications to process information accurately subsequent to 1999. Since the
Company currently uses an outside service bureau for a majority of its payroll
data processing, the Company is dependent on the service bureau to be Year 2000
compliant. The service bureau has not yet informed the Company that it is or
will be Year 2000 compliant. The Company also uses purchased software programs
for a variety of functions, such as for check processing and information
resource. The majority of the companies providing these software programs are
Year 2000 compliant. The Company uses proprietary software for its collection
processing and is in the process of identifying the costs required to update
such programs. The cost is not expected to be material. In the event that any
of the Company's significant vendors do not successfully and timely achieve
Year 2000 compliance, the Company's business or operations could be adversely
affected.
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<PAGE> 24
DESCRIPTION OF THE PLAN
The following is a description of the provisions of the Dividend
Reinvestment and Cash Purchase Plan of PMC Capital in question and answer
format:
PURPOSE
1. What is the purpose of the Plan?
The Plan offers participants ("Participants") a convenient and
economical way to purchase PMC Capital's common stock, par value $.01 per share
(the "Common Stock"). Once a Participant is enrolled in the Plan, cash
dividends will be used to purchase shares of Common Stock (both whole and
fractional shares). Participants pay no brokerage commissions for purchases
made under the Plan. To the extent the Company issues new shares, purchases of
shares of Common Stock under the Plan will provide the Company with funds to be
applied toward general corporate purposes.
ADVANTAGES
2. What are the advantages of the Plan?
Shareholders may participate in the Plan by having cash dividends on
all, or a portion of their shares of Common Stock automatically reinvested.
Participants are not required to pay any brokerage commissions in connection
with purchases made under the Plan. A full investment of funds is possible
under the Plan because fractions of shares of Common Stock, as well as full
shares of Common Stock, will be credited to Participants' Plan accounts
including dividends on these shares. Participants will avoid the cumbersome
safekeeping of certificates for shares of Common Stock credited to their Plan
accounts as the shares of Common Stock are held in custody for Participants by
American Stock Transfer & Trust Company ("American Stock Transfer").
Statements of Participants' Plan accounts will be provided monthly.
ADMINISTRATION
3. Who administers the Plan?
PMC Capital is the Plan Administrator. American Stock Transfer is the
agent for the Company and acts as custodian for the shares held in the Plan and
purchases shares of Common Stock as the Participants' agent. American Stock
Transfer will keep a record of each Participant's participation and will send
monthly statements of each Participant's Plan account. Shares of Common Stock
purchased under the Plan will be registered in the name of American Stock
Transfer, as agent for Participants in the Plan, and not in the name of the
Participant. If American Stock Transfer ceases to serve as agent, its
successor will be designated by PMC
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<PAGE> 25
Capital. At the option of the Company, the shares of Common Stock purchased
under the Plan on behalf of Participant will be newly issued by PMC Capital,
issued from treasury stock or purchased in the open market by American Stock
Transfer as agent for the Participant.
4. Who interprets and regulates the Plan?
PMC Capital reserves the right to interpret and regulate the Plan as
deemed desirable or necessary. PMC Capital, American Stock Transfer or any
agent administering the Plan will not be liable for any act done in good faith
or for any omission to act in good faith, including, without limitation, any
claim of liability arising out of a failure to terminate a Participant's
account upon the Participant's death prior to receipt of written notice of the
death (unless the Company is deemed to be an underwriter for purposes of the
federal securities laws, in which case the Company cannot be so excluded from
liability). Such exclusion of liability to American Stock Transfer or any
other agent of PMC Capital does not affect any liability of PMC Capital.
Participants should recognize that PMC Capital cannot assure them of a
profit or protect them against a loss on the shares of Common Stock purchased
under the Plan.
5. May the Plan be modified or discontinued?
PMC Capital reserves the right to suspend, modify or terminate the
Plan at any time. Any suspension, major modification or termination of the
Plan will be announced by PMC Capital to all Plan Participants.
PARTICIPATION
6. Who is eligible to participate in the Plan?
Subject to the limitations designated below, all shareholders of
record are eligible to join the Plan. In order to be eligible to participate,
beneficial owners of Common Stock whose shares are registered in names other
than their own (e.g., in the name of a broker or a bank nominee) must become
shareholders of record by having their shares of Common Stock transferred into
their names. Beneficial owners may request the record holders of their shares
of Common Stock to participate on their behalf in the dividend reinvestment
feature of the Plan; however, only holders of record may participate in the
optional cash payment feature of the Plan. In the event a Participant's
account shall have fewer than 15 shares of Common Stock, PMC Capital shall have
the option, but not the obligation, to terminate the Participant's account. In
the event a Participant's account is terminated by PMC Capital, a certificate
for whole shares of Common Stock shall be delivered to the Participant and the
Participant's fractional shares of Common Stock shall be sold (see Question
Nos. 21, 22 and 23).
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<PAGE> 26
PARTICIPATION BY SHAREHOLDERS
7. How does a shareholder of record participate?
Shareholders of record may join the Plan at any time by completing the
Authorization Form and returning it to American Stock Transfer. Authorization
Forms will be furnished to shareholders at any time upon request made to
American Stock Transfer (1-800-278-4353).
8. When will dividends be invested?
If the Authorization Form is received by American Stock Transfer on or
before the dividend record date, then the dividend will be used to purchase
additional shares of Common Stock for a Participant effective as of the
dividend payment date, provided that, if the reinvested dividends are used to
acquire shares of Common Stock in the open market, the Plan agent shall have up
to 45 days to acquire such shares. The dividend declaration date is the date
on which the Board of Directors of PMC Capital decides whether a dividend
should be paid and in what amount. If the Authorization Form is received after
the record date, a Participant's participation will not start until the next
quarterly dividend payment date. The dividend record dates are generally on
the last business day of each calendar quarter in which the AMEX is open for
trading. Quarterly dividends are paid approximately two weeks following the
dividend record date.
9. How are optional cash payments made and invested?
Optional cash payments are invested as of the fifth business day of
each month, provided that, if the optional cash payments are used to acquire
shares of Common Stock in the open market, the Plan agent shall have up to 45
days to acquire such shares. Optional cash payments should be sent so that
they are received by American Stock Transfer at least five business days before
a purchase date. Any optional cash payments received later than a purchase
date will be held by American Stock Transfer and applied to the next purchase
date, unless the shareholder requests, in writing, to American Stock Transfer
the return of such payment.
Participants do not receive any interest on the amounts held by
American Stock Transfer pending investment.
Participants may not send less than $50 per payment nor more than
$5,000 per calendar month, provided that if a Participant sends less than $50
or more than $5,000, American Stock Transfer will refund the entire amount to
him or her.
10. Are shareholders enrolled in the Plan required to send in a
new Authorization Form annually?
No. Shareholders are enrolled in the Plan without further action on
their part, unless the Participant gives notice to the Plan Administrator in
writing that he or she wishes to terminate participation (see Question Nos. 21,
22 and 23 for information concerning termination of
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<PAGE> 27
participation in the Plan). A shareholder may also submit a new Authorization
Form to change the portion of cash dividends that are to be issued in the form
of Common Stock, provided that such an election must be submitted to the Plan
Administrator prior to a dividend record date in order to be effective for the
corresponding dividend payment date (presently quarterly).
11. What does the Authorization Form provide?
The Authorization Form allows a Participant to decide the extent to
which such Participant wants to participate in the Plan. By checking the
appropriate box on the Authorization Form, a Participant may indicate whether
he wants to:
(a) Reinvest dividends paid on all shares of Common Stock
registered in a Participant's name;
(b) Reinvest dividends paid on a portion of Common Stock
registered in a Participant's name; or
(c) Invest amounts exceeding $50 by making optional
payments at any time up to an aggregate of FIVE THOUSAND AND NO/100 DOLLARS
($5,000) per calendar month.
PURCHASES
12. How many shares of Common Stock will be purchased for
Participants?
The number of shares of Common Stock to be purchased depends on the
amount of the Participant's dividends credited to the Participant's account
under the Plan or the amount of any optional payments and the purchase price of
the shares of Common Stock. Each Participant's account will be credited with
that number of shares, including fractions computed to four decimal places,
equal to the total amount to be invested divided by the applicable purchase
price.
13. What is the price of the new shares of Common Stock?
The price of shares of Common Stock bought with cash dividends or
optional payments will be (a) the average for the mean of the high and low
prices of Common Stock, as published in the Wall Street Journal - American
Stock Exchange listings, for the five days in which trading of shares of Common
Stock takes place immediately prior to the applicable purchase date (the
related dividend payment date), if the shares are purchased from the Company or
(b) the weighted average price of the shares, if such shares are purchased in
the open market.
14. Are any fees or expenses incurred by Participants?
Participants will pay no brokerage commissions for purchases made
under the Plan. Certain charges (see Question 22) may be incurred by
Participants if they withdraw from the Plan or if the Plan is terminated by the
Company.
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<PAGE> 28
REPORTS TO PARTICIPANTS
15. How will Participants be advised of their purchases of shares
of Common Stock?
As soon as practicable, Participants will receive monthly statements
of their purchases and accounts. These statements are Participants' continuing
records of the cost of their purchases and should be retained for tax purposes.
In addition, Participants will receive copies of the same communications sent
to other shareholders, including PMC Capital's annual report, interim reports,
notice of annual meeting and proxy statement, and income tax information.
Participants should notify American Stock Transfer (attn: Dividend
Reinvestment) of any change in address or duplicate mailings, so that American
Stock Transfer can consolidate their accounts and simplify their tax reporting.
DIVIDENDS
16. Will Participants be credited with dividends on shares of
Common Stock held in their accounts under the Plan?
Yes. The Company pays dividends, as declared, to the record holders
of its shares of Common Stock. As the record holder for Participants, American
Stock Transfer, as agent, will receive dividends for all Plan shares held on
the record date. It will credit these dividends to Participants on the basis
of full and fractional shares of Common Stock held in their accounts, and will
reinvest these dividends in additional shares of Common Stock.
CERTIFICATES
17. Will stock certificates be issued for shares of Common Stock
purchased?
Normally, certificates for shares of Common Stock purchased under the
Plan will not be issued to Participants. The number of shares of Common Stock
credited to accounts under the Plan will be shown on Participants' monthly
statements. This additional service protects against loss, theft or
destruction of stock certificates. The shares of Common Stock will be owned
for record purposes by American Stock Transfer until certificates are issued to
a Participant upon a Participant's written request.
Certificates for any number of whole shares of Common Stock up to the
full number of shares of Common Stock credited to Participants' Plan accounts
will be issued upon written request to American Stock Transfer (see Question
22). Any remaining full shares of Common Stock and fractional shares of Common
Stock will continue to be credited to Participants' accounts.
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<PAGE> 29
Shares of Common Stock credited to the accounts of Participants under
the Plan may not be pledged. Participants who wish to pledge such shares of
Common Stock must request that certificates for such shares of Common Stock be
issued in their names. Certificates for fractional shares of Common Stock will
not be issued under any circumstances.
18. In whose name will accounts be maintained and certificates
registered when issued?
Accounts for Participants will be maintained in the Participants'
names as shown on PMC Capital's shareholder records at the time the
Participants join the Plan. Certificates for whole shares of Common Stock will
be so registered when issued, except in instances such as death. Upon written
request, certificates can also be registered and issued in names other than the
account name, subject to compliance with any applicable laws and the payment by
the Participants of any applicable taxes, provided that the request bears the
signatures of the Participants and the signatures are guaranteed by a
commercial bank or member firm of AMEX.
CHANGING INVESTMENT OPTIONS
19. How do Participants change their investment option?
Participants may change their investment option at any time by
completing a new Authorization Form. New Authorization Forms may be obtained
by submitting a written request to American Stock Transfer. A Participant's
request will become effective as soon as practicable after the Authorization
Form is received by American Stock Transfer.
20. May PMC Capital elect not to issue shares of Common Stock
under the Plan?
PMC Capital reserves the right to terminate or modify the Plan at any
time (see Question 29) or direct the Agent not to acquire shares of Common
Stock under the Plan. Moreover, if at any time the value of the shares to be
issued is less than the current net asset value of Common Stock (which net
asset value shall be determined within forty-eight hours, excluding Sundays and
holidays next preceding the time of such determination), then that dividend
will be paid in cash.
WITHDRAWING FROM THE PLAN
21. May Participants withdraw all or a portion of their shares of
Common Stock from the Plan?
Yes. The Plan is entirely voluntary and Participants may withdraw at
any time, by completing the account correspondence stub attached to the monthly
statement, or by forwarding a written request to American Stock Transfer for a
full or partial withdrawal. Withdrawing
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<PAGE> 30
Participants may request either that their shares of Common Stock be sold and
the cash proceeds forwarded to them or request that certificates be issued to
them.
22. How do Participants withdraw all or a portion of their shares
of Common Stock from the Plan?
In order to withdraw from the Plan, Participants must notify American
Stock Transfer in writing that they wish to withdraw. Written notice should be
addressed to American Stock Transfer. Written notice may also be provided by
completing the reverse side of the account correspondence stub of the monthly
statement and returning it to American Stock Transfer.
If a Participant requests a partial withdrawal, he must specify that
American Stock Transfer either sell the full shares of Common Stock designated
or issue a certificate for any number of whole shares of Common Stock credited
to his Plan account.
If a Participant requests a full withdrawal, he must specify that
American Stock Transfer sell all of his shares of Common Stock or issue a
certificate for any number of whole shares credited to his Plan account.
If a Participant requests his shares of Common Stock to be sold,
American Stock Transfer will place a market order to sell as soon as
practicable after receipt of his request. The Participant will receive the
proceeds of the sale less any brokerage commission and any transfer tax. This
will include cash proceeds for any fraction of a share of Common Stock.
If a Participant's request for withdrawal or sale of shares of Common
Stock is received by American Stock Transfer prior to the fifth business day
after the record date, the amount of the dividend which would otherwise have
been invested on the next investment date will be paid in cash as soon as
practicable to the withdrawing Participant. If such request is received by
American Stock Transfer on or after the fifth business day after the record
date, then it will be processed as soon as practicable after the dividend
payment date. Thereafter, all dividends will be paid in cash. Any eligible
shareholder may elect to re-enroll in the Plan at any time.
23. What happens to fractions of shares of Common Stock when
Participants withdraw from the Plan?
When Participants withdraw from the Plan, cash payments representing
any fractions of shares of Common Stock will be mailed directly to the
Participants. The cash payment price will be based on the current market price
of the Common Stock less any brokerage commission and transfer tax on the date
the withdrawal notice is received by American Stock Transfer. If that date is
not a trading day, the next previous trading day will be substituted (see
Questions 21 and 22).
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<PAGE> 31
OTHER INFORMATION
24. What happens when Participants sell or transfer all of the
shares of Common Stock registered in their names?
If Participants dispose of all shares of Common Stock registered in
their names, PMC Capital will, unless otherwise instructed by the Participants,
continue to reinvest the dividends on the shares of Common Stock credited to
their Plan accounts.
25. What happens if PMC Capital issues a stock dividend, declares
a stock split, or has a rights offering?
Any shares of Common Stock distributed by PMC Capital as a stock
dividend on shares of Common Stock credited to Participants' Plan accounts, or
on any split of their shares of Common Stock, will be credited to their Plan
accounts. In a rights offering, Participants' entitlements will be based on
their total holdings, including those credited to their Plan accounts. Rights
applicable to shares of Common Stock credited to their Plan accounts, however,
will be sold by American Stock Transfer. The proceeds will be credited to
Participants' Plan accounts and applied to purchase shares of Common Stock on
the next investment date.
26. What happens if PMC Capital makes the right to purchase
additional shares of Common Stock or other securities available to its
shareholders?
In the event that PMC Capital makes available to its shareholders (a)
rights to purchase additional shares of Common Stock or (b) any securities of
any other class of PMC Capital, then the Plan Administrator will afford to
Participants the opportunity to exercise any such rights or warrants accruing
to the whole shares of Common Stock credited to the Participants' Plan
accounts.
27. How will Participant's shares of Common Stock be voted at
meetings of shareholders?
The Participants will receive proxy cards covering the total number of
whole shares of Common Stock credited to the Participants' Plan accounts. The
Plan Administrator will vote any whole shares of Common Stock that it holds for
Participants in accordance with the proxies returned by the Participants to PMC
Capital. If a proxy card is returned properly signed, but without indicating
instructions as to the manner shares are to be voted with respect to any item
thereon, the shares of Common Stock covered will be voted in accordance with
the recommendations of PMC Capital's management. If a proxy card is not
returned, or it is returned unexecuted or improperly executed, the shares of
Common Stock covered will not be voted unless the Participant or the
Participant's duly appointed representative votes in person at the meeting.
Participants will continue to receive separate proxy cards for any other whole
shares of Common Stock registered in the Participants' names.
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<PAGE> 32
28. What are the responsibilities of the Plan Administrator under
the Plan?
The Plan Administrator shall not be liable under the Plan for any act
done in good faith, or for any good faith omission to act, including, without
limitation, any claim of liability (a) arising out of any such act or omission
to act which occurs prior to the termination of participation and (b) with
respect to the prices at which shares of Common Stock are issued to
Participants' accounts. Participants should recognize that neither PMC Capital
nor the Plan Administrator can assure Participants of profits, or protect
Participants against losses, on shares issued and/or held under the Plan.
29. May the Plan be changed or discontinued?
PMC Capital reserves the right to modify, amend, suspend or terminate
the Plan at any time. Notice of any such modification shall be furnished to
Participants at least fifteen (15) days prior to the dividend record date for
which the amendment shall be effective. In such event, PMC Capital as Plan
Administrator will follow the procedures for termination set forth in Question
21.
30. Where should correspondence regarding the Plan be sent?
Any notice, instruction, request or election which by any provision of
the Plan is required or permitted to be given or made by the Participants to
the Plan Administrator shall be in writing, signed by the Participants and
addressed to:
American Stock Transfer & Trust Company
Dividend Reinvestment
40 Wall Street, 46th Floor
New York, N.Y. 10005
Telephone No.: (800) 278-4353
or such other address as the Plan Administrator shall furnish to the
Participants, and such notice, instruction, request or election shall be deemed
to have been sufficiently given or made when received by the Plan
Administrator.
Participants should mention their account numbers on all such
correspondence.
31. What is sufficient notice to Participants?
Any notice or certificate which any provision of the Plan requires the
Plan Administrator to give to the Participants shall be in writing and shall be
deemed to have been sufficiently given for all purposes by being deposited
postage prepaid in a post office letter box addressed to the Participants at
their address as it shall last appear on the Plan Administrator's records.
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<PAGE> 33
32. Can successor Plan Administrator(s) be named?
PMC Capital may, from time to time, designate a bank or trust company
as successor Plan Administrator under the Plan.
33. What law governs the Plan?
The terms and conditions of the Plan and its operation are governed by
the laws of the State of Florida.
USE OF PROCEEDS
The net proceeds from the sale of shares of Common Stock purchased
from PMC Capital from time to time will be used for general corporate purposes,
which may include lending such proceeds in accordance with the Company's
underwriting criteria.
CERTAIN CONSIDERATIONS
GENERAL
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered in evaluating an investment in
the Common Stock.
Credit Risks of Loans and Portfolio Diversification. The Company's
lending business is subject to various risks, including, but not limited to,
the risk that borrowers will not satisfy their debt service obligations and the
risk that the value of the collateral securing a liquidated loan is less than
the principal amount of such loan. In addition, since the Company's borrowers
are small businesses with more limited financial resources than larger, more
established companies, the Company may assume a greater risk of loss than might
otherwise be the case if it had focused on lending to larger companies. The
Company attempts to reduce its risk of loss by evaluating each borrower's
creditworthiness and the value of the collateral securing each loan; by
limiting the maximum amount loaned to any single borrower; by taking security
interests in assets, including real property, of the borrower and, in certain
cases, parties related to the borrower; and by obtaining personal guarantees.
The Company has a fundamental policy that requires investment of at
least 25% of its total assets in the lodging industry, and allows investment of
up to 100% of total assets in this industry. At December 31, 1997 and 1996,
loans to businesses in the lodging industry comprised 59% and 44% of the
Company's total assets, respectively, and 77% and 77% of its loans receivable,
net, respectively. There can be no assurance that the Company will continue to
experience the positive results it has historically achieved from these lending
activities or that market conditions will enable the Company to maintain or
increase this level of loan concentration. Any economic factors that
negatively impact the lodging industry could have a material adverse effect on
the business of the Company. Additionally, loans to businesses located in
Texas, Georgia and Florida currently comprise approximately 33%, 9% and 8% of
the Company's outstanding loan portfolio, respectively. A decline in economic
conditions in any of
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<PAGE> 34
these states may adversely affect the Company. The Company will invest the
proceeds of any sales of shares pursuant to the Plan in a manner the ensures
that it is in compliance with its current fundamental policies.
Leverage. The Company has borrowed funds and issued shares of
preferred stock, and intends to borrow additional funds through advances on its
revolving credit facility and through the issuance of notes payable or SBA
debentures, if available, see "Business -- Overview of SBA Regulations." As a
result, the Company is leveraged. The SBA and private lenders have fixed
dollar claims on the Company's assets superior to the claims of the holders of
Common Stock. Any increase in the interest rate earned by the Company on
investments in excess of the interest rate or dividend payable on the funds
obtained from either borrowings or the issuance of preferred stock would cause
its net income and earnings per share to increase more than they would without
leverage, while any decrease in the interest rate earned by the Company on
investments would cause net income and earnings per share to decline by a
greater amount than they would without leverage. Leverage is thus generally
considered a speculative investment technique. In order for the Company to
repay indebtedness or meet its obligations in respect of any outstanding
preferred stock on a timely basis, the Company may be required to dispose of
assets at a time which it would not otherwise do so and at prices which may be
below the net book value of such assets. Dispositions of assets may adversely
impact the Company's results of operations.
Interest Rate and Prepayment Risk. 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. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations". The impact of the lower
lending rates is partially offset (based on current market conditions) by the
reduced cost of the Company's borrowings. See "Interest Rate and Prepayment
Risk".
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
portfolio 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.
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<PAGE> 35
Credit Risk. In connection with First Western's structured sale of
$22.8 million of unguaranteed SBA loans during the 1997 and a 94% portion of
certain unguaranteed SBA loans during 1994 for proceeds of $24.8 million, the
Company is subject to credit risk. Pursuant to the structured sales, the
investors' protection from losses is provided by: (i) the subordination of the
Company's right to receive payment on loans receivable aggregating
approximately $1.6 million at the time of sale ($600,000 at December 31, 1997),
(ii) the subordination of the interest-only strip receivable related to the
Company's right to receive the servicing spread on those loans sold in the
securitizations ($1,157,000 at December 31, 1997, included in interest-only
strip receivable on the accompanying balance sheet) and (iii) cash deposits
provided by the Company. At December 31, 1997, approximately $2,594,000 of
cash deposits held in interest bearing accounts were restricted.
Impairment of the interest-only strip receivable is measured based on
its fair value. In measuring impairment at December 31, 1997 and 1996, the
servicing portfolio was evaluated based upon the predominant risk
characteristics which the Company has determined to be prepayment and payment
default risks. The Company evaluated the serviced portfolio for both the
interest-only strip receivable related to the sales of the guaranteed portion
of SBA 7(a) Loans and related to the sale of the unguaranteed portion of SBA
loans in 1994 and 1997. Based upon current prepayment assumptions, estimates
of default rates and a discount factor considering the current interest rate
environment, the Company has provided for an unrealized loss and corresponding
valuation allowance of $300,000 on the interest-only strip receivable.
In connection with the Company's investment in the Partnership, all
payments of principal and interest on the loans contributed to the Partnership
are to be deposited with the trustee and are used to pay the noteholders the
required monthly principal and interest then due on the notes pursuant to the
Trust Indenture (as defined below) prior to releasing any excess funds to the
Partnership free and clear of the Trust Indenture. The Partnership's
obligations to the noteholders are also collateralized by: (i) the
differential between the outstanding principal balance remaining due on the
underlying loans held by the Partnership and the balance due the noteholders,
(ii) the reserve account established to provide liquidity to the noteholders
(the "Reserve Account") and (iii) money held in the operating accounts of the
Partnership to the extent they are restricted pursuant to the terms of the
trust indenture established by the noteholders, the Company and the Partnership
(the "Trust Indenture"). The Trust Indenture provides for several covenants
which would require, under certain circumstances, that the excess cash, after
payment of the required principal and interest to the noteholders (the "Excess
Cash"), be retained in the Reserve Account until the Company is in compliance
with such covenants. Of the assets of the Partnership at December 31, 1997,
approximately $245,000 was Excess Cash which was distributed to the partners in
January 1998.
Dependence on Key Personnel. The Company is dependent upon the
efforts and abilities of Lance B. Rosemore, its President and Chief Executive
Officer, and Dr. Andrew S. Rosemore, its Executive Vice President and Chief
Operating Officer. Although the Company believes that it has a capable
management group, the loss or interruption of the services of these persons
could have a material adverse effect on the Company. The Company has entered
into employment agreements with Lance B. Rosemore and Dr. Andrew S. Rosemore,
which agreements expire in June 2000.
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<PAGE> 36
The Company has not purchased policies insuring the lives of Lance B.
Rosemore or Dr. Andrew S. Rosemore. All of the executive officers are required
to spend all of their business time on Company business, including the
management of PMC Advisers in connection with advisory services to be provided
by PMC Advisers to affiliates of the Company in the future. See "Remuneration
of Directors and Officers" and "Management." See also "Certain Affiliated
Transactions and Other Matters" for important information concerning the
management of the Company.
Availability of Funding Sources. The Company has a continuing need
for capital to finance its lending activities and has generally funded its loan
origination activities by borrowings through programs of the SBA, private and
public issuances of Common Stock, the issuance of senior unsecured notes, the
securitization and sale of its loan portfolio and the utilization of its
short-term uncollateralized credit facility. Accordingly, reductions in the
availability of funds from these sources could have a material adverse effect
on the Company. In addition, since the Company distributes as dividends to its
shareholders all its investment company taxable income, such earnings are not
available to fund loan originations.
Environmental Liabilities. The Company has acquired, and may in the
future acquire, through foreclosure, properties that secured defaulted loans.
While the Company performs extensive due diligence investigations into
properties both prior to originating the loan secured by such properties and
prior to foreclosing thereon, there is a risk that hazardous substances or
wastes, contaminants, pollutants or sources thereof could be discovered on
properties acquired by the Company or with respect to which the Company is
deemed to be an owner or operator under applicable environmental laws. In such
event, the Company could be required under certain environmental laws to remove
such substances and clean up the affected property at its sole cost and expense
or to contribute to the cost of such remediation or clean up , which could have
a material adverse effect on the Company. In addition, the Company could be
required to pay fines and/or penalties imposed by governmental agencies. The
Company requires environmental site assessments of commercial real estate
securing loans it makes as a condition to making such loans; however, there can
be no assurance that such assessments would reveal any or all potential
environmental liabilities.
Competition. The Company's primary competition comes from banks,
financial institutions and other lending companies. Additionally, there are
lending programs which have been established by national franchisors in the
lodging industry. Some of these competitors have greater financial and larger
managerial resources than the Company. Competition has increased as the
financial strength of the banking and thrift industries improved. In
management's opinion, there has been an increasing amount of competitive
lending activity at advance rates and interest rates which are considerably
more aggressive than those offered by the Company. In order to maintain a
quality portfolio, the Company will continue to adhere to its historical
underwriting criteria, and as a result, certain loan origination opportunities
will not be funded by the Company. The Company believes that it competes
effectively with such entities on the basis of the lending programs offered,
the interest rates, maturities and payment schedules, the quality of its
service, its reputation as a lender, the timely credit analysis and decision
making processes, and the renewal options available to borrowers. In
addition, to the extent that the investment opportunities reviewed by PMC
Advisers conform to the investment criteria of PMC Commercial, and PMC
Commercial has funds available to make these investments, such investments will
be made by PMC Commercial. See "Business -- Competition."
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<PAGE> 37
Decline in Net Asset Value. If the net asset value of the Company's
assets were to decline, PMC Capital's ability to pay dividends on the Common
Stock may be adversely affected. Such inability to pay dividends may cause PMC
Capital to lose its status as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). Additionally, such reduction
may require the Company to dispose of assets at a time at which it would not
otherwise do so and at prices which may be below the net book value of the
assets.
Shares Eligible for Future Sale. As of March 31, 1998 the Company's
executive officers and directors ("Management Shareholders") owned an aggregate
of 2,994,449 shares of Common Stock (approximately 25.4% of total shares of
Common Stock outstanding at that time). In addition, certain other persons
have purchased shares of Common Stock in reliance upon certain exemptions from
registration under the Securities Act of 1933, as amended (the "Securities
Act"). Sales of the shares of Common Stock owned by the Management
Shareholders or such other shareholders may not be made in a public
distribution unless registered under the Securities Act or sold pursuant to
Rule 144 thereunder. Sales of substantial amounts of Common Stock in the
public market subsequent, and the possibility that such sales may be made,
could adversely affect the prevailing market price of the Common Stock and
could impair the Company's ability to raise additional capital through the sale
of its equity securities.
EFFECTS OF LEVERAGE
(1) For a schedule of the annual rate of interest or dividend payments on
senior securities, see "Description of Capital Stock and Long-Term
Debt--Long-Term Debt."
(2) The following table is included to assist the investor in
understanding the effects of leverage. The figures appearing in the
table are hypothetical and actual return may be greater or less than
that reflected in table.
Leverage Effect Table
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assumed return on (15%) (10%) (5%) 0% 5% 10% 15%
portfolio (net of
expenses)
- -----------------------------------------------------------------------------------------------------------------------
Corresponding return to (43.36%) (31.54%) (19.72%) (7.91%) 3.91% 15.73% 27.55%
common shareholder
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 38
MARKET PRICE OF COMMON STOCK
The Common Stock is traded on the AMEX. The following table sets
forth the high and low sales prices on the AMEX for the Common Stock for the
periods indicated. On December 31, 1997 the closing price of the Common Stock
on the AMEX was $14.38 per share and on December 31, 1997 the net asset value
per share was $6.03. The Common Stock has historically traded at a premium to
net asset value.
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Market Price:
High . . . . . . . . . . . . . . . . . . . . . . $ 13.50 $ 12.13 $ 12.00 $ 13.25
Low . . . . . . . . . . . . . . . . . . . . . . $ 11.13 $ 10.75 $ 10.88 $ 11.38
Net Asset Value (1) . . . . . . . . . . . . . . . . . $ 5.39 $ 5.40 $ 5.44 $ 5.44
(Discount) or Premium to Net Asset Value . . . . . . 106% 99% 100% 109%
Average weekly trading volume . . . . . . . . . . . . 33,400 38,400 41,900 33,000
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Market Price:
High . . . . . . . . . . . . . . . . . . . $ 13.63 $ 13.38 $ 14.25 $ 14.75
Low . . . . . . . . . . . . . . . . . . . $ 11.88 $ 12.38 $ 11.75 $ 12.88
Net Asset Value (1) . . . . . . . . . . . . . . . . . $ 5.47 $ 5.51 $ 5.57 $ 5.64
(Discount) or Premium to Net Asset Value . . . . . . 117% 125% 111% 128%
Average weekly trading volume . . . . . . . . . . . . 32,100 22,000 27,500 28,400
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Market Price:
High . . . . . . . . . . . . . . . . . . . . $ 14.50 $ 14.88 $ 15.50 $ 15.25
Low . . . . . . . . . . . . . . . . . . . . $ 13.38 $ 12.50 $ 13.75 $ 14.00
Net Asset Value (1) . . . . . . . . . . . . . . . . . $ 5.70 $ 5.76 $ 5.81 $ 6.03
(Discount) or Premium to Net Asset Value . . . . . . 135% 117% 137% 132%
Average weekly trading volume . . . . . . . . . . . . 28,900 38,500 37,900 34,800
</TABLE>
-36-
<PAGE> 39
<TABLE>
<CAPTION>
1998
--------------------------
1st 2nd
Quarter Quarter(2)
----------- ------------
<S> <C> <C>
Market Price:
High . . . . . . . . . . . . . . . . . . . . $ 15.00 $ 14.375
Low . . . . . . . . . . . . . . . . . . . . $ 13.75 $ 14.125
Net Asset Value (1) . . . . . . . . . . . . . . . . . $ N/A $ N/A
(Discount) or Premium to Net Asset Value . . . . . . N/A N/A
Average weekly trading volume . . . . . . . . . . . . 46,000 N/A
</TABLE>
- -------------
(1) Average value during period, calculated based on average net assets during
the period divided by the weighted average number of common shares
outstanding. Securities for which market values are available are valued
at market, all other assets are valued at fair value as determined by the
Board of Directors. The Board of Directors has determined that the fair
value of the Company's loans is the principal amount of the loan less any
discounts, deferred fees, net of related costs and loan loss reserves.
(2) Though April 17, 1998.
SHARE REPURCHASES
The Company is a closed-end investment company designed for long-term
investment and investors should not consider it to be trading vehicle. In
connection with the Plan and in recognition that the Company's shares, which
historically have traded at a premium to net asset value, might trade at a
discount to net asset value or at any value that is less than the desired value
as determined by the Board of Directors of the Company (the "Board"), the Board
contemplates that the Company may from time to time repurchase its shares in
the open market pursuant to Section 23(c)(1) of the Investment Company Act.
The Company anticipates that the market price of its shares will
remain at a premium to net asset value but may vary. The market price of the
Company's shares will be determined by, among other things, the relative demand
for and supply of such shares in the market, the Company's investment
performance, the Company's dividends and yield and investor perception of the
Company's overall attractiveness. Although the Board believes that share
repurchases generally would have a favorable effect on the market price of the
Company shares, it should be recognized that the acquisition of shares by the
Company in the open market will decrease total assets and consequently have the
effect of increasing the Company's expense ratio. Due to the nature of the
Company's investment objectives, policies and portfolio, under current market
conditions the Company anticipates that repurchases generally should not have a
material adverse effect on the Company's investment performance; however, this
may not always be the case.
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<PAGE> 40
BUSINESS
GENERAL
PMC Capital is a diversified closed-end management investment company
that operates as a BDC under the Investment Company Act. The Common Stock is
traded on the AMEX under the symbol "PMC." The Company engages in the business
of originating loans to small businesses either directly or through its three
principal subsidiaries: First Western, PMIC and Western Financial. First
Western, PMIC and Western Financial are registered under the 1940 Act as
diversified closed-end management investment companies. In addition, PMC
Capital is either directly or indirectly the sole shareholder or partner of PMC
Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A and the Partnership.
PMC Advisers is an investment advisor who evaluates and services loans and
other investment alternatives pursuant to a fee arrangement. PMC Capital has
elected to be taxed as a regulated investment company and distributes
substantially all its taxable income as dividends to its shareholders, thereby
incurring no Federal income tax liability on such income.
The Company primarily originates loans to individuals and small
business concerns in the lodging industry. The Company also targets the
medical, food service, service, retail and commercial real estate industries.
The Company primarily lends to businesses in the Southwest and Southeast
regions of the United States. A majority of the Company's loans in the lodging
industry are to owner-operated facilities generally operating under national
franchises. The Company believes that franchise operations offer attractive
lending opportunities because such businesses employ proven business concepts,
have consistent product quality, are screened and monitored by franchisors and
generally have a higher rate of success as compared to other independently
operated businesses.
PMC Capital, incorporated in Florida under the name of Pro-Med
Capital, Inc. in June 1983, became the successor by merger to Western Capital
Corporation (founded in 1979) in December 1983 and changed its name to "PMC
Capital, Inc." in March 1991. The principal executive offices of the Company
are located at 17290 Preston Road, Third Floor, Dallas, Texas 75252.
Earnings per share on a quarterly basis since 1988 were as follows:
<TABLE>
<CAPTION>
Per Share Earnings
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----- ---- ---- ---- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter . . . $0.29 $0.27 $0.23 $0.19 $0.18 $0.18 $0.15 $0.13 $0.09 $0.09
Second Quarter . . 0.31 0.30 0.25 0.23 0.23 0.23 0.15 0.12 0.11 0.09
Third Quarter . . . 0.30 0.30 0.27 0.26 0.25 0.19 0.18 0.13 0.10 0.10
Fourth Quarter . . 0.45* 0.31 0.28 0.44* 0.21 0.19 0.16 0.14 0.11 0.09
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$1.35 $1.18 $1.03 $1.12 $0.87 $0.79 $0.64 $0.52 $0.41 $0.37
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
* Includes $0.21 in 1997 and $0.24 in 1994 relating to structured sales of
portions of the loan portfolio.
-38-
<PAGE> 41
LENDING PROGRAMS
FIRST WESTERN
First Western is a small business lending company ("SBLC") that
originates variable-rate loans which are partially guaranteed by the Small
Business Administration ("SBA") pursuant to its Section 7(a) Program (the "7(a)
Program"). While the eligibility requirements of the 7(a) Program vary by the
industry of the borrower and other factors, the general eligibility
requirements are that: (i) gross sales of the borrower cannot exceed $5.0
million (other than with respect to certain industries where eligibility is
determined based on a number of employees), (ii) liquid assets or real estate
equity of the borrower (and certain affiliates) cannot exceed certain limits
and (iii) the maximum aggregate SBA loan guarantees to a borrower cannot exceed
$750,000.
SBA 7(a) Program lenders are required to pay a fee of between 40 basis
points and 50 basis points ("SBA Servicing Fees") per annum on the outstanding
principal balance of any loans sold in the secondary market depending upon when
the loan was sold. At present, a 50 basis point fee is in effect for loans
originated after October, 1995. The value of the guaranteed portion of loans
decreased as a result of this fee.
The fees charged to the borrower by the SBA for the SBA's guaranty of
a loan to the lender are based on the size of the originated loan, and range
from 2% to 3.875% of the guaranteed portion of the loan. First Western had a
decrease in loan origination volume during 1996 and 1997 partially as a result
of these increased fees, rule changes as described below and an increase in
competition. Due to the decrease in loan origination volume, the premiums
recognized from the sale of the government guaranteed portion of SBA 7(a)
Program loans sold in the secondary market decreased from $2.8 million in 1995
to $1.9 million during 1996 and $1.8 million in 1997.
Effective March 1, 1996, certain eligibility requirements of the 7(a)
Program were amended. The following are the present eligibility requirements:
When the total amount of the proposed financing:
(a) Is $250,000 or less, each 20 percent owner of the applicant
must contribute to the business personal liquid assets per the
SBA rules and regulations ("Personal Liquid Assets") in
excess of two times the total financing or $100,000, whichever
is greater;
(b) Is between $250,001 and $500,000, each 20 percent owner of the
applicant must contribute Personal Liquid Assets to the
business in excess of one and one-half times the total
financing or $500,000, whichever is greater; and
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<PAGE> 42
(c) Exceeds $500,000, each 20 percent owner of the applicant must
contribute to the business Personal Liquid Assets in excess of
one times the total financing or $750,000, whichever is
greater.
As described under the caption "Managements Discussion and Analysis of
Financial Condition and Results of Operations" the above noted changes have
caused the Company to place less reliance on the 7(a) Program lending
activities. Continued program and market changes may have an adverse effect on
future periods of operations. The future profitability of the Company's 7(a)
Program lending activities will be impacted by a number of factors including:
(i) the more efficient capital structure achieved by First Western's
securitization and sale of portions of the Company's portfolio (see
Securitization and Structured Financing Programs) and the timing and
availability of portfolio for future securitizations, (ii) volume of lending,
(iii) length of loans, (iv) structure of sales to the secondary market, (v)
interest rates charged and related terms, (vi) quality of portfolio, (vii)
prepayment experience and (viii) legislative and/or regulatory changes. Any
other aspect of SBA programs under which the Company participates could be
modified by legislation or agency policy changes. PMC Capital has established
alternative lending strategies to address the above noted changes and would
pursue additional strategies should the SBA programs under which any of its
subsidiaries operates were to be eliminated or significantly curtailed.
At December 31, 1997 and 1996, First Western had outstanding loans
receivable, net, in an aggregate amount of $8.2 million and $26.3 million,
respectively. During December 1997, First Western completed a securitization
and structured sale of $22.8 million of its unguaranteed SBA loan portfolio
(the "First Western Securitization"). This transaction was rated by Moody's
Investors Service in two traunches with the majority (93%) rated "Aaa" and the
subordinated piece (7%) rated "A1". During the years ended December 31, 1997
and 1996, First Western originated $29.5 million and $29.2 million,
respectively, in loans and sold $21.6 million and $20.0 million, respectively,
of the guaranteed portion of its loans into the secondary market (without
recourse to the Company). At December 31, 1997 and 1996, First Western had
loans receivable with aggregate balances of approximately $104,000 and $412,000
(1.2% and 1.6%, respectively, of First Western's outstanding loans receivable,
net) greater than 60 days past due. Realized and unrealized losses on First
Western's investments (not including the effect of the First Western
Securitization and any valuation adjustments on investments in interest-only
strip receivables) were $111,000 and $56,000 during the years ended December
31, 1997 and 1996, respectively.
PMIC
PMIC is a licensed specialized small business investment company
("SSBIC") under the Small Business Investment Act of 1958, as amended ("SBIA").
PMIC uses long-term funds provided by the SBA, together with its own capital,
to provide long-term, collateralized loans to eligible small businesses owned
by "disadvantaged" persons, as defined under the regulations of the SBA. As an
SBIC, PMIC is eligible to obtain long-term, fixed-rate funding from the SBA
through the issuance of debentures which are guaranteed by the SBA. For any
debentures issued by PMIC prior to 1996, the interest rate has been reduced
through an SBA subsidy by 3% during the first five years. As an SSBIC, prior
to 1996 PMIC was eligible to issue preferred stock to
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<PAGE> 43
the SBA with either a 3% or 4% per annum cumulative dividend rate. Issuance
of debentures is subject to SBA approval and availability. See "Overview of
SBA Regulations."
At December 31, 1997 and 1996, PMIC had loans receivable, net, in an
aggregate amount of $ 48.9 million and $28.6 million, respectively. During
the years ended December 31, 1997 and 1996, PMIC originated $24.1 million and
$19.3 million, respectively, in loans and during the year ended December 31,
1996 transferred $24.8 million in loans to PMC Capital in conjunction with a
structured financing (the "Structured Financing"). At December 31, 1997 and
1996, PMIC had loans receivable with aggregate balances of approximately
$873,000 and $160,000 (1.8% and 0.8%, respectively, of PMIC's loans
receivable, net) greater than 60 days past due. Realized and unrealized losses
on PMIC's investments were $124,000 and $27,000 during the years ended December
31, 1997 and 1996, respectively.
WESTERN FINANCIAL
Western Financial is a licensed small business investment company
("SBIC") under the SBIA that provides loans to small business concerns and
persons whether or not they qualify as "disadvantaged." As an SBIC, Western
Financial is eligible to obtain long-term, fixed-rate funding from the SBA
through the issuance of debentures. Issuance of debentures is subject to SBA
approval and availability. See "Overview of SBA Regulations."
At December 31, 1997 and 1996, Western Financial had loans receivable,
net, in an aggregate amount of $21.9 million and $14.4 million, respectively.
During the years ended December 31, 1997 and 1996, Western Financial originated
$12.9 million and $7.5 million, respectively, in loans and during the year
ended December 31, 1996 transferred $10.0 million in loans to PMC Capital in
conjunction with the Structured Financing. At December 31, 1997 and 1996,
Western Financial had loans receivable with aggregate principal balances of
approximately $153,000 and $215,000 (0.7% and 1.5%, respectively, of Western
Financial's loans receivable, net) greater than 60 days past due. Realized and
unrealized losses on Western Financial's investments were $7,000 and $64,000,
respectively, during the years ended December 31, 1997 and 1996.
PMC CAPITAL
PMC Capital has originated both fixed-rate and variable-rate loans to
borrowers on a non-SBA supported basis using criteria similar to that utilized
by its three principal investment company subsidiaries whose loans are funded
under the SBA programs. These loans are: (i) to borrowers who exceed the
eligibility requirements of the 7(a) Program or SBIC programs, (ii) payable in
monthly installments of principal and interest based upon four to 25 year
amortization periods, with the balance due at maturity (typically four to 20
years), (iii) primarily collateralized by real estate and (iv) generally
guaranteed by the principals of the borrowers. The funding for this lending
program is limited to the extent of leverage available to PMC Capital.
However, since the formation of PMC Commercial Trust ("PMC Commercial") in
1993 most fixed-rate non-SBA supported loans have been funded by PMC Commercial
and such loans will be made
-41-
<PAGE> 44
by the Company only to the extent that PMC Commercial does not have available
funds. PMC Commercial is a Texas real estate investment trust and an affiliate
of PMC Capital.
At December 31, 1997 and 1996, PMC Capital had loans receivable, net,
in an aggregate amount of $48.3 million and $24.1 million, respectively.
During the years ended December 31, 1997 and 1996, PMC Capital originated $19.9
million and $14.2 million in loans, respectively, and during the year ended
December 31, 1996 contributed $45.6 million in loans to the Partnership
(including the $34.8 million in loans transferred from PMIC and Western
Financial to PMC Capital in conjunction with the Structured Financing). At
December 31, 1997, PMC Capital had a loan receivable with an aggregate balance
of approximately $461,000 (1.0% of PMC Capital's loans receivable, net)
outstanding greater than 60 days. At December 31, 1996, PMC Capital had no
loans receivable greater than 60 days past due. PMC Capital had no realized or
unrealized losses during the years ended December 31, 1997 and 1996.
NON INVESTMENT COMPANY SUBSIDIARIES
The accompanying consolidated financial statements include the
accounts of PMC and its wholly owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A
and the Partnership are accounted for by the equity method of accounting in
conformity with the requirements of the Federal securities laws.
PMC ADVISERS
PMC Advisers, organized in July 1993, is a registered investment
advisor under the Investment Advisers Act of 1940 which acts as the investment
advisor for PMC Commercial. PMC Advisers provides investment advisory services
to PMC Commercial pursuant to an investment management agreement (the
"Investment Management Agreement") entered into between PMC Capital, PMC
Advisers and PMC Commercial. As the investment advisor for PMC Commercial, PMC
Advisers has earned $1,622,000, $1,562,000 and $1,189,000 in advisory fees
during the years ended December 31, 1997, 1996 and 1995, respectively.
PMC CAPITAL CORP., PMC TRUST 1996-A AND THE PARTNERSHIP
The Partnership was formed as a special purpose affiliate of the
Company. On November 13, 1996, the Partnership, a Delaware limited
partnership, completed the Structured Financing through a private placement
(the "Private Placement") of approximately $40.7 million of its Loan-Backed
Fixed Rate Notes, Series 1996-A (the "Notes"). The Notes, issued at par, which
have a stated maturity in 2011 and bear interest at the rate of 6.725% per
annum, were originally collateralized by approximately $45.7 million of loans
(the "Initial Loan Contribution") contributed by PMC Capital to the
Partnership. The net book value of the Initial Loan Contribution after
deferred commitment fees, discounts and accrued interest receivable on the date
of transfer was approximately $45.5 million. In connection with the Private
Placement, the Notes were given a rating of "Aa2" by Moody's Investors Service.
The Partnership has the exclusive obligation for repayment of the Notes, and
the holders of the Notes have no recourse to PMC Capital or its other
subsidiaries or their assets in the event of nonpayment of the
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<PAGE> 45
underlying loans receivable. The net proceeds from the issuance of the Notes
(approximately $37.5 million before giving effect to payment of issuance costs
of approximately $396,000 and after giving effect to the funding of a $2.04
million reserve fund held by the trustee as collateral) were distributed to PMC
Capital. PMC Capital Corp. was formed in November 1996 to act as the
independent trustee of PMC Trust 1996-A which is the general partner of the
Partnership and owns a 1% general partnership interest in the Partnership. PMC
Capital owns a 99% limited partnership interest in the Partnership. PMC is the
servicer for all loans held by the Partnership.
PMC FUNDING
PMC Funding is a Florida corporation that holds assets on behalf of
the Company. PMC Capital is the sole shareholder of PMC Funding. Operations
from PMC Funding consist of income generated from the operation of properties
held and charter revenue derived from use by third parties of PMC Funding's
airplane. PMC Funding discontinued the use of its' airplane for charter during
1997.
ELECTION TO BE A BUSINESS DEVELOPMENT COMPANY
In 1980, the 1940 Act was amended to permit closed-end investment
companies which make certain types of investments ("Qualifying Assets") to
elect to become business development companies ("BDCs") rather than registered
investment companies. Under this amendment (the "1980 Amendment"), BDCs must
register their shares under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and become subject to the Exchange Act's periodic
reporting requirements rather than the 1940 Act's reporting requirements.
During 1994, PMC Capital elected to operate as a BDC. Companies having
securities registered under the Exchange Act, such as PMC Capital, must file
quarterly rather than semi-annual financial reports. The 1980 Amendment
provides BDCs with greater operating flexibility relating to capital
structure, portfolio diversification, transactions with downstream affiliates,
executive stock options and the frequency which they may make distributions
from capital gains, that may be greater than that available to registered
investment companies.
Under the 1980 Amendment, a BDC such as PMC Capital may only acquire
Qualifying Assets provided that, at the time of their acquisition, Qualifying
Assets represent at least 70% of the value of the BDC's total assets. The
principal categories of Qualifying Assets relevant to the business of PMC
Capital are the following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible portfolio
company. An eligible portfolio company is defined in the 1980 Amendment as any
issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
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(b) is not an investment company other than an SBIC wholly-owned
by the BDC (PMC Capital's investments in and advances to PMIC,
Western Financial and First Western are Qualifying Assets);
and
(c) does not have any class of securities with respect to which a
broker or dealer may extend margin credit.
(2) Securities received in exchange for or distributed on or with respect
to securities described in (1) above, or pursuant to the exercise of options,
warrants or rights relating to such securities.
(3) Cash, cash items, Government securities or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments
in the type of securities described in (1) above and, in order to classify the
securities as Qualifying Assets for purposes of the 70% test, the BDC must make
available to the issuer of the securities significant managerial assistance
which means, among other things:
(1) Any arrangement whereby the BDC, through its directors,
officers or employees, offers to provide, and, if accepted,
does so provide, significant guidance and council concerning
the management, operations or business objectives and policies
of a portfolio company; or
(2) In the case of an SBIC, making loans to a portfolio company.
Under the 1980 Amendment, now that PMC Capital has elected to be
regulated as a BDC, it may not change the nature of its business so as to cease
to be, or withdraw its election as, a BDC unless authorized by the vote of a
majority of shares of Common Stock.
FUNDAMENTAL AND OTHER POLICIES OF THE COMPANY AND ITS SUBSIDIARIES
PMC Capital and each of its investment company subsidiaries have
designated certain investment policies as "fundamental policies," which may
only be changed with the approval of the holders of PMC Capital's outstanding
shares of Common Stock as described below.
The following investment policies of PMC Capital and its investment
company subsidiaries are fundamental policies and may not be changed without
the approval of the lesser of (i) more than 50% of PMC Capital's outstanding
voting securities or (ii) 67% or more of PMC Capital's voting securities
present at a meeting of security holders at which a quorum is present. All
other investment policies of PMC Capital may be changed by its Board of
Directors at any time.
1. The Company will not purchase or sell commodities or commodity
contracts.
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2. The Company will not engage in short sales, purchase
securities on margin or trade in contracts commonly called puts or calls or in
combinations thereof, except that it may acquire warrants, options or other
rights to subscribe to or sell securities in furtherance of its investment
objectives.
3. The Company will not underwrite securities of other issuers,
except that it may acquire portfolio securities under circumstances where, if
sold, the Company might be deemed an underwriter for purposes of the Securities
Act of 1933. The Company may purchase "restricted securities" as to which
there are substantial restrictions on resale under the Securities Act of 1933.
4. The Company will not purchase any securities of a company if
any of the directors or officers of the Company owns more than 0.5% of such
company and such persons owning more than 0.5% together own 5% or more of the
shares of such company.
5. The Company may issue senior securities in the form of
debentures, reverse repurchase agreements and preferred stock and may borrow
monies from banks and other lenders, all on an unsecured basis. The 1940 Act
limits the Company to the issuance of one class of senior debt securities and
one class of senior equity securities (as such terms are defined in the 1940
Act).
6. The Company will not invest more than 25% of its total assets
in any one industry except in the lodging industry which may constitute 100% of
the Company's portfolio. The Company will invest at least 25% of its total
assets in the lodging industry.
7. The Company may invest in real estate development companies,
may make real estate acquisition loans and real estate improvement loans and
may further make other loans secured by real estate.
8. The Company may make loans and purchase debt securities in
furtherance of its investment objectives. The Company will not make loans to
its officers, directors or other affiliated persons.
9. PMIC will perform the functions and conduct the activities
contemplated under the SBIA, and will provide assistance solely to small
business concerns which will contribute to a well-balanced national economy by
facilitating ownership of such concerns by persons whose participation in the
free enterprise system is hampered because of social or economic disadvantages.
These fundamental policies of PMIC may not be changed without the prior written
consent of the SBA.
As stated above, the Company has a fundamental policy regarding
investment in the lodging industry. At December 31, 1997 and 1996, loans to
businesses in the lodging industry comprised 59% and 44% of its total assets,
respectively.
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There can be no assurance that the Company will continue to experience
the positive results it has historically achieved from lending to the lodging
industry or that market conditions will enable the Company to maintain or
increase its level of loan concentration in this industry. Any economic
factors that negatively impact this industry could have a material adverse
effect on the business of the Company. Additionally, at December 31, 1997,
loans to businesses located in Texas, Georgia and Florida comprised
approximately 33%, 9% and 8% of the Company's outstanding loan portfolio,
respectively. A decline in economic conditions in any of these states may
adversely affect the Company.
COMPETITION
The Company's primary competition comes from banks, financial
institutions and other lending companies. Additionally, there are lending
programs which have been established by national franchisors in the lodging
industry. Some of these competitors have greater financial and larger
managerial resources than the Company. Competition has increased as the
financial strength of the banking and thrift industries improved. In
management's opinion, there has been an increasing amount of competitive
lending activity at advance rates and interest rates which are considerably
more aggressive than those offered by the Company. In order to maintain a
quality portfolio, the Company will continue to adhere to its historical
underwriting criteria, and as a result, certain loan origination opportunities
will not be funded by the Company. The Company believes that it competes
effectively with such entities on the basis of the lending programs offered,
the interest rates, maturities and payment schedules, the quality of its
service, its reputation as a lender, the timely credit analysis and decision
making processes, and the renewal options available to borrowers. In
addition, to the extent that the investment opportunities reviewed by PMC
Advisers conform to the investment criteria of PMC Commercial, and PMC
Commercial has funds available to make these investments, such investments will
be made by PMC Commercial.
Late in the fourth quarter of 1996, the Company began marketing a new
variable rate lending program (the "Prime Lending Program") which is separate
from the 7(a) Program of First Western, the Company's other variable rate
lending program. The Prime Lending Program is designed to refinance existing
real estate collateralized commercial loans with borrowers who have proven
timely payment histories and loan-to-value and debt coverage ratios within the
Company's underwriting criteria. Loans funded within the Prime Lending Program
will have variable interest rates based on the Prime Rate (as defined below).
As of December 31, 1997, the Company had funded $47.8 million in the Prime
Lending Program with a weighted average interest rate of 1.3% above the Prime
Rate.
Additionally, the Company was approved in March 1997 as a licensee
under the Rural Economic Development Business and Industry Loan Program
sponsored by the U.S. Department of Agriculture (the "B & I Loan Program").
Under the B & I Loan Program, loans are to be originated in rural areas
(generally areas with a population of less than 50,000) and are partially
guaranteed by the U.S. Government. The U.S. Government guarantees repayment
generally up to 80% of the principal amount of loans originated under the B & I
Loan Program. The Company presently has several loans in the process of
closing.
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In addition to being designated as a "Certified SBA lender" in Miami,
Florida and as a "Preferred SBA lender" in Dallas, Texas, in December 1995
First Western was granted the designation of a "preferred lender" in over 50
additional districts of the SBA. Under the 7(a) Program, in order to have an
SBA guarantee, the lender must have some level of SBA approval. Within the
7(a) Program, the different status levels for SBA approvals are (i) guaranteed
lender, (ii) certified lender and (iii) preferred lender. Approval of loans
under the guaranteed lender program requires the greatest amount of review time
by the SBA while loans under the preferred lender program require the least.
The granting of preferred lender status to First Western assists the Company in
competing for loan origination opportunities due to the reduction in approval
time.
SECURITIZATION AND STRUCTURED FINANCING PROGRAMS
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. Any delay in the sale of receivables beyond a quarter-end or year end
would eliminate the gain on sale in the given quarter or year and adversely
affect the Company's reported earnings for such quarter or year. Any such
adverse changes or delays could have a material adverse effect on the Company's
financial position, liquidity and results of operations.
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 does not purport to be either a historical description
of the prepayment experience of the pool or a prediction 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
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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. During 1997, as a
result of increased prepayment speeds, the Company provided for an unrealized
loss and corresponding valuation allowance of $300,000 on the interest-only
strip receivables. 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.
EMPLOYEES
At December 31, 1997, the Company had 63 employees. Management of the
Company believes its relationship with its employees is good.
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OVERVIEW OF SBA REGULATIONS
The lending operations of First Western, PMIC and Western Financial
are regulated by the SBA establishing, among other things, maximum interest
rates that borrowers may be charged (which currently may not exceed the greater
of 19% per annum or 11% above the Company's cost of funds from the SBA) and
minimum and maximum maturities for the Company's loans (which generally range
from four to 25 years). Borrowers must satisfy certain criteria established by
the SBA to qualify for loans originated by the Company under SBA sponsored
programs, including limitations on the net worth and net income of potential
borrowers or alternative criteria that focus upon the number of employees of
the borrower and its gross revenues. In addition, the SBA generally limits the
aggregate amount of guaranties that can be provided to any single borrower and
restricts the use to which the loan proceeds can be employed by the borrower.
As part of the legislation by Congress in 1996, several increased
costs were put into effect for new SBA debentures. A flat 3% "draw-down" fee
replaced the 2% commitment fee and interest rates charged on newly issued SBA
Debentures increased by 100 basis points. The interest rates previously
charged on SBA debentures were approximately 70 basis points over the 10 year
Treasury Note. As adjusted, the present rates on newly issued SBA Debentures
would be approximately 170 basis points over the 10 year Treasury Note. As
part of this legislation, the availability of 3% subsidized debentures and the
right of the SBA to purchase preferred stock of an SSBIC was repealed. This
has no effect on previously issued debentures or preferred stock of SSBICs
including PMIC.
PROPERTIES
The Company's headquarters are located at 17290 Preston Road, Dallas,
Texas 75252 where its facilities comprise approximately 12,400 square feet of
space pursuant to leases with a corporation, a majority of whose shareholders
are officers and/or directors of the Company. In addition, at December 31,
1997, the Company also leased office space in Hollywood, Florida, Phoenix,
Arizona and Atlanta, Georgia. The aggregate annual lease payments for the
year ended December 31, 1997 were approximately $229,000.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation
incidental to its business. The Company does not believe that the current
proceedings will have a material adverse effect on the results of operations or
financial condition of the Company.
INVESTMENT OBJECTIVES AND POLICIES
PMC CAPITAL
PMC Capital's investment objective is to maximize earnings for
distribution to shareholders from interest income, loan servicing and other
fees generated by loans which it
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originates. Except for the fundamental policies described below, PMC Capital's
investment objectives may be changed by a majority vote of the PMC Capital
Board of Directors.
The Company places its liquid funds not invested in loans in
short-term monetary instruments. These liquid funds are maintained in such
instruments pending application to long-term portfolio investments. No dollar
limit has been established for short-term investments as a whole or for any
type of short-term instrument.
Each subsidiary of PMC Capital also sets its own investment policies.
FIRST WESTERN
The following policies of First Western may be modified or terminated
by a majority vote of its Board of Directors.
The investment objective of First Western is to receive interest,
premiums, and servicing fees to fund current operations, meet contingencies as
they arise, and provide earnings for the payment of dividends to PMC. In
seeking to achieve this objective, management may expand First Western's
investments through borrowings.
WESTERN FINANCIAL
The following policies of Western Financial may be modified or
terminated by a majority vote of its Board of Directors.
The investment objective of Western Financial is to receive interest
and fees to fund current operations, meet contingencies as they arise and
provide earnings for the payment of dividends to PMC.
Except for certain SBA restrictions which prohibit Western Financial
from making loans to any single borrower in excess of 20% of its regulatory
stated capital and capital surplus, Western Financial has not established any
more restrictive limit on the dollar amount or percentage of its total assets
that may be invested in any particular company or any group of companies than
that imposed by SBA regulations.
PMIC
The following policies of PMIC may be modified or terminated by a
majority vote of its Board of Directors, except that its policy to make loans
to "socially or economically disadvantaged" small business entrepreneurs may be
changed only as described below in "Fundamental Policies".
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The investment objective of PMIC is to receive interest and fees to
fund current operations, meet contingencies as they arise and provide earnings
for the payment of dividends to PMC. PMIC has an overall policy of making
loans to "socially or economically disadvantaged" small business entrepreneurs
pursuant to the SBIA.
SBA restrictions prohibit PMIC from making loans to any single
borrower in excess of 25% of its regulatory stated capital and capital surplus.
PMIC has not established any more restrictive limit on the dollar amount or
percentage of its total assets that may be invested in any particular company
or any group of companies than that imposed by SBA regulations.
PORTFOLIO TURNOVER
The Company's portfolio turnover rate was 20% for the year ended
December 31, 1997 primarily as a result of First Western's sales of loans in
the secondary market.
INVESTMENT ADVISOR
The Company is advised internally by its executive officers under the
supervision of its Board of Directors.
TAX CONSIDERATIONS
The following discussion is a general summary of the material Federal
tax considerations applicable to PMC Capital and to an investment in the Common
Stock and does not purport to be a complete description of the tax
considerations applicable to such an investment. Prospective investors should
consult their own tax advisors with respect to the tax considerations which
pertain to their purchase of the Common Stock. This summary does not discuss
all aspects of Federal income taxation relevant to holders of the Common Stock
("Holders") in light of their personal circumstances, or to certain types of
Holders subject to special treatment under federal income tax laws, including
foreign taxpayers. This summary does not discuss any aspects of foreign,
state, or local tax laws.
GENERAL
PMC Capital, Western Financial, PMIC and First Western have qualified
and intends to continue to qualify to be treated as "regulated investment
companies" under the Code. To be so treated, the Company must (i) be
registered under the Investment Company Act at all times during the taxable
year, (ii) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or certain other passive
income, and (iii) diversify its holdings to meet certain requirements set forth
in the Code. The Company has treated, and intends to
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continue to treat, all amounts received on the sale of loans in excess of a
normal servicing fee, as qualifying income for purposes of meeting the test in
clause (ii).
The Company intends to make timely distributions of its investment
company taxable income, net capital gains and capital gain net income so that
the Company will not be subject to federal income or excise taxes. For Federal
income and excise tax purposes, dividends declared in October, November or
December of any calendar year and payable to Holders of record on a specified
date in such a month are deemed to have been received by each Holder, and to
have been paid by the Company, on December 31 of such calendar year, provided
that such dividend is actually paid during January of the following year.
TAXATION OF HOLDERS; DISTRIBUTIONS
Distributions to Holders of the Company's dividend and interest income
and of any net short-term capital gain in any year will generally be taxable as
dividend income to Holders to the extent of the Company's earnings and profits.
Distributions which constitute dividends for Federal income tax purposes will
not generally be eligible for the dividends-received deduction for
corporations. To the extent that such distributions to a United States Holder
in any year exceed the Company's earnings and profits, they will be treated as
a nontaxable return of capital and will reduce the United States Holder's basis
in his shares. The amount of such distributions, if any, in excess of the
Holder's basis in his shares, will be treated as a gain from the sale of
shares, as discussed below. Distributions of the Company's net capital gains
(which will be designated as capital gain dividends by the Company) will be
taxable to United States Holders as long-term capital gain, regardless of the
length of time the Holder has held his shares.
The Company may elect to retain amounts representing long-term capital
gain income on which the Company will be taxed at regular corporate rates. In
that case, each Holder will be taxed on a proportionate share of the total
long-term capital gains retained by the Company and will also receive a credit
for a proportionate share of the tax paid by the Company. Each Holder shall
increase the adjusted basis in his shares by the difference between the
allocable amount of long-term capital gain and the tax deemed paid by the
Holder. If the Company should elect to retain long-term capital gains, it will
notify each Holder of the relevant tax information after the close of the
taxable year.
SALES
A Holder may recognize taxable gain or loss if the Holder sells shares
of the Company. Any gain or loss arising from such sale will generally be
capital gain or loss and will be long-term capital gain or loss if such Holder
has held such shares for more than one year at the time of the sale; otherwise
it will be short-term capital gain or loss. The long-term capital gain rate is
28% if the shares have been held for more than one year but for not more than
18 months, and 20% if the shares have been held for more than 18 months.
However, any capital loss arising from the sale of shares held for six months
or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received by the Holder.
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REPORTING AND BACK-UP WITHHOLDING
PMC Capital will inform Holders each year of the amount and nature of
any income or gain distributed to them. Certain Holders may be subject to a
31% Federal back-up withholding tax on distributions if they fail to provide
PMC Capital with their correct taxpayer identification number and certification
that they are not subject to backup withholding.
MANAGEMENT
PMC Capital has no formal advisory board but is advised by its
executive officers under the direction of its Board of Directors. PMC
Capital's Loan Committee, comprised primarily of senior management, including
but not limited to Mr. Lance B. Rosemore, Dr. Andrew S. Rosemore, Ms. Mary J.
Brownmiller and Mr. Jan F. Salit, is primarily responsible for the day-to-day
management of the Company's loan portfolio. PMC Capital's Board of Directors
is divided into three classes with staggered three year terms. No more than
one class of directors is elected at any annual meeting. All officers and
directors hold office until their respective successors are elected and
qualified or until their earlier resignation or removal.
The Audit Committee of PMC Capital's Board of Directors is currently
comprised of Mr. Thomas Hamill and Mr. Barry A. Imber. The principal
functions of the Audit Committee are to oversee the financial reporting
policies, the accounting issues, the portfolio valuation and the entire audit
function of the Company. The Audit Committee reports their activities to PMC
Capital's Board of Directors.
There are no compensation or nomination committees; however, PMC
Capital's Board of Directors as a whole performs these functions. PMC Capital
has appointed an Independent Directors Committee consisting of Dr. Irvin
Borish, Mr. Robert Diamond, Mr. Hamill, Mr. Imber and Mr. Lee Ruwitch, each of
whom is otherwise unaffiliated with the Company. The Independent Directors
Committee reviews all proposed affiliated transactions to ensure that such
transactions do not violate the appropriate provisions of the Investment
Company Act.
The following table set forth certain information about the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND ADDRESS(1) OFFICES WITH THE COMPANY
------------------- ------------------------
<S> <C>
Dr. Fredric M. Rosemore(2) Chairman of the Board and Treasurer
Mr. Lance B. Rosemore(2) President, Chief Executive Officer,
Secretary, and Director
Dr. Andrew S. Rosemore(2) Executive Vice President,
Chief Operating Officer, and Director
Mr. Jan F. Salit Executive Vice President, Chief Investment
Officer and Assistant Secretary
Mr. Barry N. Berlin Chief Financial Officer
Ms. Cheryl T. Murray General Counsel
Ms. Mary J. Brownmiller Senior Vice President
Dr. Irvin M. Borish Director
Mr. Robert Diamond Director
Dr. Martha R. Greenberg(2) Director
Mr. Thomas Hamill Director
Mr. Barry A. Imber Director
Mr. Lee Ruwitch Director
</TABLE>
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- ---------------
(1) The address for each of the persons listed in this table is c/o the
Company, 17290 Preston Road, 3rd Floor, Dallas, Texas 75252.
(2) Mr. Lance B. Rosemore and Dr. Andrew S. Rosemore are the sons, and Dr.
Martha R. Greenberg is the daughter, of Dr. Fredric M. Rosemore and
Mrs. Marion Rosemore. Dr. Andrew S. Rosemore owns in excess of 5% of
the shares of the Company. Consequently, all these family members are
"interested persons" as defined under the Investment Company Act.
Information concerning the executive officers and directors of the Company is
as follows:
DR. FREDRIC M. ROSEMORE--Dr. Rosemore, 74, has been the Chairman of
the Board of the Company since 1983. From 1990 to 1992, Dr. Rosemore was Vice
President of the Company and from 1979 to 1990, Dr. Rosemore was the President
of the Company. For many years he was engaged in diverse businesses, including
the construction of apartment complexes, factory buildings, and numerous
commercial retail establishments. From 1948 to 1980, Dr. Rosemore practiced
optometry. He has been a director of the Company since 1983.
MR. LANCE B. ROSEMORE--Mr. Rosemore, 49, has been Chief Executive
Officer of the Company since May 1992, President of the Company since 1990 and
Secretary since 1983. From 1990 to May 1992, Mr. Rosemore was Chief Operating
Officer of the Company. Previously, Mr. Rosemore owned his own consumer
finance company and was employed by C.I.T. Financial and United Carolina Bank
Shares. He has been a director of the Company since 1983.
DR. ANDREW S. ROSEMORE--Dr. Rosemore, 51, has been Chief Operating
Officer of the Company since May 1992 and Executive Vice President of the
Company since 1990. From 1988 to May 1990, Dr. Rosemore was Vice President of
the Company. From 1973 to 1988, Dr. Rosemore owned and managed commercial
rental properties, apartment complexes and factory buildings. Since 1972, Dr.
Rosemore has been a licensed physician in Alabama. He has been a director of
the Company since 1988.
MR. JAN F. SALIT--Mr. Salit, 47, has been Executive Vice President of
the Company since May 1993 and Chief Investment Officer and Assistant Secretary
of the Company since March 1994. From 1979 to 1992, Mr. Salit was employed by
Glenfed Financial Corporation and its predecessor company Armco Financial
Corporation, holding various positions including Executive Vice President and
Chief Financial Officer.
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MR. BARRY N. BERLIN--Mr. Berlin, 37, has been Chief Financial Officer
of the Company since November of 1992. From August 1986 to November 1992, he
was an audit manager with Imber and Company Certified Public Accountants.
Imber and Company served as the Company's independent accountants from March
1988 until September 1992. Mr. Berlin is a Certified Public Accountant.
MS. MARY J. BROWNMILLER--Ms. Brownmiller, 43, has been Senior Vice
President of the Company since 1992, and Vice President of the Company since
November 1989. From 1987 to 1989, she was Vice President for Independence
Mortgage, Inc., an SBA lender. From 1976 to 1987, Ms. Brownmiller was employed
by the SBA, holding various positions including senior loan officer. Ms.
Brownmiller is a Certified Public Accountant.
MS. CHERYL T. MURRAY--Ms. Murray, 31, has been General Counsel of the
Company since March 1994. From 1992 to 1994 she was associated with the law
firm of Johnson & Gibbs, P.C. and practiced in the financial services
department. Ms. Murray earned her law degree from Northwestern University
School of Law.
DR. IRVIN M. BORISH--Dr. Borish, 85, served as Benedict
(Distinguished) Professor of Optometry at the University of Houston after
retiring from Indiana University, where he holds the status of Professor
Emeritus. He operated a private practice of optometry for over thirty years.
He is the author of the major text in his field and holds five patents in
contact lenses. He has been a director of the Company since 1989.
DR. MARTHA R. GREENBERG--Dr. Greenberg, 46, has practiced optometry
for 22 years in Russellville, Alabama and currently serves on the Board of
Trustees of Southern College of Optometry. She has been a director of the
Company since 1984.
MR. THOMAS HAMILL--Mr. Hamill, 44, is vice president of Jardine Sayer
& Company, Inc., the U.S. reinsurance intermediary subsidiary of Jardine Lloyd
Thompson plc. From 1989 through 1996, Mr. Hamill was president of Caliban
Holdings Ltd. ("Caliban") and its subsidiaries, including Belvedere Insurance
Co., Ltd. ("Belvedere"). From September 1986 to December 1989, Mr. Hamill was
vice president of Belvedere Corporation. Mr. Hamill is a non-executive
director and Chairman of the Board of Caliban, Belevedere and Midlands
Management Corporation. Mr. Hamill has been a director of the Company since
1992, when he was elected pursuant to an agreement between the Company and
Belvedere in April 1991 whereby the directors of the Company agreed at that
time to support a representative of Caliban Holdings in his candidacy for
director in exchange for Belvedere's purchase of 185,000 shares of Common
Stock.
MR. LEE RUWITCH--Mr. Ruwitch, 84, is currently the owner of a
ministorage facility, Regency Storage, Inc., which is located in Palm Beach,
Florida. Mr. Ruwitch has been involved with the daily management of personal
investments since he sold a major legal printing business in 1986. He is the
president of LFR Corporation and has been a partner in TCA Joint Venture in
Miami since 1992. He is involved with the Francien and Lee Ruwitch Charitable
Foundation in Miami, Florida. He was a director of the Company from 1984 to
December 1993 and rejoined the board in September 1994.
-55-
<PAGE> 58
MR. BARRY A. IMBER--Mr. Imber, 51, has been a principal of Imber and
Company, Certified Public Accountants, or its predecessor, since 1982. Imber
and Company was the independent certified public accountant for PMC and its
subsidiaries for the years ended December 31, 1988 through December 31, 1991.
Mr. Imber has been a director of the Company since March 1995.
MR. ROBERT DIAMOND--Mr. Diamond, 66, has been an attorney for 40
years. He is currently of counsel to the law firm of Diamond & Diamond, P.A.,
Millburn, New Jersey. He served as a director of the Company from 1982 to 1992
and rejoined the Board of Directors in January 1994. He served as a member of
the Board of Directors of Allstate Financial Corporation from 1991 to 1993. He
has managed personal investments since 1991.
REMUNERATION OF OFFICERS AND DIRECTORS
The PMC Capital Board of Directors had four regular (including video
conferences) meetings during 1997. Non-employee directors were compensated
$500 per meeting for each meeting they attended. PMC Capital pays for the
travel expenses incurred by directors in connection with such meetings.
The following table sets forth the aggregate amount of compensation
paid by PMC Capital during 1997 to each of the three highest compensated
officers of the Company and to all executive officers and directors as a group
during fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Profit Sharing Total Profit Compensation
Capacities in Which Contribution Sharing Benefits Paid
Remuneration Aggregate Accrued During Accrued by Company
Name of Person Received Compensation (1) Last Fiscal Year (2) to Date to Directors
-------------- ------------------- ----------------- -------------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Dr. Fredric M. Rosemore Chairman of Board $ 156,771 $ 18,811 $ 196,345
Mr. Lance B. Rosemore President, Chief 405,793 18,811 203,183
Executive Officer
Dr. Andrew S. Rosemore Executive Vice 409,909 18,811 167,924
President, Chief
Operating Officer
Mr. Jan F. Salit Executive Vice President
Chief Investment Officer 205,089 18,811 53,407
Dr. Irvin M. Borish Director $ 2,000
Mr. Thomas Hamill Director 2,500
Mr. Barry A. Imber Director 2,500
Dr. Martha R. Greenberg Director 2,000
Mr. Robert Diamond Director 2,000
Mr. Lee Ruwitch Director 1,500
- -------------------
</TABLE>
(1) The Company has determined that the amount of perquisites and other
personal benefits paid to each of the executive officers listed in the
compensation table does not exceed the lesser of $50,000 or 10% of
each such person's annual salary and bonus reported in such table and
that the aggregate amount of perquisites and other personal benefits
paid to all executive officers and directors as a group does not
exceed the lesser of 10% of all such person's annual salary and bonus
or $650,000 ($50,000 multiplied by 13, the number of
-56-
<PAGE> 59
executive officers and directors). Accordingly, none of such
perquisites and other personal benefits is included in the above
table.
(2) The participants in the Company's profit sharing plan (the "Plan")
consist of all employees who are at least 20-1/2 years old, have been
employed by the Company for six months and are employed at the end of
each fiscal year or have died, become totally disabled or retired
after age 65 during such fiscal year. The Plan is intended to qualify
under Section 401(a) of the Code. A required distribution of $24,139
was paid to Dr. Fredric M. Rosemore. No monies were withdrawn from
the Plan during 1997 for the benefit of Mr. Lance B. Rosemore or Dr.
Andrew S. Rosemore. Mr. Lance B. Rosemore and Dr. Fredric M. Rosemore
are co-administrators of the Plan.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Fredric M.
Rosemore, Lance B. Rosemore, Andrew S. Rosemore, Mary J. Brownmiller, Jan F.
Salit, Barry N. Berlin and Cheryl T. Murray. Each of these employment
agreements provides for at least annual reviews by the Board of Directors of
the salaries contained therein, with a mandatory minimum increase based on
percentage increases to the cost of living index. In addition, the Board of
Directors may determine, in its discretion, to award bonuses to each of the
foregoing persons based on the Company's performance. Each of the employment
agreements also provides that if a new board of directors of the Company is put
in place, as a result of the acquisition of the Common Stock by an outside
party or otherwise, and such new board requests the covered executive to resign
or substantially modifies the duties or working conditions of the executive,
the executive could resign and be entitled to be paid by the Company an amount
equal to 2.99 times the average compensation paid to the executive over the
last five years.
OTHER EXPENSES
In addition to compensating its management members as discussed above,
the Company incurs various other expenses in its operations, such as custody
and transfer agent fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its shares, taxes and governmental fees, fees and expenses of the directors,
costs of obtaining insurance, expenses of printing and distributing shareholder
materials, organizational expenses, including costs or losses related to any
litigation.
HOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
On March 31, 1998, the Company had outstanding 11,795,035 shares of
Common Stock. The table below lists, as of the same date, certain information
regarding the beneficial ownership of the Company's Common Stock by all persons
who are known by the Company to be the beneficial owners of more than 5% of the
Common Stock, the directors, the executive officers and by all executive
officers and directors as a group.
-57-
<PAGE> 60
<TABLE>
<CAPTION>
Names and Addresses Amount and Nature of Percent of
of Beneficial Owners Beneficial Ownership Ownership
-------------------- ---------------------- ----------
<S> <C> <C>
Dr. Irvin M. Borish (1) 135,000 1.1%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Robert Diamond (2) 353,935 3.0%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Dr. Martha R. Greenberg *(3) 527,248 4.5%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Thomas Hamill (4) 6,000 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Barry A. Imber - **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Dr. Andrew S. Rosemore *(5) 774,017 6.6%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Dr. Fredric Rosemore *(6) 572,187 4.9%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Lance B. Rosemore *(7) 224,502 1.9%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Lee Ruwitch (8) 398,216 3.4%
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Jan F. Salit (9) 719 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Mr. Barry N. Berlin 315 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Ms. Mary J. Brownmiller 2,110 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Ms. Cheryl T. Murray 200 **
17290 Preston Road, 3rd Floor
Dallas, Texas 75252
Directors and executive officers 2,994,449 25.4%
as a group (13 persons)
</TABLE>
-58-
<PAGE> 61
- ------------------
(1) Includes 115,000 shares held by a partnership of which Dr. Borish is
the general partner and 20,000 shares held in two charitable lead
trusts of which Dr. Borish is the trustee.
(2) Includes 179,691 shares held in an individual retirement rollover
account and 5,300 held in grandchildren's trusts of which Mr. Diamond
is the trustee.
(3) Includes 15,795 shares in which her children have a beneficial
interest, 31,400 shares held in an individual retirement account,
127,500 shares held jointly with her husband, 141,894 shares held in a
pension trust, 2,500 shares held in a foundation and 25,300 shares
held in trust for Dr. Greenberg and her children. Does not include
225,660 shares owned by her husband, as to which shares she disclaims
any beneficial interest.
(4) Includes 1,000 shares owned by his minor son. Does not include
321,000 shares held by two companies of which Mr. Hamill is a
director, as to which shares he disclaims any beneficial interest.
(5) Includes 368,332 shares held by a partnership of which Dr. Rosemore
and his wife are general partners, 17,550 shares held as custodian for
his children, 354,650 shares held in individual retirement accounts,
24,785 shares held in trust for the benefit of Dr. Rosemore and his
children and 9,200 shares held by a partnership for the benefit of Dr.
Rosemore and his children.
(6) Represents shares of Common Stock held by a partnership of which Dr.
Fredric M. Rosemore is a general partner.
(7) Includes 2,892 shares in which his minor children have beneficial
interest, 142,989 shares held jointly with his wife, 11,486 shares
held in an individual retirement account, 26,095 shares held in trust
for the benefit of Mr. Rosemore and his children, 6,600 shares held by
a partnership for the benefit of Mr. Rosemore and his children and
4,020 shares owned individually by Mr. Lance B. Rosemore's wife.
(8) Includes 5,775 shares held in the name of his wife, 387,441 shares
held in various trusts of which Mr. Ruwitch is the trustee and 5,000
shares held by a corporation controlled by Mr. Ruwitch.
(9) Consists of 719 shares held in an individual retirement account.
* Mr. Lance B. Rosemore and Dr. Andrew S. Rosemore are the sons, and
Dr. Martha R. Greenberg is the daughter, of Dr. Fredric M. Rosemore
and Mrs. Marion Rosemore. Dr. Fredric M. Rosemore, Mrs. Marion
Rosemore and Dr. Andrew S. Rosemore each own in excess of 5% of the
shares of the Company. Consequently, all such persons may be deemed
to be "interested persons" as defined under the Investment Company
Act.
** Less than 1.0%
-59-
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT
CAPITAL STOCK OF THE COMPANY
General. The authorized share capital of PMC Capital consists of
30,000,000 shares of Common Stock. As of March 31, 1998, PMC Capital had
11,795,035 shares of Common Stock issued and outstanding. In addition, PMC
Capital has reserved for issuance 1,500,000 shares under the Plan. The
following summary is qualified by reference to the Company's Articles of
Incorporation, as amended (the "Articles"), a copy of which has been
incorporated by reference herein.
Voting Rights. Each holder of Common Stock is entitled to one vote
per share on all matters submitted to a vote of shareholders. Holders of
Common Stock do not have cumulative voting rights.
Dividend Rights. Holders of Common Stock are entitled to receive
dividends out of funds legally available therefor when, as and if declared by
the Board of Directors. The Company's dividend history and policy is described
under "Dividends".
Liquidation and Other Provisions. All shares of Common Stock have
equal rights to receive pro rata, the net assets of the Company upon
liquidation or dissolution after payments to creditors and the prior payment of
any preferential amounts payable to holders of preferred stock. The Common
Stock is not redeemable and has no preemptive or conversion rights. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, when issued, fully paid and non-assessable.
Liability and Indemnification of Directors. Florida law limits the
liability of a director of a Florida corporation if the director discharges his
duties in accordance with standards specified by statute. Florida law and the
Company's bylaws also authorize the Company to indemnify the Company's
directors, officers, employees and agents. Additionally, each of the Company's
directors has entered into an agreement with the Company which provides for
such director's indemnification in certain circumstances.
PREFERRED STOCK OF PMIC
PMIC has outstanding 30,000 shares of $100 par value, 3% cumulative
preferred stock (the "3% Preferred Stock") and 40,000 shares of $100 par vale,
4% cumulative preferred stock (the "4% Preferred Stock"). The 3% Preferred
Stock and the 4% Preferred Stock (collectively the "Preferred Stock") are held
by the SBA pursuant to the SBIA.
PMIC is entitled to redeem, in whole or in part, the 3% Preferred
Stock by paying 35% of the par value of these securities plus dividends
accumulated and unpaid on the date of redemption. While the 3% Preferred Stock
may be redeemed, redemption is not mandatory. Dividends of approximately
$90,000 on the 3% Preferred Stock were recognized during each of the years
ended December 31, 1997 and 1996.
-60-
<PAGE> 63
The 4% Preferred Stock was issued during September 1994 ($2,000,000)
and May 1995 ($2,000,000), and must be redeemed at par no later than 15 years
from the date of issuance. Dividends of approximately $160,000 were recognized
during each of the years ended December 31, 1997 and 1996.
Neither series of Preferred Stock has any preemptive or conversion
rights. The Preferred Stock provides for a liquidation preference in the
amount of $100 per share plus accrued and unpaid dividends.
LONG-TERM DEBT
PMC Capital has a $15 million uncollateralized revolving credit
facility which, as extended, expires in May 1998. Advances pursuant to the
credit facility bear interest at PMC Capital's option at the lender's prime
rate less 50 basis points or the London Interbank Offering Rate (LIBOR) plus
175 basis points. The credit facility requires the Company to meet certain
covenants, the most restrictive of which includes that the ratio of net
charge-offs to net loans receivable will not exceed 2.0%, and the ratio of
assets to senior debt (as defined in the credit facility) will not fall below
150%. At December 31, 1997, the Company had no outstanding borrowings under
this credit facility. At December 31, 1997, the Company was in compliance with
all covenants of this facility.
PMC Capital has consummated $35 million in private placements of
uncollateralized senior notes. These borrowings have been utilized to fund
commitments of the Company's non-SBA lending program. The notes require the
Company to meet certain covenants, the most restrictive of which require; (i)
that net loans receivable (as defined in the note agreement) exceed 150% of
senior funded debt, (ii) the increase in the Company's loan valuation reserve
for any 12 month period must not exceed 3% of net loans receivable, and (iii)
the Company's consolidated earnings plus interest expense must exceed 150% of
interest expense. At December 31, 1997, the Company was in compliance with all
of the covenants of these notes. At December 31, 1997 outstanding
uncollateralized senior notes were as follows:
<TABLE>
<CAPTION>
Interest Final
Date Rate Amount Maturity
---- ---- ------ --------
<S> <C> <C> <C>
July 19, 1993 7.20% $20,000,000(2) July 19, 2001
December 15, 1993 6.97% 5,000,000 December 15, 2002
April 19, 1995 8.60% 5,000,000 April 19, 2003
April 19, 1995 LIBOR + 1.3%(1) 5,000,000 April 19, 2004
-----------
$35,000,000
===========
</TABLE>
- -------------------
(1) Reset quarterly, 7.08% at December 31, 1997
(2) Payable in three equal annual installments commencing July 19, 1999.
Principal payments required on the senior notes at December 31, 1997
are as follows:
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<PAGE> 64
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . $ --
1999 . . . . . . . . . . . . . . . . . . . . 6,666,667
2000 . . . . . . . . . . . . . . . . . . . . 6,666,667
2001 . . . . . . . . . . . . . . . . . . . . 6,666,666
2002 . . . . . . . . . . . . . . . . . . . . 5,000,000
2003 . . . . . . . . . . . . . . . . . . . . 5,000,000
2004 . . . . . . . . . . . . . . . . . . . . 5,000,000
--------------
$ 35,000,000
==============
</TABLE>
Western Financial and PMIC have issued debentures to the SBA to
partially fund their lending activities. These debentures require semi-annual
interest payments, with the entire principal amount due at maturity. The
debentures are not convertible, have no sinking fund provisions, impose
restrictions on the ability of Western Financial and PMIC to repurchase their
securities, to make distributions to PMC other than out of retained earnings
and to increase the aggregate amount of salaries or other compensation of
officers, directors, or employees in excess of the amount previously approved
by the SBA. See "Capitalization" and Note 6 to the Consolidated Financial
Statements as of and for the period ending December 31, 1996.
At March 31, 1998, the maturities, interest rates and principal
outstanding on the SBA debentures were as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Amount
------------- ------------- ------
<S> <C> <C>
August 18, 1999 . . . . . . . . . . . . . . 8.125% $ 1,000,000
September 1, 1999 . . . . . . . . . . . . . 8.800% 2,500,000
December 1, 1999 . . . . . . . . . . . . . . 8.600% (1) 650,000
January 2, 2000 . . . . . . . . . . . . . . 7.875% 3,000,000
March 1, 2000 . . . . . . . . . . . . . . . 9.350% 1,000,000
June 1, 2000 . . . . . . . . . . . . . . . . 9.300% 2,000,000
June 1, 2000 . . . . . . . . . . . . . . . . 9.300% (1) 300,000
June 1, 2000 . . . . . . . . . . . . . . . . 9.300% (3) 1,030,000
September 1, 2000 . . . . . . . . . . . . . 9.600% 4,310,000
December 1, 2002 . . . . . . . . . . . . . . 7.510% (1) 510,000
September 1, 2004 . . . . . . . . . . . . . 5.200% (2) 3,000,000
September 1, 2004 . . . . . . . . . . . . . 8.200% 3,000,000
March 1, 2005 . . . . . . . . . . . . . . . 4.840% (4) 3,000,000
June 1, 2005 . . . . . . . . . . . . . . . . 3.690% (5) 5,000,000
September 1, 2005 . . . . . . . . . . . . . 3.875% (6) 7,000,000
September 1, 2006 . . . . . . . . . . . . . 7.590% 2,490,000
------------
$ 39,790,000
============
</TABLE>
-62-
<PAGE> 65
- ---------------
(1) During April 1995, the Company assumed $2,260,000 in SBA
debentures from a non-affiliated small business investment
corporation in exchange for loans receivable of $2,109,062 and
cash of $150,938. The loans acquired were initially originated by
the Company and a portion sold to the non-affiliated SBIC. All of
these loans were purchased at par and were performing according to
their terms at the time of reacquisition.
(2) The interest rate will increase to 8.200% in September 1999 until
maturity.
(3) During May 1996, the Company assumed $1,030,000 in SBA
debentures from a non-affiliated SBIC in exchange
for loans receivable of approximately $200,000 and cash of
approximately $900,000. The loans were initially originated by
the Company and a portion sold to the non-affiliated SBIC. All of
these loans were purchased at par and were performing according to
their terms at the time of reacquisition.
(4) The interest rate will increase to 7.840% in March 2000 until
maturity.
(5) The interest rate will increase to 6.690% in June 2000 until
maturity.
(6) The interest rate will increase to 6.875% in September 2000 until
maturity.
OUTSTANDING SECURITIES
The following chart indicates the Common Stock and Cumulative
Preferred Stock of PMIC outstanding as of March 31, 1998:
<TABLE>
<CAPTION>
Amount Outstanding
Amount held by Exclusive of Amount
Amount the Company or Held by the Company
Title of Class Authorized for its Account for its Account
-------------- ---------- --------------- -------------------
(Rounded to the nearest thousand)
<S> <C> <C> <C>
Common Stock 30,000,000 - 11,795,000
Class A Cumulative 30,000 - 30,000
Preferred Stock of
PMIC
Class B Cumulative 40,000 - 40,000
Preferred Stock of PMIC
</TABLE>
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
The Company retains custody of its securities (which consist
principally of loan documentation) and, therefore, is subject to the additional
record keeping and examination requirements of Rule 17f-2 under the Investment
Company Act.
The Company's transfer and dividend-paying agent is American Stock &
Trust Company, 40 Wall Street, 46th Floor, New York, N.Y. 10005.
-63-
<PAGE> 66
FLORIDA LAW
The Company has elected not to be subject to the Florida Control Share
Act which generally provides that shares acquired in excess of certain
specified thresholds will not possess any voting rights unless such voting
rights are approved by a majority vote of the corporation's disinterested
shareholders. The Florida Control Share Act may deter an attempt to acquire
control of the Company.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Company generally does not pay brokerage fees on the securities in
its portfolio. Although the Company may pay such fees in the future in
connection with the purchase of short-term investments, there is no arrangement
to allocate brokerage expenses.
The Company has no obligation to deal with any broker, dealer or group
of brokers or dealers in purchasing or selling portfolio securities, and orders
for such transactions may be placed with a number of brokers and dealers.
In purchasing and selling portfolio securities, the Company selects
brokers and dealers on the basis of the price of the security, commission rates
and other factors. Where practicable, the Company will survey a number of
brokers and dealers in connection with a proposed portfolio transaction and
select the broker or dealer that offers the Company the best price and
execution or other services. At least annually the Company evaluates the
overall reasonableness of the brokerage commissions it has paid, if any.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and the Investment Company Act, and in accordance therewith files
reports and other information with the SEC. The Registration Statement,
including the exhibits thereto, as well as any reports, proxy statements and
other information filed with the SEC can be examined without charge at, or
copies obtained upon payment of prescribed fees from, the SEC's public
reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC located at 13th
Floor, 7 World Trade Center, New York, New York 10048; and Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In
addition, reports and other information concerning the Company may be examined
without charge, or copies obtained upon payment of prescribed fees, at the
American Stock Exchange, Inc., 86 Trinity Place, New York, New York 10006.
Copies of the Registration Statement and the exhibits thereto may also be
obtained at the SEC's Internet address at http:\\www.sec.gov.
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<PAGE> 67
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be
passed upon for the Company by Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996, the
consolidated schedule of investments and the consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997 of PMC Capital, Inc. and subsidiaries and the statement
of assets, liabilities and partners' capital as of December 31, 1997 and 1996
and the related statements of income, partners' capital and cash flows for the
year ended December 31, 1997 and for the period from November 8, 1996
(inception) to December 31, 1996, included in this registration statement, have
been included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
-65-
<PAGE> 68
PMC CAPITAL, INC AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PMC CAPITAL, INC AND SUBSIDIARIES
Summary of Selected Financial Information ..................................................... F-2
Quarterly Statistics .......................................................................... F-3
Report of Independent Accountants ............................................................. F-4
Consolidated Financial Statements:
Financial Highlights ...................................................................... F-5
Consolidated Balance Sheets as of December 31, 1997 and 1996 .............................. F-6
Consolidated Schedule of Investments as of December 31, 1997 .............................. F-7
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 .... F-9
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997,
1996 and 1995 ........................................................................ F-10
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996
and 1995 ............................................................................. F-11
Notes to Consolidated Financial Statements ................................................ F-12
Consolidating Financial Statements:
Consolidating Balance Sheet as of December 31, 1997 ....................................... F-32
Consolidating Statement of Income for the Year Ended December 31, 1997 .................... F-33
Consolidating Statement of Shareholders' Equity for the Year Ended December 31, 1997 ...... F-34
Consolidating Statement of Cash Flows for the Year Ended December 31, 1997 ................ F-35
PMC CAPITAL LIMITED PARTNERSHIP
Report of Independent Accountants ............................................................. F-36
Statements of Assets, Liabilities and Partners' Capital as of December 31, 1997 and 1996 ...... F-37
Statements of Income for the year ended December 31, 1997 and for the Period From
November 8, 1996 (Inception) to December 31, 1996 ......................................... F-38
Statements of Partners' Capital for the year ended December 31, 1997 and for the Period
From November 8, 1996 (Inception) to December 31, 1996 .................................... F-39
Statements of Cash Flows for the year ended December 31, 1997 and for the Period From
November 8, 1996 (Inception) to December 31, 1996 ......................................... F-40
Notes to Financial Statements ................................................................. F-41
</TABLE>
F-1
<PAGE> 69
- --------------------------------------------------------------------------------
PMC CAPITAL, INC AND SUBSIDIARIES
SUMMARY OF SELECTED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1997 1996 1995 1993 1994
--------- --------- --------- --------- ---------
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
OPERATING:
Operating income ............................. $ 24,406 $ 23,821 $ 21,262 $ 16,450 $ 15,670
Operating expenses ........................... (10,602) (10,454) (9,541) (7,578) (5,933)
Realized and unrealized gain (loss)
on investments ............................. 1,818 (147) (359) 3,151 (404)
--------- --------- --------- --------- ---------
Net operating income and realized
and unrealized gain (loss) on
investments ................................ $ 15,622 $ 13,220 $ 11,362 $ 12,023 $ 9,333
========= ========= ========= ========= =========
Dividends declared, common ................... $ 14,543 $ 12,853 $ 11,600 $ 11,244 $ 9,367
========= ========= ========= ========= =========
Earnings per common share .................... $ 1.35 $ 1.18 $ 1.03 $ 1.12 $ 0.87
========= ========= ========= ========= =========
Dividends per common share ................... $ 1.27 $ 1.16 $ 1.08 $ 1.06 $ 0.89
========= ========= ========= ========= =========
Weighted average common shares
outstanding ................................ 11,411 11,002 10,768 10,650 10,579
========= ========= ========= ========= =========
Loans funded ................................. $ 86,361 $ 70,154 $ 77,567 $ 75,349 $ 74,091
========= ========= ========= ========= =========
AT END OF PERIOD:
Loans receivable, net ........................ $ 127,240 $ 93,354 $ 110,499 $ 75,264 $ 71,528
========= ========= ========= ========= =========
Total assets ................................. $ 165,839 $ 164,964 $ 159,002 $ 125,416 $ 112,515
========= ========= ========= ========= =========
SBA debentures payable ....................... $ 41,290 $ 44,570 $ 43,540 $ 26,280 $ 20,280
========= ========= ========= ========= =========
Notes payable ................................ $ 35,000 $ 35,000 $ 35,001 $ 25,001 $ 25,001
========= ========= ========= ========= =========
Preferred stock of consolidated subsidiary ... $ 7,000 $ 7,000 $ 7,000 $ 5,000 $ 3,000
========= ========= ========= ========= =========
Common shareholders' equity .................. $ 70,166 $ 62,903 $ 59,088 $ 57,371 $ 55,524
========= ========= ========= ========= =========
Number of common shares outstanding .......... 11,631 11,162 10,871 10,684 10,603
========= ========= ========= ========= =========
RATIOS:
Return on average assets ..................... 9.7% 8.3% 8.0% 10.3% 9.4%
========= ========= ========= ========= =========
Return on average common shareholders'
equity ..................................... 23.3% 21.3% 19.2% 21.2% 16.8%
========= ========= ========= ========= =========
</TABLE>
F-2
<PAGE> 70
- --------------------------------------------------------------------------------
PMC CAPITAL, INC AND SUBSIDIARIES
QUARTERLY STATISTICS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................ $ 5,954 $ 6,103 $ 6,082 $ 6,267 $ 24,406
NET OPERATING INCOME ............ $ 3,324 $ 3,488 $ 3,471 $ 3,521 $ 13,804
NET GAIN (LOSS) ON INVESTMENTS .. $ (57) $ 38 $ (20) $ 1,857 $ 1,818
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .. $ 3,267 $ 3,526 $ 3,451 $ 5,378 $ 15,622
- -------------------------------------------------------------------------------------------------------------------
PER SHARE
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME ................ $ 0.530 $ 0.538 $ 0.531 $ 0.540 $ 2.139
NET OPERATING INCOME ............ $ 0.296 $ 0.307 $ 0.303 $ 0.303 $ 1.209
NET GAIN (LOSS) ON INVESTMENTS .. $ (0.005) $ 0.003 $ (0.002) $ 0.160 $ 0.156
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .. $ 0.291 $ 0.310 $ 0.301 $ 0.463 $ 1.365
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................ $ 5,480 $ 5,904 $ 6,051 $ 6,386 $ 23,821
NET OPERATING INCOME ............ $ 3,012 $ 3,346 $ 3,421 $ 3,588 $ 13,367
NET GAIN (LOSS) ON INVESTMENTS .. $ (17) $ (1) $ (23) $ (106) $ (147)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .. $ 2,995 $ 3,345 $ 3,398 $ 3,482 $ 13,220
- -------------------------------------------------------------------------------------------------------------------
PER SHARE
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME ................ $ 0.502 $ 0.539 $ 0.550 $ 0.574 $ 2.165
NET OPERATING INCOME ............ $ 0.276 $ 0.305 $ 0.311 $ 0.323 $ 1.215
NET GAIN (LOSS) ON INVESTMENTS .. $ (0.002) -- $ (0.002) $ (0.010) $ (0.014)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .. $ 0.274 $ 0.305 $ 0.309 $ 0.313 $ 1.201
</TABLE>
F-3
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
PMC Capital, Inc.:
We have audited the accompanying consolidated balance sheets of PMC Capital,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997 and the financial
highlights for each of the five years in the period ended December 31, 1997. We
have also audited the accompanying consolidated schedule of investments as of
December 31, 1997. These financial statements and the financial highlights are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included the examination or confirmation of
securities owned as of December 31, 1997 and 1996. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and financial highlights
referred to above present fairly, in all material respects, the consolidated
financial position of PMC Capital, Inc. and subsidiaries as of December 31, 1997
and 1996, the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, and the financial
highlights for each of the five years in the period ended December 31, 1997, and
the consolidated schedule of investments as of December 31, 1997, in conformity
with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The supplementary
consolidating balance sheet and the related consolidating statements of income,
cash flows, and shareholders' equity are presented for purposes of additional
analysis rather than to present the financial position, results of operations,
and cash flows of the individual companies, and are not a required part of the
consolidated financial statements. The supplementary consolidating information
has been subjected to the auditing procedures applied in the audit of the
consolidated financial statements and, in our opinion, is fairly stated, in all
material respects, in relation to the consolidated financial statements taken as
a whole.
COOPERS AND LYBRAND L.L.P.
Dallas, Texas
February 28, 1998
F-4
<PAGE> 72
- --------------------------------------------------------------------------------
PMC CAPITAL, INC AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights of the Company should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere on this Form 10-K. The financial highlights below provide
information about the Company's financial history. It uses the Company's fiscal
year (which ends December 31) and expresses the per share operating performance
in terms of a single share outstanding throughout each fiscal period. The
information is derived from the audited consolidated financial statements. The
financial highlights have been audited by Coopers & Lybrand L.L.P., independent
accountants.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE (1):
Net asset value, beginning of period ................. $ 5.64 $ 5.44 $ 5.37 $ 5.24 $ 5.20
-------- -------- -------- -------- --------
Net operating income ................................. 1.21 1.21 1.09 0.83 0.92
Net gains or losses on securities
realized and unrealized (2) ........................ 0.47 0.17 0.08 0.37 0.02
-------- -------- -------- -------- --------
Total from investment operations ................. 1.68 1.38 1.17 1.20 0.94
-------- -------- -------- -------- --------
Less distributions:
Preferred shareholder of consolidated subsidiary ... 0.02 0.02 0.02 0.01 0.01
Common shareholders ................................ 1.27 1.16 1.08 1.06 0.89
-------- -------- -------- -------- --------
Total distributions ............................. 1.29 1.18 1.10 1.07 0.90
-------- -------- -------- -------- --------
Net asset value, end of period ....................... $ 6.03 $ 5.64 $ 5.44 $ 5.37 $ 5.24
======== ======== ======== ======== ========
Per share market value, end of period ................ $ 14.56 $ 14.00 $ 12.63 $ 13.50 $ 14.50
======== ======== ======== ======== ========
Total investment return .............................. 13% 20% 2% 0% 16%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period ( in thousands) ............ $ 70,166 $ 62,903 $ 59,088 $ 57,371 $ 55,524
======== ======== ======== ======== ========
Ratio of expenses to average net assets .............. 16% 17% 16% 13% 11%
======== ======== ======== ======== ========
Ratio of operating income to average net assets ...... 21% 22% 20% 16% 18%
======== ======== ======== ======== ========
Ratio of net operating income and realized and
unrealized gain (loss) on investments to
average net assets ................................. 24% 22% 20% 21% 17%
======== ======== ======== ======== ========
Portfolio turnover (3) ............................... 20% 16% 30% 65% 54%
======== ======== ======== ======== ========
</TABLE>
Footnotes:
(1) The per share changes during the year are based on the weighted
average number of shares outstanding of the Company during the year
presented.
(2) The per share net gains or losses on securities (realized and
unrealized) includes the effect of stock issuances and other changes
in per share amounts during the year presented.
(3) Included in the computation of the portfolio turnover rate are the
sales of loans through the secondary market or private placement.
F-5
<PAGE> 73
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net ............................................. $ 127,240 $ 93,354
Cash equivalents .................................................. 17,237 49,677
Investment in unconsolidated subsidiaries ......................... 7,797 8,585
Interest-only strip receivables ................................... 3,708 3,143
Restricted investments ............................................ 2,798 1,229
Real property owned ............................................... 296 303
--------- ---------
TOTAL INVESTMENTS ................................................... 159,076 156,291
--------- ---------
OTHER ASSETS:
Receivable for loans sold ......................................... 1,346 2,508
Due from unconsolidated subsidiaries .............................. 1,302 1,097
Servicing asset ................................................... 1,607 1,753
Deferred charges, deposits and other assets ....................... 1,398 885
Accrued interest receivable ....................................... 608 376
Cash .............................................................. 265 340
Property and equipment, net ....................................... 237 181
--------- ---------
TOTAL OTHER ASSETS .................................................. 6,763 7,140
--------- ---------
TOTAL ASSETS ........................................................ $ 165,839 $ 163,431
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ............................................ $ 41,290 $ 44,570
Notes payable ..................................................... 35,000 35,000
Accounts payable .................................................. 3,269 4,145
Dividends payable ................................................. 4,018 3,635
Borrower advances ................................................. 1,678 1,795
Accrued interest payable .......................................... 1,316 1,442
Due to unconsolidated subsidiaries ................................ 279 1,076
Deferred fee revenue .............................................. 571 419
Other liabilities ................................................. 1,252 1,446
--------- ---------
TOTAL LIABILITIES ................................................... 88,673 93,528
--------- ---------
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,
11,631,000 and 11,162,000 shares issued and outstanding
at December 31, 1997 and 1996, respectively .................. 116 112
Additional paid-in capital ........................................ 68,555 62,125
Undistributed net operating income ................................ 2,289 1,101
Net unrealized depreciation on investments ........................ (794) (435)
--------- ---------
70,166 62,903
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................... $ 165,839 $ 163,431
========= =========
NET ASSET VALUE PER COMMON SHARE .................................... $ 6.03 $ 5.64
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 74
PMC CAPITAL INC AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997 (Dollars in thousands)
<TABLE>
<CAPTION>
RETAINED LOANS SERVICED LOANS (2)
-------------------------------------------------- ----------------------------
NUMBER NUMBER
OF OF
CATEGORY/ISSUER (1) LOANS VALUE % COST % LOANS COST %
------------------- ----- -------- ----- -------- ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS TO SMALL BUSINESS CONCERNS (3):
SMALL BUSINESS LENDING COMPANY LOANS:
FIRST WESTERN SBLC, INC AND SUBSIDIARY
Hotels and motels ...................... 60 $ 4,149 3.3% $ 4,207 3.3% 127 $ 91,886 30.9%
Gasoline/service stations .............. 13 115 0.1% 126 0.1% 17 4,902 1.6%
Restaurants ............................ 32 340 0.3% 439 0.4% 67 12,306 4.1%
Laundromats ............................ 6 5 -- 6 -- 10 1,241 0.4%
Retail, other .......................... 32 1,709 1.3% 1,732 1.4% 63 8,182 2.8%
Health care ............................ 8 39 -- 41 -- 11 794 0.3%
Food and grocery stores ................ 8 5 -- 23 -- 12 2,910 1.0%
Services ............................... 45 1,241 1.0% 1,317 1.0% 88 13,122 4.4%
Manufacturing .......................... 12 124 0.1% 124 0.1% 13 2,718 0.9%
Wholesale .............................. 17 469 0.4% 469 0.4% 21 3,975 1.3%
Car washes ............................. -- -- -- -- -- 1 104 --
----- -------- ----- -------- ------ ------ -------- -------
Total .................................... 233 8,196 6.5% 8,484 6.7% 430 142,140 47.7%
----- -------- ----- -------- ------ ------ -------- -------
SMALL BUSINESS INVESTMENT COMPANY LOANS:
WESTERN FINANCIAL CAPITAL CORPORATION
Hotels and motels ...................... 19 11,824 9.3% 12,035 9.3% 26 17,741 6.0%
Gasoline / service stations ............ 5 1,951 1.5% 1,970 1.5% 7 2,482 0.8%
Restaurants ............................ 1 1,159 0.9% 1,165 0.9% 2 1,352 0.5%
Retail, other .......................... 2 1,501 1.2% 1,558 1.2% 4 1,687 0.6%
Services ............................... 13 3,113 2.4% 3,208 2.5% 15 3,472 1.2%
Health care ............................ 22 1,078 0.8% 1,132 0.9% 23 1,173 0.4%
Food and grocery stores ................ 1 100 0.1% 100 0.1% 1 100 --
Manufacturing .......................... 1 51 -- 51 -- 1 51 --
Agriculture ............................ 2 871 0.7% 879 0.7% 2 879 0.3%
Transportation ......................... 1 101 0.1% 103 0.1% 1 103 --
Other notes receivable ................. 4 109 0.1% 146 0.1% 5 234 0.1%
----- -------- ----- -------- ------ ------ -------- -------
Total .................................... 71 21,858 17.1% 22,347 17.3% 87 29,274 9.9%
----- -------- ----- -------- ------ ------ -------- -------
SPECIALIZED SMALL BUSINESS INVESTMENT COMPANY LOANS:
PMC INVESTMENT CORPORATION
Hotels and motels ...................... 55 42,727 33.6% 43,483 33.6% 78 60,642 20.4%
Gasoline / service stations ............ 7 3,468 2.7% 3,525 2.7% 9 4,339 1.5%
Restaurants ............................ 1 278 0.2% 278 0.2% 1 278 0.1%
Retail, other .......................... 1 50 -- 51 -- 1 51 --
Services ............................... 3 481 0.4% 491 0.4% 3 491 0.2%
Health care ............................ 12 457 0.4% 570 0.4% 12 570 0.2%
Food and grocery stores ................ 4 758 0.6% 769 0.6% 6 1,515 0.5%
Other notes receivable ................. 2 630 0.5% 763 0.6% 2 763 0.3%
----- -------- ----- -------- ------ ------ -------- -------
Total .................................... 85 48,849 38.4% 49,930 38.5% 112 68,649 23.2%
----- -------- ----- -------- ------ ------ -------- -------
COMMERCIAL LOANS:
PMC CAPITAL, INC
Hotels and motels ...................... 43 39,956 38.2% 39,911 30.8% 56 48,624 16.3%
Gasoline / service stations ............ 2 583 0.5% 585 0.5% 2 585 0.2%
Restaurants ............................ 1 155 0.1% 156 0.1% 1 156 --
Retail, other .......................... 2 1,859 1.5% 1,861 1.4% 2 1,859 0.6%
Services ............................... 2 1,418 1.1% 1,419 1.1% 2 1,418 0.5%
Commercial real estate ................. 5 3,575 3.1% 3,912 3.0% 5 3,912 1.3%
Apartment complex ...................... 1 791 0.6% 799 0.6% 1 799 0.3%
----- -------- ----- -------- ------ ------ -------- -------
Total .................................... 56 48,337 38.0% 48,643 37.5% 69 57,353 19.2%
----- -------- ----- -------- ------ ------ -------- -------
TOTAL LOANS RECEIVABLE (4) ............... 445 $127,240 100.0% $129,404 100.0% 698 $297,416 100.0%
===== ======== ===== ======== ====== ====== ======== =======
</TABLE>
(Continued on next page)
F-7
<PAGE> 75
PMC CAPITAL INC AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
(CONTINUED)
<TABLE>
<CAPTION>
CATEGORY/ISSUER VALUE % COST %
--------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
TOTAL LOANS RECEIVABLE (FROM PRIOR PAGE) ........................... $127,240 80.0% $129,404 80.1%
-------- ------- -------- -------
MONEY MARKET AND FUND DEPOSIT ACCOUNTS (5):
Certificates of deposit (6) .................................. 1,089 0.7% 1,089 0.7%
Bank money market saving accounts ............................ 5,647 15.2% 5,647 3.5%
SunTrust, overnight repo account ............................. 182 0.1% 182 0.1%
Short-term government agency securities ...................... 7,984 5.9% 7,984 4.9%
Dreyfus, Cash Management Plus money market fund .............. 2,021 1.3% 2,021 1.9%
Goldman Sachs, Prime Obligation money market fund ........... 518 0.3% 518 0.3%
-------- ------- -------- -------
Total money market and fund deposit accounts .................. 17,441 31.1% 17,441 10.8%
-------- ------- -------- -------
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES:
Investment in PMC Limited Partnership ........................ 7,473 4.7% 7,473 4.6%
Investment in PMC Advisers, LTD .............................. 26 -- 26 --
Investment in PMC Capital Corp 1996-A and PMC Trust 1996-A ... 253 0.2% 253 0.2%
Investment in PMC Funding Corp ............................... 45 -- 45 --
-------- ------- -------- -------
Total investment in unconsolidated subsidiaries ............... 7,797 4.9% 7,797 4.8%
-------- ------- -------- -------
OTHER INVESTMENTS:
Interest-only strip receivable ............................... 3,708 2.3% 4,008 2.5%
SunBank Miami, restricted investments ........................ 1,206 0.8% 1,206 0.7%
Bank One Trust Company, restricted investments ............... 1,388 0.9% 1,388 0.7%
Real property owned .......................................... 296 0.2% 329 0.2%
-------- ------- -------- -------
Total other investments ....................................... 6,598 4.1% 6,931 4.8%
-------- ------- -------- -------
TOTAL INVESTMENTS (7) .............................................. $159,076 100.0% $161,573 100.0%
======== ======= ======== =======
</TABLE>
(1) Names have been omitted as disclosure to the public may be detrimental
to the small business.
(2) Balances include retained loans, loans sold into the secondary market
($102.1 million), the loans contributed to the Partnership ($34.3
million) and the unguaranteed portion of First Western loans sold and
serviced ($31.5 million). The balance does not include approximately
$110.8 million of loan portfolio serviced on behalf of PMC Commercial
Trust.
(3) Interest rates on loans receivable range from 8.0% to 14.9%.
(4) Balances are at face value of loans, less discounts aggregating
$109,000 in accordance with Emerging Issues Task Force 88-11,
discounts on purchased loans of $406,000, deferred fee revenue of $1.2
million and reserves of $494,000.
(5) Interest or dividend rates on money market and fund deposit accounts
range from 4.8% to 6.1%.
(6) Interest rates on certificates of deposit range from 5.2% to 5.6%. All
certificates held by either PMC or any of its subsidiaries are less
than $100,000 in any one institution, generally have original
maturities of 90 days and are considered to be cash equivalents.
(7) The aggregate cost of investments for Federal income tax purposes is
$160.7 million.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE> 76
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest ................................................. $ 17,136 $ 18,571 $ 16,330
Premium income ........................................... 1,776 1,942 2,847
Other investment income, net ............................. 504 608 368
-------- -------- --------
Total investment income .................................... 19,416 21,121 19,545
Other income, net .......................................... 2,430 2,331 1,795
Equity in income (loss) of unconsolidated subsidiaries ..... 2,560 369 (78)
-------- -------- --------
Total income ............................................... 24,406 23,821 21,262
-------- -------- --------
EXPENSES:
Interest ................................................. 5,548 5,708 5,049
Salaries and related benefits ............................ 3,435 3,180 2,778
General and administrative ............................... 797 843 1,053
Profit sharing plan ...................................... 243 217 190
Rent ..................................................... 229 213 203
Legal and accounting ..................................... 192 149 152
Small Business Administration fees ....................... 108 99 77
Directors and shareholders expense ....................... 50 45 39
-------- -------- --------
Total expenses ............................................. 10,602 10,454 9,541
-------- -------- --------
Net operating income ...................................... 13,804 13,367 11,721
-------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ...................................... (183) (214) (309)
Recoveries on loans written-off ........................ -- 35 40
Sale of assets ......................................... 2,360 -- --
Change in unrealized appreciation
(depreciation) on investments ........................ (359) 32 (90)
-------- -------- --------
Total realized and unrealized gain (loss) on investments ... 1,818 (147) (359)
-------- -------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................... $ 15,622 $ 13,220 $ 11,362
======== ======== ========
PREFERRED DIVIDENDS ........................................ $ 250 $ 251 $ 222
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 11,411 11,002 10,768
======== ======== ========
EARNINGS PER COMMON SHARE .................................. $ 1.35 $ 1.18 $ 1.03
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<PAGE> 77
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NET
UNDISTRIBUTED UNREALIZED
ADDITIONAL NET DEPRECIATION
COMMON PAID-IN OPERATING ON
STOCK CAPITAL INCOME INVESTMENTS TOTAL
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ............... $ 107 $ 56,254 $ 1,387 $ (377) $ 57,371
Issuances of common stock pursuant
to dividend reinvestment and cash
purchase plan, 187,005 shares ........ 2 2,175 -- -- 2,177
Net income ............................. -- -- 11,452 (90) 11,362
Dividends:
Preferred ............................ -- -- (222) -- (222)
Common ( $1.08 per common share )..... -- -- (11,600) -- (11,600)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1995 ............. 109 58,429 1,017 (467) 59,088
Issuances of common stock pursuant
to dividend reinvestment and cash
purchase plan, 291,042 shares ........ 3 3,696 -- -- 3,699
Net income ............................. -- -- 13,188 32 13,220
Dividends:
Preferred ............................ -- -- (251) -- (251)
Common ( $1.16 per common share )..... -- -- (12,853) -- (12,853)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 ............. 112 62,125 1,101 (435) 62,903
Issuances of common stock pursuant
to dividend reinvestment and cash
purchase plan, 468,706 shares ........ 4 6,430 -- -- 6,434
Net income ............................. -- -- 15,981 (359) 15,622
Dividends:
Preferred ............................ -- -- (250) -- (250)
Common ( $1.27 per common share ) ..... -- -- (14,543) -- (14,543)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 ............. $ 116 $ 68,555 $ 2,289 $ (794) $ 70,166
======== ======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<PAGE> 78
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments ...... $ 15,622 $ 13,220 $ 11,362
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 ................................................ (20,622) (21,915) (30,468)
Proceeds from sale of guaranteed loans ..................................... 21,638 19,988 30,299
Change in unrealized depreciation on investments and loans written-off ..... 543 182 359
Unrealized premium income, net ............................................. 215 (5) 80
Depreciation and amortization .............................................. 1,032 1,084 1,142
Accretion of loan discount and deferred fees ............................... (1,623) (957) (799)
Deferred fees collected .................................................... 766 785 1,050
(Gain) loss on sale of assets .............................................. (2,360) -- 26
Equity in (income) loss of unconsolidated subsidiaries ..................... (2,560) (369) 78
Net change in operating assets and liabilities:
Accrued interest receivable ............................................ (231) 347 (298)
Other assets ........................................................... (527) 357 (166)
Accrued interest payable ............................................... (127) 8 401
Borrower advances ...................................................... (116) (465) (694)
Other liabilities ...................................................... (1,069) 1,812 503
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................................... 10,581 14,072 12,875
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ..................................................................... (65,739) (48,239) (47,098)
Principal collected and other adjustments ........................................ 10,069 22,647 10,651
Proceeds from interest-only strip receivables .................................... 648 -- --
Purchase of furniture and fixtures and other assets .............................. (139) (127) (53)
Purchase of government securities ................................................ -- -- (3,942)
Proceeds from maturities of government securities ................................ -- -- 8,947
Proceeds from sale of assets ..................................................... 22,986 -- 233
Proceeds from partnership distributions .......................................... 3,347 -- --
Release of (investment in) restricted cash ....................................... (1,569) 556 (251)
Investment in unconsolidated subsidiaries ........................................ -- (893) (400)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES .............................................. (30,397) (26,056) (31,913)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption of SBA debentures ......................... -- 941 15,000
Proceeds from issuance of notes payable ......................................... -- -- 10,000
Proceeds from issuance of common stock .......................................... 5,475 2,834 1,399
Proceeds from issuance of preferred stock ....................................... -- -- 2,000
Proceeds from unconsolidated subsidiary ......................................... -- 37,803 --
Proceeds from revolving credit facility ......................................... 8,300 -- --
Payment on revolving credit facility ............................................ (8,300) -- --
Payment of dividends on common stock ............................................ (13,197) (11,935) (11,189)
Payment of dividends on preferred stock ......................................... (250) (250) (204)
Payment of SBA debentures ....................................................... (3,280) -- --
Advances from (to) unconsolidated affiliates, net ............................... (1,004) 1,114 357
Payment of issuance costs on notes and debentures ............................... (443) (80) (447)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................................ (12,699) 30,427 16,916
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... (32,515) 18,443 (2,122)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................................... 50,017 31,574 33,696
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................................. $ 17,502 $ 50,017 $ 31,574
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ................................................................... $ 5,631 $ 5,433 $ 4,648
======== ======== ========
Dividends reinvested ............................................................ $ 963 $ 880 $ 777
======== ======== ========
Loans receivable acquired in exchange for SBA debentures ........................ $ -- $ 158 $ 2,109
======== ======== ========
Reclassification from loans receivable to real property owned ................... $ 203 $ 453 $ 65
======== ======== ========
Loans to facilitate sale of real property owned ................................. $ -- $ -- $ 85
======== ======== ========
Loans contributed to unconsolidated subsidiary, net ............................. $ -- $ 45,145 $ --
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE> 79
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
PMC Capital, Inc. ("PMC" or "PMC" Capital") is a diversified, closed-end
management investment company that has elected to operate as a business
development company under the Investment Company Act of 1940 (the "1940 Act").
PMC engages in the business of originating loans to small businesses either
directly or through its three principal subsidiaries: First Western SBLC, Inc.
("First Western"), PMC Investment Corporation ("PMIC") and Western Financial
Capital Corporation ("Western Financial"). First Western, PMIC and Western
Financial are registered under the 1940 Act as diversified, closed-end
management investment companies. In addition, PMC is either directly or
indirectly the sole shareholder or partner of PMC Advisers, LTD ("PMC
Advisers"), PMC Funding Corp. ("PMC Funding"), PMC Capital Corp. 1996-A ("PMC
Capital Corp."), PMC Trust 1996-A and PMC Capital Limited Partnership ( the
"Partnership"). PMC has elected to be taxed as a regulated investment company
and distributes substantially all of its taxable income as dividends to
shareholders.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PMC and its wholly
owned regulated investment company subsidiaries (collectively, the "Company").
Intercompany transactions have been eliminated in consolidation.
The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A
and the Partnership are accounted for by the equity method of accounting in
conformity with Federal securities laws.
CONSOLIDATED SUBSIDIARIES
First Western is a small business lending company ("SBLC") that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration ("SBA") pursuant to its Section 7(a) Program (the "SBA 7(a)
Program"). The eligibility requirements of the SBA 7(a) Program vary by the
industry of the borrower and other factors.
PMIC is a licensed specialized small business investment company ("SSBIC") under
the Small Business Investment Act of 1958, as amended ("SBIA"). PMIC uses
long-term funds provided by the SBA, together with its own capital, to provide
long-term 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 or variable 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 is reduced
through an SBA subsidy by 3% during the first five years) and preferred stock.
Western Financial is a licensed small business investment company ("SBIC") under
the SBIA that provides long-term loans to borrowers whether or not they qualify
as "disadvantaged". The interest rates on loans originated by PMIC are either
fixed or variable 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 SBA 7(a) Program or SBIC programs.
UNCONSOLIDATED ENTITIES
PMC Advisers, organized in 1993, is a registered investment advisor under the
Investment Advisers Act of 1940 which acts as the investment advisor for PMC
Commercial Trust ("PMC Commercial" or the "Trust"), a Texas real estate
investment trust and an affiliate of PMC Capital.
F-12
<PAGE> 80
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PMC Funding is a Florida corporation that holds assets on behalf of the Company.
PMC Capital is the sole shareholder of PMC Funding.
The Partnership was formed as a Delaware limited partnership in November 1996 to
act as a special purpose affiliate of the Company. The Partnership was
established to acquire loans from the Company and to issue fixed-rate debt
through a private placement.
PMC Capital Corp. is a Delaware corporation formed in November 1996 to be the
independent trustee of the general partner of the Partnership. PMC Trust 1996-A
is a Delaware business trust formed in November 1996 to be the general partner
of the Partnership.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
VALUATION OF INVESTMENTS
Loans Receivable: Loans receivable are carried at the Board of Directors'
estimate of fair value. The Board of Directors has estimated the fair value of
loans receivable to approximate the amortized costs of the loans, unless there
is doubt as to the realization of the loan (a "Problem Loan"). A valuation
reserve is established for a Problem Loan based on the creditor's payment
history, collateral value, guarantor support and other factors.
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 60 days. If a loan or a portion of a loan is classified as doubtful or
is partially reserved or charged-off, the loan is classified as non-accrual.
Loans that are on a current payment status or past due less than 60 days may
also be classified as non-accrual if repayment in full of principal and/or
interest is in doubt.
Deferred fees consist of non-refundable fees less direct loan origination costs.
These fees are being recognized over the expected life of the related loan as an
adjustment of yield.
When selling the SBA-guaranteed portion of loans, the basis of the retained
portion of the loans has been reduced by the differential between the face
amount of the unguaranteed portion of the loans and the value as determined in
accordance with the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") 88-11. This difference being the Retained Loan
Discount. At the time of sale, premium income has been reduced by the Retained
Loan Discount. Unless the underlying loans are paid in full or sold, the
Retained Loan Discount is amortized over the life of the underlying loan based
on an effective yield method. When a loan is prepaid, the remaining Retained
Loan Discount is recognized as an increase to interest income. When a loan is
sold, the remaining Retained Loan Discount is included as a reduction to the
basis of the retained portion of the underlying loan as a reduction of cost.
Interest-only Strip Receivable and Servicing Asset: Effective January 1, 1997,
the Company prospectively adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." SFAS No. 125 provides for the accounting
and reporting of transfers and servicing of financial assets based on a
financial-components approach.
The transfer of assets that qualifies for sale treatment under SFAS No. 125 is
generally accounted for by the seller by: (i) derecognizing all assets sold,
(ii) recognizing all assets obtained and liabilities incurred at their relative
fair value, and (iii) recognizing all assets retained at their allocated
previous carrying amount based on relative fair values. The Company typically
receives cash and retains the right to receive contractual servicing fees and
the right to receive future interest income on loans sold that exceed the
contractually specified servicing fee (the interest-only strip receivable) in
exchange for a portion of the
F-13
<PAGE> 81
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
loan, typically the guaranteed portion of an SBA 7(a) loan. The difference
between (i) the carrying value of the portion of loans sold and (ii) the sum of
(a) cash received, (b) the relative fair values of the servicing rights and (c)
the interest-only strip receivable retained, constitutes the gain on sale.
SFAS No. 125 also requires that amounts carried previously as excess servicing
assets be reclassified to a servicing asset and an interest-only strip
receivable, as defined. Accordingly, the Company reclassified its excess
servicing asset (net of an allowance for credit losses on loans sold) of
$4,896,000 at December 31, 1996 to $1,753,000 of a servicing asset and
$3,143,000 of an interest-only strip receivable.
In accordance with SFAS No. 125, the servicing asset is amortized in proportion
to and over the period of estimated net servicing income and is evaluated for
impairment by stratifying the servicing assets by one or more of the predominant
risk characteristics of the underlying financial assets. The interest-only strip
receivable is accounted for as an investment in debt securities classified as
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 an
updated IRR based on the recorded interest-only strip receivable during the
following quarter. 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 market value.
In addition, commencing with the first quarter of 1997 and for each quarter
thereafter, the Company measures the fair value of the interest-only strip
receivable based upon the future anticipated cash flows discounted to reflect
the current market interest rates for investments of this type. Any appreciation
(depreciation) of the interest-only strip receivable is reflected on the
accompanying consolidated statements of income as an unrealized gain (loss) on
investment. During the year ended December 31, 1997, there was a valuation
reserve of $300,000 related to the interest-only strip receivable recognized
with a corresponding $300,000 unrealized loss on investment.
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, accordingly total income during the
period of change and subsequent periods would be reduced. If prepayments occur
slower than anticipated, cash flows would exceed estimated amounts and total
income during the period of change and subsequent periods would be enhanced.
During the year ended December 31, 1997 as compared to the prior year, the
amount of amortization of the servicing asset was increased as a result of
increased prepayment speeds.
Real Property Owned: Real property owned is carried at the Board of Directors'
estimate of fair value, based upon appraisals and other factors.
Cash equivalents: Cash equivalents are carried at value, which approximates
cost.
VALUATION OF DEBT
Debt incurred by the Company is valued at cost.
F-14
<PAGE> 82
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are carried at their value, which
is cost less accumulated depreciation and amortization. Depreciation and
amortization is computed using accelerated and straight-line methods, with
estimated useful lives ranging from five to 15 years.
NET UNREALIZED DEPRECIATION ON INVESTMENTS
Included in net unrealized depreciation on investments is valuation allowances
for loans receivable and the interest-only strip receivables.
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gains or losses are measured by the difference between the proceeds
from the sale and the cost basis of the investment, without regard to unrealized
gains and losses previously recognized. The gain or loss calculated also
includes loans written-off or charged-down during the year and recoveries of
loans written-off or charged-down in prior years.
Other changes in the value of investments are included as changes in the
unrealized appreciation (depreciation) on investments in the statements of
income.
Realized gains on the sale of the unguaranteed portion of SBA loans are
recognized based upon the difference between the sales price as adjusted for the
value of the anticipated future cash values (as reduced by the effect of future
credit losses) and the carrying value of the assets (including the Retained Loan
Discount).
INTEREST INCOME
Interest income includes income on loans and the yield on the interest-only
strip receivables. Interest income is accrued as earned and the accrual of
interest is generally suspended when the related loan becomes 60 days past due
("Non-accrual Loan"). Interest income on a Non-accrual Loan is recognized on the
cash basis.
PREMIUM INCOME
For loans originated by the SBLC, gain on the sale of the SBA guaranteed portion
of such loans to the secondary market has been adjusted to reflect a normal
service fee for the future servicing rights retained by the Company. Premium
income represents the differential between the value attributable to the sale of
a loan to the secondary market and the principal balance (cost) of the loan in
accordance with EITF 88-11. The sale price includes the value attributable to
any excess servicing spread retained by the Company plus any cash received.
DEFERRED CHARGES
Costs incurred in connection with the issuance of SBA debentures and notes
payable are included in deferred charges, deposits and other assets. These costs
are amortized over the life of the related obligation.
FEDERAL INCOME TAXES
The Company has elected to be treated as a regulated investment company by
meeting certain requirements of the Internal Revenue Code relating to the
distribution of its net investment income to shareholders. Thereby the Company
incurs no Federal income tax liability on such income. Based on its status as a
regulated investment company, the Company may elect to retain, deem to
distribute or distribute, in whole or in part, net long-term capital gains
realized on the disposition of its investments.
Any dividends declared by the Company in October, November or December of any
calendar year, payable to shareholders of record on a specified date in such
month and actually paid during January of the following year, may be treated as
if it were received by the shareholders on December 31 of the year declared.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
F-15
<PAGE> 83
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents for purposes of the
consolidated statement of cash flows.
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.
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.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to current year
presentation.
NOTE 2. LOANS RECEIVABLE:
Loans receivable consist primarily of loans made under SBIC, SSBIC and SBLC
programs established by the SBA and financings to businesses outside of the SBA
loan programs.
As an SBLC, First Western originates loans which are partially guaranteed by the
SBA and which are collateralized generally, with first liens on real and/or
personal property of the borrower. The SBA guarantees repayment of up to 90% of
the principal amount of the loans originated by First Western. First Western
sells, without recourse, the guaranteed portion of its loans into the secondary
market ("SBA Guaranteed Sales") while retaining the rights to service the loans.
Funding for the SBA 7(a) Program depends on the annual appropriations by the
U.S. Congress. At December 31, 1997, included in loans receivable are
approximately $4.5 million which represents the guaranteed portion of First
Western loans available for sale.
The principal balance of the loans serviced on behalf of third parties by First
Western was approximately $133.7 million and $137.7 million at December 31, 1997
and 1996, respectively.
First Western's loans: (i) generally range in original principal amount from
$50,000 to $1,100,000, (ii) provide for a variable rate of interest based on
1.0% to 2.75% above the then prevailing prime rate, (iii) have a term of seven
to 25 years, (iv) may be prepaid without penalty and (v) require monthly
payments covering accrued interest and amortization of principal based in part
on the remaining useful life of the assets collateralizing the loans and on the
borrowers' use of loan proceeds.
PMIC and Western Financial originate loans that are payable in monthly
installments of principal and interest based upon four to 20 year amortization
periods, with the balance due at maturity. These loans are collateralized with
first liens on real and/or personal property and are generally guaranteed by the
principals of the borrower.
PMC originates loans to borrowers on a non-SBA supported basis, using similar
criteria for loans that are funded under the SBA programs utilized by its three
principal subsidiaries. These loans are: (i) to borrowers who exceed the
eligibility requirements of the 7(a) Program or SBIC programs, (ii) payable in
monthly installments of principal and interest based upon four to 25 year
amortization periods, with the balance due at maturity, (iii) generally
collateralized by real estate and/or equipment and (iv) are generally guaranteed
by the principals of the borrower.
F-16
<PAGE> 84
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LOANS RECEIVABLE: (CONTINUED)
The Company's portfolio of investments consists of loans to borrowers located
principally in the southern portion of the United States. The most significant
concentration of loans were to borrowers in Texas, Florida and Georgia, as noted
below:
<TABLE>
<CAPTION>
Percentage of Loan Portfolio
State December 31,
----- ----------------------------
1997 1996
---- ----
<S> <C> <C>
Texas 33% 38%
Georgia 9% 11%
Florida 8% 13%
Other 50% 38%
---- ----
100% 100%
==== ====
</TABLE>
The activity in net unrealized depreciation on loans receivable is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Balance, beginning of period ...... $ 435,000 $ 467,000
Provision for losses .............. 242,000 182,000
Loans written-off ................. (183,000) (214,000)
--------- ---------
Balance, end of period ............ $ 494,000 $ 435,000
========= =========
</TABLE>
Loans receivable with an aggregate retained balance of $1.5 million and $1.0
million were greater than 60 days past due, litigation against the borrowers has
commenced, or the loans are in the process of liquidation at December 31, 1997
and 1996, respectively.
At December 31, 1997 and 1996, the recorded investment in loans identified as
impaired in accordance with SFAS No. 114 totaled $3.1 million and $1.0 million,
respectively. Of this total, at December 31, 1997 and 1996, approximately $1.9
million and $80,000 respectively, related to loans with no valuation reserve,
since the estimated fair value of the collateral for each loan exceeds the
respective loan balance. Approximately $1.2 million and $900,000 of these loans
at December 31, 1997 and 1996, have a corresponding valuation allowance of
$472,000 and $412,000, respectively. At December 31, 1997 and 1996, the Company
has recognized $22,000 and $23,000 in valuation allowances on identified problem
loans of $95,000 and $317,000, respectively, which were not deemed impaired. The
Company did not recognize any material amount of interest on impaired loans
during the portion of the period that they were impaired. Had these impaired
loans performed in accordance with their original terms, interest income of
approximately $264,000 and $113,000, respectively, would have been recognized
during the years ended December 31, 1997 and 1996.
In addition to the SBA Guaranteed Sales, First Western sells through separate
transactions, the unguaranteed portion of certain of its originated loans
through private placements ("SBA Unguaranteed Sales"). First Western retains the
right to service all such loans. The guaranteed portions are sold to either
dealers in government guaranteed loans or institutional investors and certain of
the unguaranteed portions have been sold in privately negotiated transactions
between First Western and the purchasers.
During the year ended December 31, 1996, PMC Capital contributed approximately
$45.7 million (aggregate principal balance due, including $34.4 million in loans
transferred from PMIC and Western Financial to PMC Capital) of loans to the
Partnership without recourse (see Note 15). At December 31, 1997, the remaining
principal balance outstanding on those loans was $34.3 million.
NOTE 3. SERVICING ASSET AND PREMIUM INCOME:
By retaining the right to service the loan, First Western earns an interest rate
spread equal to the difference between the interest rate on the loan and the
interest rate paid to the purchaser on the sold portion (this difference being
the "Servicing Spread"). On SBA Guaranteed Sales, First Western or PMC
recognizes premium income by receiving either a cash premium, an excess
servicing right on the sale or a combination of these elements. On SBA
Guaranteed Sales that involve receiving the maximum
F-17
<PAGE> 85
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SERVICING ASSET AND PREMIUM INCOME: (CONTINUED)
premium, First Western retains the minimum Servicing Spread of 1% required by
SBA regulations ("SBA Minimum Servicing"). When receiving the maximum premium,
PMC or First Western recognizes as premium income the difference between the
amount received from the purchaser and the aggregate of the outstanding
principal amount of the guaranteed portion plus any value of the Servicing
Spread in excess of normal servicing fees (the "Excess Servicing Spread").
On SBA Guaranteed Sales, First Western recognizes premium income equal to the
value of the Excess Servicing Spread, plus the difference, if any, between the
amount received from the purchaser and the outstanding principal amount of the
guaranteed portion sold as valued in accordance with EITF 88-11.
The Board of Directors estimates the value of the Excess Servicing Spread based
upon various factors including premiums realized on comparable transactions in
the secondary market with a 1% servicing fee being retained, comparable market
bids with normal servicing rates on SBA loans and the likelihood of prepayment.
The value of the Excess Servicing Spread is recognized as premium income at the
time of the sale and is concurrently capitalized as an asset on the Company's
balance sheet as the Servicing Asset and the interest only strip receivable.
The activity in the servicing asset is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Aggregate balance, beginning of year ...... $ 1,753,000 $ 7,514,000 $ 7,694,000
Aggregate additions, net of allowances .... 328,000 707,000 791,000
Amortization, net ......................... (474,000) (1,792,000) (971,000)
----------- ----------- -----------
1,607,000 6,429,000 7,514,000
Reclassifications pursuant to SFAS No. 125:
Valuation reserves .................. -- (1,533,000) --
Allocation to interest-only
strip receivables ................ -- (3,143,000) --
----------- ----------- -----------
Aggregate balance, end of year ............ $ 1,607,000 $ 1,753,000 $ 7,514,000
=========== =========== ===========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT:
At December 31, 1997 and 1996, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Furniture and equipment ............. $392,000 $319,000
Leasehold improvements .............. 150,000 150,000
Automobiles ......................... 13,000 13,000
-------- --------
555,000 482,000
Less: accumulated depreciation ..... 318,000 301,000
-------- --------
$237,000 $181,000
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was approximately $59,000, $49,000 and $57,000, respectively.
NOTE 5. NOTES PAYABLE:
PMC has a $15 million uncollateralized revolving credit facility which expires
May 1998. Advances pursuant to the credit facility bear interest at the
Company's option at the bank's prime rate less 50 basis points or the London
Interbank Offering Rate (LIBOR) plus 175 basis points. The credit facility
requires the Company to meet certain covenants, the most restrictive of which
includes that the ratio of net charge-offs to net loans receivable will not
exceed 2%, and the ratio of assets to senior debt (as defined in the note
agreement) will not fall below 150%. At December 31, 1997 and 1996, the Company
had no amounts outstanding pursuant to this credit facility and the Company was
in compliance with all covenants of this facility.
F-18
<PAGE> 86
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. NOTES PAYABLE: (CONTINUED)
PMC has $35 million in outstanding debt pursuant to private placements of
uncollateralized notes. These borrowings have been utilized to fund commitments
of the non-SBA lending program. The notes require the Company to meet certain
covenants (terms are as defined in the applicable note agreement), the most
restrictive of which require; (i) that net loans receivable exceed 150% of
senior funded debt, (ii) the increase in the Company's loan valuation reserve
for any 12 month period must not exceed 3% of net loans receivable and (iii) the
Company's consolidated earnings plus interest expense must exceed 150% of
interest expense. At December 31, 1997, the Company was in compliance with all
of the covenants of these notes. At December 31, 1997 and 1996 outstanding
uncollateralized notes were as follows:
<TABLE>
<CAPTION>
Interest Final
Date Rate Amount Maturity
- ----------------- -------------- ----------- -----------------
<S> <C> <C> <C>
July 19, 1993 7.20% $20,000,000(2) July 19, 2001
December 15, 1993 6.97% 5,000,000 December 15, 2002
April 19, 1995 8.60% 5,000,000 April 19, 2003
April 19, 1995 LIBOR +1.3% (1) 5,000,000 April 19, 2004
-----------
$35,000,000
===========
</TABLE>
(1) Reset quarterly, 7.08% at December 31, 1997.
(2) Payable in three equal annual installments commencing July 19, 1999.
Principal payments required on the notes at December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
- ----------------- -----------
<S> <C>
1998 $ --
1999 6,666,667
2000 6,666,667
2001 6,666,666
2002 5,000,000
2003 5,000,000
2004 5,000,000
-----------
$35,000,000
===========
</TABLE>
NOTE 6. SBA DEBENTURES PAYABLE:
Debentures payable represent amounts due to the SBA as a result of borrowing
made pursuant to the SBIA.
At December 31, 1997, the maturities, interest rates and principal payments on
the SBA debentures were as follows:
<TABLE>
<CAPTION>
Maturity Date (1) Interest Rate Amount
-------------------------- ---------------- -----------
<S> <C> <C>
February 1, 1998 (2) 8.850% $ 1,500,000
August 18, 1999 8.125% 1,000,000
September 1, 1999 8.800% 2,500,000
December 1, 1999 (3) 8.600% 650,000
January 2, 2000 7.875% 3,000,000
March 1, 2000 9.350% 1,000,000
June 1, 2000 (3) 9.300% 300,000
</TABLE>
F-19
<PAGE> 87
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. SBA DEBENTURES PAYABLE: (CONTINUED)
<TABLE>
<S> <C> <C>
June 1, 2000 9.300% 2,000,000
June 1, 2000 (4) 9.300% 1,030,000
September 1, 2000 9.600% 4,310,000
December 1, 2002 (3) 7.510% 510,000
September 1, 2004 (5) 5.200% 3,000,000
September 1, 2004 8.200% 3,000,000
March 1, 2005 (6) 4.840% 3,000,000
June 1, 2005 (7) 3.690% 5,000,000
September 1, 2005 (8) 3.875% 7,000,000
September 1, 2006 7.590% 2,490,000
-----------
$41,290,000
===========
</TABLE>
(1) During 1997, the Company paid off $3,280,000 in
debentures payable at their maturity. Total debentures
outstanding at December 31, 1996 were $44,570,000.
(2) Paid off in February 1998.
(3) During April 1995, the Company assumed $2,260,000 in SBA
debentures from a non-affiliated small business
investment corporation in exchange for loans receivable
of $2,109,062 and cash of $150,938. The loans acquired
were initially originated by the Company and a portion
sold to the non-affiliated small business investment
corporation. All of these loans were purchased at par and
were performing according to their terms at the time of
reacquisition.
(4) During May 1996, the Company assumed $1,030,000 in SBA
debentures from a non-affiliated SBIC in exchange for
loans receivable of approximately $200,000 and cash of
approximately $900,000. The loans acquired were initially
originated by the Company and a portion sold to the
non-affiliated SBIC. All of these loans were purchased at
par and were performing according to their terms at the
time of reacquisition.
(5) The interest rate will increase to 8.200% in September
1999 until maturity.
(6) The interest rate will increase to 7.840% in March 2000
until maturity.
(7) The interest rate will increase to 6.690% in June 2000
until maturity.
(8) The interest rate will increase to 6.875% in September
2000 until maturity.
NOTE 7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
During 1991, the Company entered into an agreement to lease its corporate office
space for a 15 year period from a corporation, a majority of whose principals
are officers and directors of the Company. Leasehold improvements of $150,000
have been paid to the corporation for costs incurred during the build-out of the
leased premises. The lease has been amended to allow the Company to terminate
such lease without penalty upon 60 days written notice to the corporation. The
Company has also entered into agreements to lease additional space in the same
building for one year periods.
The independent members of the Board of Directors decide on an annual basis
whether PMC will continue the leases and the annual lease payment.
At December 31, 1997, the Company has additional agreements to lease office
space in Hollywood,Florida; Phoenix, Arizona; and Atlanta, Georgia.
F-20
<PAGE> 88
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Rental expense amounted to approximately $229,000, $213,000 and $203,000 during
the years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease payments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
- ------------ ----------
<S> <C>
1998 $ 219,000
1999 219,000
2000 204,000
2001 203,000
2002 203,000
Thereafter 812,000
----------
$1,860,000
==========
</TABLE>
LOAN COMMITMENTS
Loan commitments outstanding at December 31, 1997, to various prospective small
business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $49.6 million. Of these
commitments, $17.1 million are for loans to be originated by First Western, a
portion of which will be sold pursuant to SBA Guaranteed Sales. These
commitments are made in the ordinary course of the Company's business and in
management's opinion, are generally on the same terms as those to existing
borrowers. Commitments to extend credit are agreements to lend to a customer
provided that the terms established in the contract are met. Commitments
generally have fixed expiration dates and require payment of a fee. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain of its officers and/or
employees for terms expiring June 2000. Annual remuneration during the term of
the contracts do not exceed $315,000. Future minimum payments under these
contracts are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ -----------
<S> <C>
1998 $ 1,512,000
1999 1,468,000
2000 825,000
-----------
$ 3,805,000
===========
</TABLE>
During the years ended December 31, 1997, 1996 and 1995 compensation to officers
was approximately $1,639,000, $1,382,000, and $1,229,000, respectively.
LITIGATION
In the normal course of business, the Company is subject to various proceedings
and claims, the resolution of which will not, in management's opinion, have a
material adverse effect on the Company's consolidated financial position or
results of operations.
NOTE 8. CREDIT AND INTEREST RATE RISK:
In connection with First Western's structured sale of $22.8 million of
unguaranteed SBA loans during 1997 and a 94% portion of certain unguaranteed SBA
loans during 1994 for proceeds of $24.8 million, the Company is subject to
credit risk. Pursuant to the structured sales, the investors' protection from
losses is provided by: (i) the subordination of the Company's right to receive
payment on loans receivable aggregating approximately $1.6 million at the time
of sale ($600,000 at December 31, 1997), (ii) the subordination of the
interest-only strip receivable related to the Company's right to receive the
Servicing Spread
F-21
<PAGE> 89
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CREDIT AND INTEREST RATE RISK: (CONTINUED)
on those loans sold in the securitizations ($1,157,000 at December 31, 1997,
included in interest-only strip receivable on the accompanying balance sheet)
and (iii) cash deposits provided by the Company. At December 31, 1997,
approximately $2,594,000 of cash deposits held in interest bearing accounts were
restricted.
Impairment of the interest-only strip receivable is measured based on its fair
value. In measuring impairment at December 31, 1997 and 1996, the servicing
portfolio was evaluated based upon the predominant risk characteristics which
the Company has determined to be prepayment and payment default risks. The
Company evaluated the serviced portfolio for both the interest-only strip
receivable related to SBA Guaranteed Sales and related to the sale of the
unguaranteed portion of SBA loans in 1994 and 1997 (the "SBA Unguaranteed
Sales"). Based upon current prepayment assumptions, estimates of default rates
and a discount factor considering the current interest rate environment, the
Company has provided for an unrealized loss and corresponding valuation
allowance of $300,000 on the interest-only strip receivable.
In connection with the Company's investment in the Partnership, all payments of
principal and interest on the loans contributed to the Partnership are to be
deposited with the trustee and are used to pay the noteholders the required
monthly principal and interest then due on the notes pursuant to the Trust
Indenture (as defined below) prior to releasing any excess funds to the
Partnership free and clear of the Trust Indenture. The Partnership's obligations
to the noteholders are also collateralized by: (i) the differential between the
outstanding principal balance remaining due on the underlying loans held by the
Partnership and the balance due the noteholders, (ii) the reserve account
established to provide liquidity to the noteholders ( the "Reserve Account") and
(iii) money held in the operating accounts of the Partnership to the extent they
are restricted pursuant to the terms of the trust indenture established by the
noteholders, the Company and the Partnership (the "Trust Indenture"). The Trust
Indenture provides for several covenants which would require, under certain
circumstances, that the excess cash , after payment of the required principal
and interest to the Partnership Noteholders (the "Excess Cash"), be retained in
the Reserve Account until the covenants are in compliance. Of the assets of the
Partnership at December 31, 1997, approximately $245,000 was Excess Cash which
was distributed to the Partners in January 1998.
The Company has a fundamental policy that requires investment of at least 25% of
its total assets in the lodging industry, and allows investment of up to 100% of
total assets in this industry. At December 31, 1997 and 1996, loans to
businesses in the lodging industry comprised 59% and 44% of its total assets,
respectively, and 77% and 77% of its loans receivable, net, respectively. There
can be no assurance that the Company will continue to experience the positive
results it has historically achieved from these lending activities or that
market conditions will enable the Company to maintain or increase this level of
loan concentration. Any economic factors that negatively impact the lodging
industry could have a material adverse effect on the business of the Company.
Additionally, loans to businesses located in Texas, Georgia and Florida
currently comprise approximately 33%, 9% and 8% of the Company's outstanding
loan portfolio, respectively. A decline in economic conditions in any of these
states may adversely affect the Company.
Net income of the Company is effected by the spread between the rate at which it
borrows funds and the rate at which it loans these funds. A significant portion
of the portfolios of PMC Capital, Western Financial and PMIC have typically been
long-term and at fixed rates and the borrowed funds of these companies are
typically long-term and at fixed rates. PMIC, WFCC and PMC have also originated
variable-rate loans. It is anticipated that the variable-rate loans originated
by PMIC, WFCC and PMC will be part of a structured financing or securitization
and sale which would be completed with a variable interest rate. First Western
originates variable-rate loans and has utilized equity capital of PMC Capital
and structured sales of loans 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.
F-22
<PAGE> 90
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CUMULATIVE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY:
PMIC has outstanding 30,000 shares of $100 par value, 3% cumulative preferred
stock (the "3% Preferred Stock") and 40,000 shares of $100 par value, 4%
cumulative preferred stock (the "4% Preferred Stock"). The 3% Preferred Stock
and the 4% Preferred Stock (collectively the "Preferred Stock") are held by the
SBA pursuant to the SBIA.
PMIC is entitled to redeem, in whole or in part, the 3% Preferred Stock by
paying 35% of the par value of these securities plus dividends accumulated and
unpaid on the date of redemption. While the 3% Preferred Stock may be redeemed,
redemption is not mandatory. Dividends of approximately $90,000 on the 3%
Preferred Stock were recognized during each of the years ended December 31,
1997, 1996 and 1995.
The 4% Preferred Stock was issued during 1994 ($2,000,000) and 1995
($2,000,000), and must be redeemed at par no later than 15 years from the date
of issuance. Dividends of approximately $160,000, $160,000 and $132,000 were
recognized on the 4% Preferred Stock during the years ended December 31, 1997,
1996 and 1995, respectively.
Neither series of Preferred Stock has any preemptive or conversion rights. The
Preferred Stock provides for a liquidation preference in the amount of $100 per
share plus accrued and unpaid dividends.
NOTE 10. SHAREHOLDERS' EQUITY:
The Company has a dividend reinvestment and cash purchase plan (the "Plan") for
up to 1,000,000 shares of common stock. As amended, effective March 1998,
participants in the Plan have the option to reinvest all or a portion of
dividends received plus an optional cash purchase of up to $5,000 per month. The
purchase price of the shares is 98% of the average of the high and low price of
the common stock as published for the five trading days immediately prior to the
dividend record date or prior to the optional cash payment purchase date,
whichever is applicable. During the years ended December 31, 1997, 1996 and
1995, the Company issued 468,706; 291,042; and 187,005 shares of common stock
pursuant to the Plan for proceeds (through cash and the reinvestment of
dividends) of approximately $6.4 million; $3.7 million; and $2.2 million,
respectively.
NOTE 11. 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 year ended
December 31, 1997 since the stock options were anti-dilutive. Earnings are
defined as the net operating income and realized and unrealized gain (loss) on
investments and are reduced by the preferred stock dividend requirements of
PMIC. Preferred stock dividend requirements were approximately $250,000;
$250,000 and $222,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. The weighted average number of shares used in the computations of
basis earnings per common share were 11.4 million, 11.0 million and 10.8 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 12. BORROWER ADVANCES:
The Company finances several projects during the construction phase. At December
31, 1997, the Company was in the process of funding approximately $13.6 million
in construction projects, of which $4.6 million in funding remained. As part of
the monitoring process to verify that the borrowers' cash equity is utilized for
its intended purpose, the Company deposits amounts received from the borrowers
and releases the funds upon presentation of appropriate supporting
documentation. The Company had approximately $1.7 million and $1.8 million in
funds held on behalf of borrowers at December 31, 1997 and 1996, respectively,
which is included as a liability in the accompanying consolidated balance
sheets.
NOTE 13. PROFIT SHARING PLAN:
The Company has a profit sharing plan available to its full-time employees after
one year of employment. Vesting increases ratably to 100% after the sixth year
of employment. Pursuant to the profit sharing plan, the Company has expensed
approximately $243,000, $217,000 and $188,000 during the years ended December
31, 1997, 1996 and 1995, respectively. Contributions to the profit sharing plan
are at the discretion of the Board of Directors.
F-23
<PAGE> 91
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. RELATED PARTY TRANSACTIONS:
Pursuant to agreements between PMC Capital and its wholly owned subsidiaries,
during the three years ended December 31, 1997, PMC provided certain services to
the subsidiaries at no cost. These services and costs include salaries, rent and
other general corporate expenses. However, PMC retains all cash premiums on
First Western's SBA Guaranteed Sales ($1,991,000, $1,937,000 and $2,927,000
during the years ended December 31, 1997, 1996 and 1995, respectively) as
compensation for these services and for working capital provided by PMC Capital
to First Western.
During December 1993, PMC Advisers entered into an investment management
agreement with the Trust. The officers and certain trust managers of the Trust
are officers and directors of PMC. Pursuant to its agreement with PMC Advisers,
through June 30, 1996 the Trust paid PMC Advisers a base annual servicing fee of
0.50% of the average assets (as defined in the agreement) of the Trust under
management plus an advisory fee of 1% of the average invested assets (as defined
in the agreement ) of the Trust. In addition, through June 30, 1996, PMC
Advisers earned an advisory fee up to 1% of the average invested assets upon
meeting certain criteria in regards to investment returns to the Trust
shareholders. All such advisory fees were reduced by 50% with respect to the
value of average invested assets that exceed the beneficiaries' equity of the
Trust as a result of leverage or the issuance of preferred shares.
Effective July 1, 1996, the Investment Management Agreement was amended to
include compensation to PMC Advisers for its assistance in any issuance of debt
or equity securities for PMC Commercial. Such compensation includes a consulting
fee based on (i) 12.5% of any offering fees incurred by PMC Commercial pursuant
to the public offering or private placement of its common shares, and (ii) 50%
of any issuance or placement fees incurred by PMC Commercial pursuant to the
public offering or private placement of its debt securities or preferred shares
of beneficial interest. Of the amount of servicing and advisory fees paid or
payable to PMC Advisers for the year ended December 31, 1996, approximately
$251,000 was earned pursuant to a public offering of common shares by PMC
Commercial in July 1996.
Pursuant to the amended Investment Management Agreement, the quarterly servicing
and advisory fee (the "Base Fee") is based on the assets and capital structure
of PMC Commercial. As defined in the Investment Management Agreement, the Base
Fee is the sum of (i) 0.4167% (1.67% on an annual basis) of the lesser of (a)
the average quarterly value of common equity capital or (b) the average
quarterly value of all invested assets and (ii) 0.21875% (0.875% on an annual
basis) of the difference between the average quarterly value of all invested
assets and the average quarterly value of common equity capital. For purposes of
calculating the Base Fee, the average quarterly value of common equity capital
was not increased by the proceeds received from any public offering of common
shares by PMC Commercial (other than pursuant to its dividend reinvestment plan
or any employee/trust manager benefit plan) during the 180 calendar day period
immediately following such public offering. In no event will the aggregate
annual fees charged under the new agreement be greater than that which would
have been charged had there been no revision to the Investment Management
Agreement.
Pursuant to the applicable investment management agreement between PMC Advisers
and PMC Commercial, PMC Advisers earned $1.6 million, $1.6 million and $1.2
million during the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 15. UNCONSOLIDATED WHOLLY OWNED ENTITIES:
As described in Note 1, PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust
1996-A and the Partnership are accounted for under the equity method of
accounting. The condensed balance sheet and income statement, as applicable, for
each of the entities on an individual basis are provided below (rounded to the
nearest thousand).
F-24
<PAGE> 92
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)
PMC ADVISERS
The following is the condensed balance sheet for PMC Advisers as of December 31,
1997 and 1996 and the condensed statements of income for the years ended
December 31, 1997, 1996 and 1995:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................. $ 19,000 $ 63,000
Due from affiliates, net ................... 371,000 649,000
Other assets ............................... 8,000 7,000
-------- --------
$398,000 $719,000
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Due to parent ......................... $210,000 $395,000
Deferred fee revenue .................. 150,000 286,000
Other liabilities ..................... 12,000 12,000
-------- --------
372,000 693,000
-------- --------
SHAREHOLDER'S EQUITY:
Common stock .......................... 1,000 1,000
Additional paid-in capital ............ 25,000 25,000
-------- --------
26,000 26,000
-------- --------
$398,000 $719,000
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Management fee ........... $1,622,000 $1,562,000 $1,190,000
Other income ............. 4,000 14,000 55,000
---------- ---------- ----------
Total income .......... 1,626,000 1,576,000 1,245,000
---------- ---------- ----------
EXPENSES:
General and administrative 1,603,000 1,572,000 1,242,000
Other .................... 23,000 4,000 3,000
---------- ---------- ----------
Total expenses ........ 1,626,000 1,576,000 1,245,000
---------- ---------- ----------
NET INCOME ............ $ -- $ -- $ --
========== ========== ==========
</TABLE>
PMC Capital allocates overhead to PMC Advisers to the extent that PMC Advisers
utilizes the staff and facilities of PMC Capital. The overhead allocated during
the years ended December 31, 1997, 1996 and 1995, was $1,603,000, $1,571,000 and
$1,190,000, respectively. These amounts are included in Other income, net, on
the accompanying consolidated statements of income. In no event will the
allocated expenses exceed the income available from the operations of PMC
Advisers.
F-25
<PAGE> 93
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)
PMC FUNDING CORP.
The following is the condensed balance sheet for PMC Funding Corp. as of
December 31, 1997 and 1996 and the condensed statements of income for the years
ended December 31, 1997, 1996 and 1995:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................... $ 18,000 $ 81,000
Property and equipment ......................... 625,000 628,000
Investment in real property .................... 467,000 --
Other assets ................................... 7,000 26,000
----------- -----------
$ 1,117,000 $ 735,000
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Due to parent ............................. $ 1,072,000 $ 642,000
----------- -----------
SHAREHOLDERS EQUITY:
Common stock and additional paid-in capital 451,000 451,000
Accumulated deficit ....................... (406,000) (358,000)
----------- -----------
45,000 93,000
----------- -----------
$ 1,117,000 $ 735,000
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INCOME:
Investment income ................ $ 1,000 $ 3,000 $ 3,000
Other income, net ................ 90,000 173,000 46,000
--------- --------- ---------
91,000 176,000 49,000
--------- --------- ---------
EXPENSES:
General and administrative expense 139,000 135,000 126,000
--------- --------- ---------
NET INCOME (LOSS) ........... $ (48,000) $ 41,000 $ (77,000)
========= ========= =========
</TABLE>
PMC CAPITAL LIMITED PARTNERSHIP
On November 13, 1996, the Partnership (a newly formed special purpose affiliate
of the Company) completed a private placement of approximately $40.7 million of
its Loan-Backed Fixed Rate Notes, Series 1996-A (the "Notes"). The Notes, issued
at par, which have a stated maturity in 2011 and bear interest at the rate of
6.725% per annum, are collateralized by loans contributed by PMC Capital to the
Partnership. In connection with this private placement, the Notes were given a
rating of "Aa2" by Moody's Investors Service. The Partnership has the exclusive
obligation for the repayment of the Notes, and the holders of the Notes have no
recourse to PMC Capital or its other subsidiaries or their assets in the event
of nonpayment of the loans. The net proceeds from the issuance of the Notes
(approximately $37.5 million before giving effect to payment of offering costs
of approximately $396,000 and after giving effect to the funding of a $2.04
million reserve fund held by the trustee as collateral) were distributed to PMC
Capital. The net effect of the contributed loans less the distributed funds
comprises the limited partners capital on the following condensed statement of
assets, liabilities and partners' capital.
F-26
<PAGE> 94
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)
The following is the condensed statement of assets, liabilities and partners'
capital for PMC Capital Limited Partnership as of December 31, 1997 and 1996 and
for the year ended December 31, 1997 and the period November 8, 1996 (inception)
to December 31, 1996:
CONDENSED STATEMENTS OF
ASSETS, LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Loans receivable, net .............................. $33,975,000 $41,805,000
Restricted investments - money market funds and cash 2,219,000 5,444,000
Due from affiliates ................................ 15,000 826,000
Deferred borrowing costs and other assets .......... 485,000 640,000
----------- -----------
$36,694,000 $48,715,000
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable ................................. $29,007,000 $40,183,000
Accrued interest payable ...................... 164,000 233,000
Due to affiliates ............................. 46,000 83.000
----------- -----------
29,217,000 40,499,000
----------- -----------
PARTNERS' CAPITAL:
General Partner's interest .................... 4,000 11,000
Limited Partner's interest .................... 7,473,000 8,205,000
----------- -----------
7,477,000 8,216,000
----------- -----------
$36,694,000 $48,715,000
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 8, 1996
DECEMBER 31, (INCEPTION) TO
1997 DECEMBER 31, 1996
---------- -----------------
<S> <C> <C>
INCOME:
Interest income .................. $4,823,000 $ 599,000
Other investment income, net ..... 197,000 111,000
---------- ----------
5,020,000 710,000
---------- ----------
EXPENSES:
Interest expense ................ 2,287,000 362,000
General and expense administrative 125,000 20,000
---------- ----------
2,412,000 382,000
---------- ----------
NET INCOME ........................... $2,608,000 $ 328,000
========== ==========
</TABLE>
F-27
<PAGE> 95
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)
PMC CAPITAL CORP. AND PMC TRUST 1996-A:
The following is the condensed combined balance sheet for PMC Capital Corp. (the
independent trustee of the general partner for PMC Capital Limited Partnership)
and PMC Trust 1996-A (the general partner for PMC Capital Limited Partnership),
as of December 31, 1997 and 1996. PMC Capital Corp. and PMC Trust 1996-A did not
have any income statement activity from inception through December 31, 1996
other than approximately $3,000 earned pursuant to PMC Trust 1996-A's interest
in the Partnership of which $2,000 was distributed as a dividend to PMC Capital:
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash ................................................. $ 1,000 $ 1,000
Investment in Partnership ............................ 3,000 11,000
Due from parent ...................................... 250,000 250,000
--------- ---------
$ 254,000 $ 262,000
========= =========
SHAREHOLDERS' AND BENEFICIAL OWNERS EQUITY
Common stock and beneficial owners beneficial interest $ 261,000 $ 261,000
Retained earnings (deficit) .......................... (7,000) 1,000
--------- ---------
$ 254,000 $ 262,000
========= =========
</TABLE>
CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 8, 1996
DECEMBER 31, (INCEPTION) TO
1997 DECEMBER 31, 1996
------------ -----------------
<S> <C> <C>
Investment Income from partnership $26,000 $ 3,000
------- -------
Net Income ....................... $26,000 $ 3,000
======= =======
Dividends Paid to Parent ......... $34,000 $ 2,000
======= =======
</TABLE>
NOTE 16. COMBINED FINANCIAL STATEMENTS:
As described in Note 1, the consolidated financial statements include the
accounts of PMC and its wholly owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding Corp., the Partnership, PMC Capital
Corp. and PMC Trust 1996-A (the "Unconsolidated Entities") are accounted for by
the equity method of accounting in conformity with Federal securities law. The
following is the condensed combined balance sheet as of December 31, 1997 and
1996 and the condensed combined statement of income for the years ended December
31, 1997 and 1996 for the Company and the Unconsolidated Entities.
F-28
<PAGE> 96
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Investments at value:
Loans receivable, net ........................ $ 161,215 $ 135,159
Cash equivalents ............................. 17,272 49,816
Interest-only strip receivable ............... 3,708 6,429
Restricted investments and real property owned 5,780 6,976
--------- ---------
187,975 198,380
Other assets ...................................... 6,931 6,222
--------- ---------
Total assets ................................. $ 194,906 $ 204,602
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ....................... $ 41,290 $ 44,570
Notes payable ................................ 64,007 75,183
Other liabilities ............................ 12,443 14,946
--------- ---------
117,740 134,699
--------- ---------
Cumulative preferred stock of subsidiary ..... 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common Stock ................................. 116 112
Additional paid-in capital ................... 68,555 62,125
Undistributed net operating income ........... 2,289 1,101
Net unrealized depreciation on investments ... (794) (435)
--------- ---------
70,166 62,903
--------- ---------
Total liabilities and shareholders' equity ... $ 194,906 $ 204,602
========= =========
</TABLE>
CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
INCOME:
Investment income ........................... $ 24,437 $ 21,835
Other income, net ........................... 2,542 2,504
-------- --------
Total income ............................. 26,979 24,339
-------- --------
EXPENSES:
Interest .................................... 7,836 6,070
Salaries and related benefits ............... 3,435 3,180
General and administrative expenses ......... 1,082 998
Other ....................................... 822 724
-------- --------
Total expense ............................ 13,175 10,972
-------- --------
Net operating income ............................. 13,804 13,367
Realized and unrealized gain (loss) on investments 1,818 (147)
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............... $ 15,622 $ 13,220
======== ========
</TABLE>
F-29
<PAGE> 97
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. STOCK BASED COMPENSATION PLAN:
During fiscal year 1997 the Company granted stock options under the PMC Capital,
Inc. 1997 Non-Employee Director Stock Option Plan and the PMC Capital, Inc. 1997
Employee Stock Option Plan (collectively, the "Plan") it sponsored. The Company
applies the Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Plan. In 1995, SFAS No. 123 "Accounting
for Stock-Based compensation" ("SFAS No. 123") was issued which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plan. Adoption of the cost recognition provisions of
SFAS No. 123 is optional and the Company has decided not to elect these
provisions of SFAS No. 123. However, pro-forma disclosures as if the Company
adopted the cost recognition provisions of SFAS No. 123 are required by SFAS No.
123 and are presented below.
Under the Plan, the Company is authorized to issue 6% of the then outstanding
shares of Common Stock pursuant to "Awards" granted as incentive stock options
(intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended) to employees and non-qualified stock options to employees and
non-employee directors.
STOCK OPTIONS
The Company granted stock options in fiscal 1997 to certain employees and
directors. The stock options granted in fiscal 1997 have contractual term of
five years. All of the options granted to the employees and directors have an
exercise price equal to the fair market value of the stock at grant date. The
range of options granted during the year ended December 31, 1997 was from
$13.56 to $14.31. The options granted in fiscal 1997 vest 100% on the first
anniversary of the date of grant.
<TABLE>
<CAPTION>
1997
------------------------
NUMBER OF WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICES
---------- ---------
<S> <C> <C> <C>
Outstanding January 1 ............ -- n/a
Granted .......................... 86,755 $ 14.21
Exercised ........................ -- n/a
Forfeited and expired ............ -- n/a
---------- ---------
Outstanding December 31 .......... 86,755 $ 14.21
========== =========
Exercisable at December 31 ....... -- n/a
========== =========
Weighted-average fair value of
options granted during the year $ 0.54 $ 0.54
========== =========
</TABLE>
The weighted-average remaining term of the options outstanding as of December
31, 1997 is 4.46 years. The fair value of each stock option granted is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for grants in fiscal 1997:
<TABLE>
<CAPTION>
ASSUMPTION 1997
---------- ------
<S> <C>
Expected Term (years) 3.0
Risk-Free Interest Rate 6.17%
Expected Dividend Yield 8.77%
Expected Volatility 11.41%
</TABLE>
F-30
<PAGE> 98
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. STOCK BASED COMPENSATION PLAN: (CONTINUED)
PRO-FORMA NET INCOME AND EARNINGS PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net income and earnings
per common share for 1997 would approximate the pro forma amounts below (in
thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
SFAS No. 123 Charge $ -- $ 25
APB 25 Charge $ -- $ --
Net Income $ 15,622 $ 15,597
Earnings Per Common Share $ 1.35 $ 1.35
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
F-31
<PAGE> 99
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
( IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST
CONSOLIDATED WESTERN WESTERN
BEFORE PMC SBLC, FINANCIAL PMC
ELIMINATION ELIMINATION CAPITAL, INC. AND CAPITAL INVESTMENT
CONSOLIDATED ENTRIES ENTRIES INC. SUBSIDIARY CORPORATION CORPORATION
------------ ----------- ----------- -------- ---------- ----------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
Loans receivable, net ......................... $ 127,240 $ -- $ 127,240 $ 48,337 $ 8,196 $ 21,858 $ 48,849
Cash equivalents .............................. 17,237 -- 17,237 11,621 1,041 4,094 481
Investment in unconsolidated subsidiaries ..... 7,797 (23,378) 31,175 31,175 -- -- --
Interest-only strip receivables ............... 3,708 -- 3,708 -- 3,708 -- --
Restricted investments ........................ 2,798 -- 2,798 -- 2,594 -- 204
Real property owned ........................... 296 -- 296 -- 96 125 75
--------- --------- --------- --------- --------- --------- ---------
Total investments ............................... 159,076 (23,378) 182,454 91,133 15,635 26,077 49,609
--------- --------- --------- --------- --------- --------- ---------
OTHER ASSETS:
Receivable for loans sold ..................... 1,346 -- 1,346 104 1,242 -- --
Due from unconsolidated subsidiaries .......... 1,302 (18,994) 20,296 20,258 24 4 10
Servicing asset ............................... 1,607 -- 1,607 -- 1,607 -- --
Deferred charges, deposits and other assets ... 1,398 -- 1,398 328 482 171 417
Accrued interest receivable ................... 608 -- 608 235 13 123 237
Cash .......................................... 265 -- 265 187 54 16 8
Property and equipment, net ................... 237 -- 237 147 30 30 30
--------- --------- --------- --------- --------- --------- ---------
Total other assets .............................. 6,763 (18,994) 25,757 21,259 3,452 344 702
--------- --------- --------- --------- --------- --------- ---------
Total assets .................................... $ 165,839 $ (42,372) $ 208,211 $ 112,392 $ 19,087 $ 26,421 $ 50,311
========= ========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ........................ $ 41,290 $ -- $ 41,290 $ -- $ -- $ 17,290 $ 24,000
Notes payable ................................. 35,000 -- 35,000 35,000 -- -- --
Accounts payable .............................. 3,269 -- 3,269 69 3,145 53 2
Dividends payable ............................. 4,018 -- 4,018 3,955 -- -- 63
Borrower advances ............................. 1,678 -- 1,678 57 464 211 946
Accrued interest payable ...................... 1,316 -- 1,316 431 25 467 393
Due to unconsolidated subsidiaries ............ 279 (18,994) 19,273 283 13,742 -- 5,248
Deferred fee revenue .......................... 571 -- 571 123 20 287 141
Other liabilities ............................. 1,252 -- 1,252 1,023 203 10 16
--------- --------- --------- --------- --------- --------- ---------
Total liabilities ............................... 88,673 (18,994) 107,667 40,941 17,599 18,318 30,809
--------- --------- --------- --------- --------- --------- ---------
Cumulative preferred stock of subsidiary ........ 7,000 3,000 4,000 -- -- -- 4,000
--------- --------- --------- --------- --------- --------- ---------
Shareholders' equity:
Cumulative preferred stock of subsidiary, 3% .. -- (3,000) 3,000 -- -- -- 3,000
Common stock .................................. 116 (22) 138 116 -- 21 1
Additional paid-in capital .................... 68,555 (22,373) 90,928 68,555 2,000 7,934 12,439
Undistributed net operating income ............ 2,289 (1,983) 4,272 2,780 960 257 275
Net unrealized depreciation on investments .... (794) -- (794) -- (472) (109) (213)
--------- --------- --------- --------- --------- --------- ---------
70,166 (27,378) 97,544 71,451 2,488 8,103 15,502
Less treasury stock ........................... -- 1,000 (1,000) -- (1,000) -- --
--------- --------- --------- --------- --------- --------- ---------
Total shareholders' equity ...................... 70,166 (26,378) 96,544 71,451 1,488 8,103 15,502
--------- --------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $ 165,839 $ (42,372) $ 208,211 $ 112,392 $ 19,087 $ 26,421 $ 50,311
========= ========= ========= ========= ========= ========= =========
NET ASSET VALUE PER COMMON SHARE ................ $ 6.03
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATING FINANCIAL STATEMENTS.
F-32
<PAGE> 100
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST
CONSOLIDATED WESTERN WESTERN
BEFORE PMC SBLC, FINANCIAL PMC
ELIMINATION ELIMINATION CAPITAL, INC. AND CAPITAL INVESTMENT
CONSOLIDATED ENTRIES ENTRIES INC. SUBSIDIARY CORPORATION CORPORATION
------------ ----------- ----------- -------- ---------- ----------- -----------
INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest ..................................... $ 17,136 $ -- $ 17,136 $ 3,959 $ 5,911 $ 2,446 $ 4,820
Premium income ............................... 1,776 -- 1,776 1,991 (215) -- --
Other investment income, net ................. 504 -- 504 297 52 63 92
-------- -------- -------- -------- -------- -------- --------
Total investment income ........................ 19,416 -- 19,416 6,247 5,748 2,509 4,912
Other income, net .............................. 2,430 -- 2,430 1,941 256 119 114
Equity in income (loss) of subsidiaries ........ 2,560 (12,445) 15,005 15,005 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total income ................................... 24,406 (12,445) 36,851 23,193 6,004 2,628 5,026
-------- -------- -------- -------- -------- -------- --------
EXPENSES:
Interest ..................................... 5,548 -- 5,548 2,692 5 1,588 1,263
Salaries and related benefits ................ 3,435 -- 3,435 3,435 -- -- --
General and administrative ................... 797 -- 797 735 29 16 17
Profit sharing plan .......................... 243 -- 243 243 -- -- --
Rent ......................................... 229 -- 229 229 -- -- --
Legal and Accounting ......................... 192 -- 192 187 3 1 1
Small Business Administration fees ........... 108 -- 108 -- -- 41 67
Directors and shareholders expense ........... 50 -- 50 50 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total expense .................................. 10,602 -- 10,602 7,571 37 1,646 1,348
-------- -------- -------- -------- -------- -------- --------
Net operating income .......................... 13,804 (12,445) 26,249 15,622 5,967 982 3,678
-------- -------- -------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off .......................... (183) -- (183) -- (163) -- (20)
Sale of assets ............................. 2,360 -- 2,360 -- 2,360 -- --
Change in unrealized appreciation
(depreciation) on investments ............ (359) -- (359) -- (248) (7) (104)
-------- -------- -------- -------- -------- -------- --------
1,818 -- 1,818 -- 1,949 (7) (124)
-------- -------- -------- -------- -------- -------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ................... $ 15,622 $(12,445) $ 28,067 $ 15,622 $ 7,916 $ 975 $ 3,554
======== ======== ======== ======== ======== ======== ========
EARNINGS PER SHARE ............................. $ 1.35
=======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATING FINANCIAL STATEMENTS
F-33
<PAGE> 101
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Undistributed Appreciation Total
Preferred Common Paid-in Net Operating (Depreciation) Treasury Shareholders'
Stock, 3% Stock Capital Income on Investments Stock Equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PMC CAPITAL, INC
Balances, January 1, 1997 ................. $ -- $ 112 $ 62,125 $ 1,701 $ -- $ -- $ 63,938
Net income ................................ -- -- -- 15,622 -- -- 15,622
Dividend reinvestment plan, 468,706 shares -- 4 6,430 -- -- -- 6,434
Dividends on common stock ................. -- -- -- (14,543) -- -- (14,543)
-------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1997 ............... $ -- $ 116 $ 68,555 $ 2,780 $ -- $ -- $ 71,451
======== ======== ======== ======== ======== ======== ========
FIRST WESTERN SBLC, INC AND SUBSIDIARY
Balances, January 1, 1997 ................. $ -- $ -- $ 2,000 $ 1,796 $ (224) $(1,000) $ 2,572
Net income ................................ -- -- -- 8,164 (248) -- 7,916
Dividends to parent company ............... -- -- -- (9,000) -- -- (9,000)
-------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1997 ............... $ -- $ -- $ 2,000 $ 960 $ (472) $(1,000) $ 1,488
======== ======== ======== ======== ======== ======== ========
WESTERN FINANCIAL CAPITAL CORPORATION
Balances, January 1, 1997 ................. $ -- $ 21 $ 7,934 $ 110 $ (102) $ -- $ 7,963
Net income ................................ -- -- -- 982 (7) -- 975
Dividends to parent company ............... -- -- -- (835) -- -- (835)
-------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1997 ............... $ -- $ 21 $ 7,934 $ 257 $ (109) $ -- $ 8,103
======== ======== ======== ======== ======== ======== ========
PMC INVESTMENT CORPORATION
Balances, January 1, 1997 ................. $ 3,000 $ 1 $ 12,439 $ 527 $ (109) $ -- $ 15,858
Net income ................................ -- -- -- 3,658 (104) -- 3,554
Dividends to parent company ............... -- -- -- (3,660) -- -- (3,660)
Dividends, preferred ...................... -- -- -- (250) -- -- (250)
-------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1997 ............... $ 3,000 $ 1 $ 12,439 $ 275 $ (213) $ -- $ 15,502
======== ======== ======== ======== ======== ======== ========
ELIMINATION ADJUSTMENTS
Equity in income of subsidiaries .......... -- -- -- (12,445) -- -- (12,445)
Dividends to parent ....................... -- -- -- 13,495 -- -- 13,495
Stock of subsidiaries ..................... (3,000) (22) (22,373) -- -- 1,000 (24,395)
Undistributed earnings of subsidiaries .... -- -- -- (3,033) -- -- (3,033)
-------- -------- -------- -------- -------- -------- --------
(3,000) (22) (22,373) (1,983) -- 1,000 (26,378)
-------- -------- -------- -------- -------- -------- --------
CONSOLIDATED ................................ $ -- $ 116 $ 68,555 $ 2,289 $ (794) $ -- $ 70,166
======== ======== ======== ======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATING FINANCIAL STATEMENTS.
F-34
<PAGE> 102
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST
CONSOLIDATED WESTERN WESTERN
BEFORE PMC SBLC, FINANCIAL PMC
ELIMINATION ELIMINATION CAPITAL, INC., AND INVESTMENT CAPITAL
CONSOLIDATED ENTRIES ENTRIES INC SUBSIDIARY CORPORATION CORPORATION
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and
unrealized gain (loss) on investments ............ $ 15,622 $(12,445) $ 28,067 $ 15,622 $ 7,916 $ 975 $ 3,554
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 .................. (20,622) -- (20,622) -- (20,622) -- --
Proceeds from sale of guaranteed loans ....... 21,638 -- 21,638 -- 21,638 -- --
Change in unrealized depreciation on
investments and loans written-off ........ 543 -- 543 -- 412 7 124
Unrealized premium income, net ............... 215 -- 215 -- 215 -- --
Depreciation and amortization ................ 1,032 -- 1,032 94 844 35 59
Accretion of loan discount and deferred fees . (1,623) -- (1,623) (33) (1,232) (109) (249)
Deferred fees collected ...................... 766 -- 766 (58) 17 343 464
(Gain) loss on sale of assets ................ (2,360) -- (2,360) -- (2,360) -- --
Equity in income of subsidiary ............... (2,560) -- (2,560) (2,560) -- -- --
Net change in operating assets and liabilities:
Accrued interest receivable ............... (231) -- (231) (78) 2 (55) (100)
Other assets .............................. (527) -- (527) (39) (396) (35) (57)
Accrued interest payable .................. (127) -- (127) (1) (27) (97) (2)
Borrower advances ......................... (116) -- (116) (127) (583) (20) 614
Other liabilities ......................... (1,069) -- (1,069) (115) (960) 38 (32)
-------- -------- -------- -------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ 10,581 (12,445) 23,026 12,705 4,864 1,082 4,375
-------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ....................................... (65,739) 8,337 (74,076) (28,203) (8,834) (12,896) (24,143)
Principal collected and other adjustments .......... 10,069 (8,337) 18,406 3,989 5,559 5,406 3,452
Proceeds from interest-only strip receivable ....... 648 -- 648 -- 648 -- --
Purchase of furniture and fixtures and other
assets .......................................... (139) -- (139) (114) (25) -- --
Proceeds from sale of assets ....................... 22,986 -- 22,986 -- 22,971 15 --
Proceeds from partnership distributions ............ 3,347 3,347 -- -- -- -- --
Release of (investment in) restricted cash ......... (1,569) -- (1,569) -- (1,365) -- (204)
Investment in subsidiaries ......................... -- 12,445 (12,445) (12,445) -- -- --
-------- -------- -------- -------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .. (30,397) 15,792 (46,189) (36,773) 18,954 (7,475) (20,895)
-------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............ 5,475 -- 5,475 5,475 -- -- --
Proceeds from revolving credit facility ........... 8,300 -- 8,300 8,300 -- -- --
Payment on revolving credit facility .............. (8,300) -- (8,300) (8,300) -- -- --
Payment of dividends to parent .................... -- (3,347) 3,347 16,842 (9,000) (835) (3,660)
Payment of dividends on common stock .............. (13,197) -- (13,197) (13,197) -- -- --
Payment of dividends on preferred stock ........... (250) -- (250) -- -- -- (250)
Payment of SBA debentures ......................... (3,280) -- (3,280) -- -- (3,280) --
Advances from (to) affiliates, net ................ (1,004) -- (1,004) 13,442 (18,614) (68) 4,236
Payment of issuance costs on notes and debentures . (443) -- (443) (4) (439) -- --
-------- -------- -------- -------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .. (12,699) (3,347) (9,352) 22,558 (28,053) (4,183) 326
-------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . (32,515) -- (32,515) (1,510) (4,235) (10,576) (16,194)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ......... 50,017 -- 50,017 13,318 5,330 14,686 16,683
-------- -------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ............... $ 17,502 $ -- $ 17,502 $ 11,808 $ 1,095 4,110 $ 489
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ..................................... $ 5,631 $ -- $ 5,631 $ 2,649 $ 32 $ 1,685 $ 1,265
======== ======== ======== ======== ======== ======== ========
Dividends reinvested .............................. $ 963 $ -- $ 963 $ 963 $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ========
Reclassification from loans receivable
to real property owned .......................... $ 203 $ -- $ 203 $ -- $ 108 $ -- $ 95
======== ======== ======== ======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-35
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partner
PMC Capital Limited Partnership:
We have audited the accompanying statement of assets, liabilities and partners'
capital of PMC Capital Limited Partnership (the "Partnership") as of December
31, 1997 and 1996, and the related statements of income, partners' capital and
cash flows for the year ended December 31, 1997 and for the period from November
8, 1996 (inception) to December 31, 1996. These financial statements are the
responsibility of the Partnership's General Partner. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
General Partner, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PMC Capital Limited Partnership
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the period from November 8, 1996 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 28, 1998
F-36
<PAGE> 104
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
( IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
------- -------
ASSETS
<S> <C> <C>
INVESTMENTS AT VALUE:
Loans receivable, net .............................. $33,975 $41,805
Restricted investments - money market funds and cash 2,219 5,444
------- -------
36,194 47,249
------- -------
OTHER ASSETS:
Due from affiliates ................................ 15 826
Deferred borrowing costs ........................... 296 390
Accrued interest receivable ........................ 189 239
Other .............................................. -- 11
------- -------
TOTAL OTHER ASSETS ................................... 500 1,466
------- -------
TOTAL ASSETS ......................................... $36,694 $48,715
======= =======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable ...................................... $29,007 $40,183
Accrued interest payable ........................... 164 233
Due to affiliates .................................. 46 83
------- -------
TOTAL LIABILITIES .................................... 29,217 40,499
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
PARTNERS' CAPITAL:
General Partner's interest ......................... 4 11
Limited Partner's interest ......................... 7,473 8,205
------- -------
7,477 8,216
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL .............. $36,694 $48,715
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
F-37
<PAGE> 105
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
November 8,
Year Ended 1996 (Inception)
December 31, to December 31,
1997 1996
------ ----
<S> <C> <C>
INVESTMENT INCOME:
Interest ................... $4,823 $599
Other investment income, net 197 111
------ ----
Total investment income ...... 5,020 710
------ ----
EXPENSES:
Interest ................... 2,287 362
General and administrative . 125 20
------ ----
Total expenses ............... 2,412 382
------ ----
NET INCOME ................... $2,608 $328
====== ====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-38
<PAGE> 106
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Limited General
Partner's Partner's
Interest Interest Total
-------- -------- --------
<S> <C> <C> <C>
Balance, November 8, 1996 (inception) ............ $ -- $ -- $ --
Limited Partner's contribution of loans receivable
and other assets ............................ 45,681 -- 45,681
General Partner's cash contribution .............. -- 10 10
Net income ....................................... 325 3 328
Partnership distributions ........................ (37,801) (2) (37,803)
-------- -------- --------
Balance, December 31, 1996 ....................... 8,205 11 8,216
Net income ....................................... 2,582 26 2,608
Partnership distributions ........................ (3,314) (33) (3,347)
-------- -------- --------
Balance, December 31, 1997 ....................... $ 7,473 $ 4 $ 7,477
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-39
<PAGE> 107
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
November 8,
Year Ended 1996 (Inception)
December 31, to December 31,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 2,608 $ 328
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization .................................... 99 16
Accretion of loan discount and deferred fees .... (207) (28)
Net change in operating assets and liabilities:
Accrued interest receivable ................. 50 (239)
Other assets ................................ 11 (11)
Accrued interest payable .................... (69) 233
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............... 2,492 299
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected and other adjustments ............. 8,037 3,904
Release of (investment in) restricted cash ............ 3,225 (5,444)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ..... 11,262 (1,540)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable .............. -- 40,183
Proceeds from issuance of general partnership interest -- 10
Partner distributions ................................ (3,347) (37,803)
Payment on notes payable ............................. (11,176) --
Advances from (to) affiliates, net ................... 774 (743)
Payment of issuance costs on notes ................... (5) (406)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ..... (13,754) 1,241
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............ -- --
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR .................. $ -- $ --
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-40
<PAGE> 108
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
PMC Capital Limited Partnership ("the Partnership") was formed as a
Delaware limited partnership in November 1996 to act as a special
purpose affiliate of PMC Capital, Inc. ("PMC Capital"). PMC Capital is
a diversified, closed-end management investment company that has
elected to operate as a business development company under the
Investment Company Act of 1940. PMC engages in the business of
originating loans to small businesses either directly or through its
three principal subsidiaries. The Partnership was established to
acquire loans from PMC Capital and to issue fixed-rate debt through a
private placement. PMC Capital is either directly or indirectly the
sole partner of the Partnership.
PMC Capital Corp. is a Delaware corporation formed in November 1996 to
be the independent trustee of the general partner of the Partnership.
PMC Trust 1996-A is a Delaware business trust formed in November 1996
to be the general partner of the Partnership.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
VALUATION OF INVESTMENTS
Loans receivable are carried at amortized cost which is the loan
principal balance less deferred fees and discounts, unless there is
doubt as to the realization of the loan (a "Problem Loan"). A valuation
reserve is established for a Problem Loan based on the creditor's
payment history, collateral value, guarantor support and other factors.
Loans, including impaired loans, are generally classified as
non-accrual if they are past due as to maturity or payment of principal
or interest for a period of more than 60 days. If a loan or a portion
of a loan is classified as doubtful or is partially reserved or
charged-off, the loan is classified as non-accrual. Loans that are on a
current payment status or past due less than 60 days may also be
classified as non-accrual if repayment in full of principal and/or
interest is in doubt.
Deferred fees consist of non-refundable fees less direct loan
origination costs. These fees are being recognized over the expected
life of the related loan as an adjustment of yield.
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gains or losses are measured by the difference between the
proceeds from the sale and the cost basis of the investment, without
regard to unrealized gains and losses previously recognized. The gain
or loss calculated also includes loans written-off or charged-down
during the year and recoveries of loans written-off or charged-down in
prior years.
Other changes in the value of investments are included as changes in
the unrealized appreciation (depreciation) on investments in the
statement of income.
INTEREST INCOME
Interest income on loans is accrued as earned. The accrual of interest
is generally suspended when the related loan becomes 60 days past due
("Non-accrual Loan"). Interest income on a Non-accrual Loan is
recognized on the cash basis.
F-41
<PAGE> 109
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEFERRED BORROWING COSTS
Costs incurred in connection with the issuance of notes payable are
included in deferred borrowing costs. These costs are amortized over
the estimated life of the related obligation.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents for
purposes of the statement of cash flows.
NOTE 2. LOANS RECEIVABLE:
On November 13, 1996, PMC Capital contributed approximately $45.7
million of loans (the "Contributed Loans") to the Partnership without
recourse to PMC Capital.
At December 31, 1997 and 1996 their was no recorded investment in loans
identified as impaired.
The Company's portfolio of investments consists of loans to borrowers
located principally in the southern portion of the United States. The
most significant concentration of loans were as noted below:
<TABLE>
<CAPTION>
Percentage of Loan Portfolio
State December 31,
- ----- ------------------------
1997 1996
------- --------
<S> <C> <C>
Texas 37% 42%
Florida 9% 10%
Other 54% 48%
---- ----
100% 100%
==== ====
</TABLE>
There were no loans receivable; (i) greater than 60 days past due, (ii)
on which litigation against the borrowers had commenced, or (iii) which
were in the process of liquidation at December 31, 1997 and 1996.
NOTE 3. CREDIT RISK:
At December 31, 1997 and 1996 loans to businesses in the lodging
industry comprised 93% and 85% of loans receivable and 88% and 74% of
total assets, respectively. There can be no assurance that the
Partnership will experience the positive results which PMC Capital has
historically achieved from these lending activities. Any economic
factors that negatively impact the lodging industry could have a
material adverse effect on the business of the Partnership.
Additionally, at December 31, 1997 loans to businesses located in Texas
comprised approximately 37% of the Partnership's outstanding loan
portfolio. No other state had a concentration greater than 10%. A
decline in economic conditions in any of these states may adversely
affect the Partnership.
F-42
<PAGE> 110
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 4. NOTES PAYABLE:
On November 13, 1996, the Partnership completed a private placement
of approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "Notes"). The Notes, issued at par, which have a
stated maturity in 2005 and bear interest at the rate of 6.725% per
annum, are collateralized by the loans contributed by PMC Capital to
the Partnership. In connection with this private placement, the Notes
were given a rating of "Aa2" by Moody's Investors Service. The
Partnership has the exclusive obligation for the repayment of the
Notes, and the holders of the Notes have no recourse to PMC Capital
or its other subsidiaries or their assets in the event of nonpayment
of the loans. Required principal payments to the noteholders are
based upon the collection of principal on the Contributed Loans. All
principal collected on the Contributed Loans during the monthly
period (as defined in the Trust Indenture) are used to make the
required principal payment on the first business day of the following
month.
NOTE 5. PARTNERS' CAPITAL:
The net proceeds from the issuance of the Notes (approximately $37.5
million before giving effect to payment of offering costs of
approximately $396,000 and after giving effect to the funding of a
$2.04 million reserve fund held by the trustee as collateral) were
distributed to PMC Capital. Pursuant to an agreement between PMC
Capital and PMC Trust 1996-A, PMC Trust 1996-A waived any rights it
had under the partnership agreement to receive any portion of such
distribution.
NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimates of fair value as required by Statement of Financial
Accounting Standards ("SFAS") No. 107 differ from the value of the
financial assets and liabilities determined by the General Partner
primarily as a result of the effects of discounting future cash
flows. Considerable judgement is required to interpret market data
and develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Partnership could realize in a current market exchange or the amount
that ultimately will be realized by the Partnership upon maturity or
disposition.
The estimated fair values of the Partnership's financial instruments
pursuant to SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Loans receivable, net $ 33,975 $ 34,749 $ 41,805 $ 42,894
Restricted investments 2,219 2,219 5,444 5,444
Liabilities:
Notes payable 29,007 29,216 40,183 39,770
</TABLE>
Loans receivable, net: The estimated fair value for all fixed rate
loans is estimated by discounting the estimated cash flows using the
current rate at which similar loans would be made to borrowers with
similar credit ratings and maturities. The impact of delinquent loans
on the estimation of the fair values described above is not
considered to have a material effect and accordingly, delinquent
loans have been disregarded in the valuation methodologies employed.
F-43
<PAGE> 111
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
Restricted investments : The carrying amount is a reasonable
estimation of fair value.
Notes payable: The estimated fair value is based on present value
calculation using prices of the same or similar instruments after
considering risk, current interest rates and remaining maturities.
NOTE 7. RELATED PARTY TRANSACTIONS:
At December 31, 1997, the balance in due to affiliates of $46,000 was
a result of payments on loans receivable of affiliates deposited
directly by the borrower into the Partnership's operating bank
account. The balance in due from affiliates of $15,000 was a result
of payments on the Partnership's loans receivable deposited directly
by the borrower into an affiliate's operating bank account. These
balances were transferred to the appropriate company subsequent to
year end.
F-44
<PAGE> 112
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) The listing of the financial statements and notes thereto in the Index
to Consolidated Financial Statements in the Registration Statement attached
hereto is incorporated herein by reference.
(2) Exhibits.
Exhibit Description
a. Charter documents:
a.1 Articles of Incorporation, as amended
(previously filed as Exhibit 4(b)(1) to the
Registrant's Registration Statement on Form
N-2 (Registration No. 33-2535) (the
"Registration Statement"), dated November 29,
1991, and incorporated herein by reference).
b. Bylaws:
b.1 Bylaws, as amended (previously filed as
Exhibit 2 to Amendment No. 7 to the
Registration Statement, dated April 27, 1989,
and incorporated herein by reference).
c. Not applicable.
d. Certificate of Common Stock, par value $.01 per share
(previously filed as Exhibit 4 to Amendment No. 1 to
the Registration Statement, dated November 10, 1983,
and incorporated herein by reference).
f. Long term debt instruments:
f.1 Debenture dated September 24, 1996 for
$2,490,000 loan with SBA (previously filed as
Exhibit 4.2 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1996 and
incorporated herein by reference).
C-1
<PAGE> 113
f.2 Debenture dated February 17, 1988 for
$1,500,000 loan with SBA (previously filed as
Exhibit 4(b)(2) to Amendment No. 7 to the
Registration Statement, dated April 27, 1989,
and incorporated herein by reference).
f.3 Debenture dated June 27, 1990 for $2,000,000
loan with SBA (previously filed as Exhibit
4(b)(5)(n) to Amendment No. 9 to the
Registration Statement, dated April 29, 1991,
and incorporated herein by reference).
f.4 Debenture dated September 26, 1990 for
$2,810,000 loan with SBA (previously filed as
Exhibit 4(b)(5)(o) to Amendment 9 to the
Registration Statement, dated April 29, 1991,
and incorporated herein by reference).
f.5 Debenture dated September 26, 1990 for
$1,500,000 loan with SBA (previously filed as
Exhibit 4(b)(5)(p) to Amendment 9 to the
Registration Statement, dated April 29, 1991,
and incorporated herein by reference).
f.6 Debenture dated March 29, 1990 for $1,000,000
loan with SBA (previously filed as Exhibit
5(q) to Amendment No. 3 to the Registration
Statement, dated August 18, 1992, and
incorporated herein by reference).
f.7 Debenture dated September 27, 1989 for
$1,000,000 loan with SBA (previously filed as
Exhibit 5(r) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.8 Debenture dated September 27, 1989 for
$1,500,000 loan with SBA (previously filed as
Exhibit 5(s) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.9 Debenture dated January 2, 1990 for
$3,000,000 loan with SBA (previously filed as
Exhibit 5(t) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
f.10 Debenture dated August 18, 1989 for
$1,000,000 loan with SBA (previously filed as
Exhibit 5(u) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated herein by reference).
C-2
<PAGE> 114
f.11 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed as
Exhibit 4.13 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.12 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed as
Exhibit 4.14 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.13 Senior Note dated July 19, 1993 for
$6,000,000 with Columbine Life Insurance
Company (previously filed as Exhibit 4.15 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and incorporated
herein by reference).
f.14 Senior Note dated July 19, 1993 for
$9,000,000 with Life Insurance Company of
Georgia (previously filed as Exhibit 4.16 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and incorporated
herein by reference).
f.15 Senior Note dated July 19, 1993 for
$5,000,000 with SouthLand Life Insurance
Company (previously filed as Exhibit 4.17 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and incorporated
herein by reference).
f.16 Senior Note dated December 15, 1993 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.18 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated
herein by reference).
f.17 Senior Note dated December 15, 1993 for
$3,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.19 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.18 Debenture dated March 29, 1995 for $3,000,000
loan with SBA (previously filed as Exhibit
4.20 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
f.19 Debenture dated June 28, 1995 for $5,000,000
loan with SBA (previously filed as Exhibit
4.21 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
C-3
<PAGE> 115
f.20 Debenture dated September 27, 1995 for
$7,000,000 loan with SBA (previously filed as
Exhibit 4.22 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.21 Debenture dated December 20, 1989 for
$650,000 loan with SBA (previously filed as
Exhibit 4.24 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.22 Debenture dated June 27, 1990 for $300,000
loan with SBA (previously filed as Exhibit
4.25 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
f.23 Debenture dated December 6, 1992 for $510,000
loan with SBA (previously filed as Exhibit
4.26 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
f.24 Senior Note Dated April 19, 1995 for
$5,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.27 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.25 Senior Note Dated April 19, 1995 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.28 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.26 Senior Note Dated April 19, 1995 for
$2,000,000 with Indiana Insurance Company
(previously filed as Exhibit 4.29 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.27 Senior Note Dated April 19, 1995 for
$1,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.30 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
C-4
<PAGE> 116
f.28 Debenture dated June 27, 1990 for $1,030,000
with SBA (previously filed as Exhibit 4.31 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and incorporated
herein by reference).
f.29 Master Promissory Note for $15,000,000 with
Bank One, Texas N.A. (previously filed as
Exhibit 10.7 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1996
and incorporated herein by reference).
g. Not applicable.
h. Not applicable.
i. Not applicable.
j. Not applicable.
k. Material Contracts
k.1 Employment contract between the Registrant
and Lance B. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.1 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.2 Employment contract between the Registrant
and Andrew S. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.2 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.3 Employment contract between the Registrant
and Fredric M. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.3 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.4 Employment contract between the Registrant
and Jan F. Salit dated June 30, 1996
(previously filed as Exhibit 10.4 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.5 Employment contract between the Registrant
and Barry N. Berlin dated June 30, 1996
(previously filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
C-5
<PAGE> 117
k.6 Employment contract between the Registrant
and Mary J. Brownmiller dated June 30, 1996
(previously filed as Exhibit 10.6 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.7 Servicing Agreement by and among Sun Trust,
PMC Capital Limited Partnership and PMC
Capital (previously filed as Exhibit 10.8 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and incorporated
herein by reference).
l. Opinion of counsel, as to the legality of the shares being
registered.*
m. Not applicable
n. Consents
n.1 Consent of Coopers & Lybrand L.L.P. as to
inclusion of their report.**
o. Not applicable.
p. Not applicable.
q. Not applicable.
r. Financial Data Schedule**
-----------
* Previously filed as an exhibit to the Registrant's
Registration Statement on Form N-2 Registration No.
333-33151.
** Filed herewith
ITEM 25. MARKETING ARRANGEMENTS
None
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fees $ 1,995
Stock Exchange Fees $ 1,000
Printing and Mailing $ 3,000
Accounting Fees $ 5,000
Legal Fees $ 10,000
Plan Administrator Fee $ 1,000
Miscellaneous $ 3,005
--------------
TOTAL $ 25,000
==============
</TABLE>
C-6
<PAGE> 118
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Registrant owns 100% of the issued and outstanding common
stock or is the sole owner (either directly or indirectly) of
the following: Western Financial Capital Corporation
("WFCC"), a Florida corporation, First Western SBLC, Inc.
("First Western"), a Florida corporation, PMC Investment
Corporation ("PMIC"), PMC Funding Corp., a Florida corporation
("PMC Funding"), PMC Advisers, Ltd., a Texas limited
partnership ("PMC Advisers"), PMC Capital Corp. 1996-A, a
Texas corporation, PMC Trust 1996-A, a Delaware Trust, and PMC
Capital Limited Partnership, a Delaware Limited Partnership.
WFCC, First Western and PMIC are registered under the
Investment Company Act. Each of the investment company
subsidiaries is included in the consolidated financial
statements of PMC Capital included herein. PMC Advisers, PMC
Funding, PMC Capital Corp. 1996-A, PMC Trust 1996-A and PMC
Capital Limited Partnership are not consolidated because they
are not investment companies.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of May 27, 1997 there were approximately 1,794 holders of
record of the Registrant's common stock, par value $.01 per
share.
ITEM 29. INDEMNIFICATION
Section 607.0850 of the Florida Statutes and Article IX of the
Articles of Incorporation and Article VI of the Bylaws of the Registrant
provide for indemnification of the Registrant's directors and officers under
certain circumstances. Additionally, in 1992, each of the Company's directors
entered into an indemnification agreement with the Company which provides for
such director's indemnification under certain circumstances.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereby, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Not applicable.
C-7
<PAGE> 119
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Registrant's books and records are located at 17290
Preston Road, 3rd Floor, Dallas, Texas 75252, c/o Lance B.
Rosemore, President
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective
amendment to this registration statement:
(i) To include any prospectus required
by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any
facts or events arising after the
effective date of the registration
statement (or the most recent
post-effective amendment thereof)
which, individually or in the
aggregate, represent a fundamental
change in the information set forth
in the registration statement; and
(iii) To include any material information
with respect to the plan of
distribution not previously
disclosed in the registration
statement or any material change to
such information in the registration
statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933,
each such post-effective amendment shall be
deemed to be a new registration statement
relating to the securities offered therein,
and the offering of such securities at that
time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the
securities being registered which remain
unsold at the termination of the offering.
B. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is,
C-8
<PAGE> 120
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
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<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-effective Amendment No. 2 to the Registration Statement
on Form N-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, and State of Texas, on the 20th day of
April, 1998.
PMC CAPITAL, INC.
By: /s/ Lance B. Rosemore
------------------------------------
Lance B. Rosemore, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-effective Amendment No. 2 to the Registration Statement on Form N-2 has
been signed below on April 20, 1998 by the following persons in the capacities
indicated.
<TABLE>
<S> <C>
/s/ Fredric M. Rosemore Chairman of the Board and Treasurer
- ---------------------------
FREDRIC M. ROSEMORE
/s/ Lance B. Rosemore President, Chief Executive Officer,
- --------------------------- Secretary and Director
LANCE B. ROSEMORE
/s Andrew S. Rosemore Executive Vice President, Chief Operating
- --------------------------- Officer and Director
ANDREW S. ROSEMORE
/s/ Barry N. Berlin Chief Financial Officer and Principal
- --------------------------- Accounting Officer
BARRY N. BERLIN
/s/ Robert Diamond Director
- ---------------------------
ROBERT DIAMOND
/s/ Lee Ruwitch Director
- ---------------------------
LEE RUWITCH
</TABLE>
C-10
<PAGE> 122
<TABLE>
<S> <C>
/s/ Martha R. Greenberg Director
- ---------------------------
MARTHA R. GREENBERG
/s/ Barry A. Imber Director
- ---------------------------
BARRY A. IMBER
/s/ Irvin M. Borish Director
- ---------------------------
IRVIN M. BORISH
/s/ Thomas Hamill Director
- ---------------------------
THOMAS HAMILL
</TABLE>
C-11
<PAGE> 123
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ----------- --------
<S> <C> <C>
a. Charter documents:
a.1 Articles of Incorporation, as amended (previously filed as Exhibit 4(b)(1) to the
Registrant's Registration Statement on Form N-2 (Registration No. 33-2535) (the
"Registration Statement"), dated November 29, 1991, and incorporated herein by
reference).
b. Bylaws:
b.1 Bylaws, as amended (previously filed as Exhibit 2 to Amendment No. 7 to the
Registration Statement, dated April 27, 1989, and incorporated herein by reference).
c. Not applicable.
d. Certificate of Common Stock, par value $.01 per share (previously filed as Exhibit 4 to
Amendment No. 1 to the Registration Statement, dated November 10, 1983, and incorporated herein
by reference).
f. Long term debt instruments:
f.1 Debenture dated September 24, 1996 for $2,490,000 loan with SBA (previously filed as
Exhibit 4.2 to the Registrant's Form 10-K for the fiscal year ended December 31, 1996
and incorporated herein by reference).
f.2 Debenture dated February 4, 1987 for $2,480,000 loan with SBA (previously filed as an
exhibit to Amendment No. 6 to the Registration Statement, dated April 27, 1988, and
incorporated herein by reference).
f.3 Debenture dated February 17, 1988 for $1,500,000 loan with SBA (previously filed as
Exhibit 4(b)(2)
</TABLE>
E-1
<PAGE> 124
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ------------ --------
<S> <C> <C>
to Amendment No. 7 to the Registration Statement, dated April 27, 1989, and
incorporated herein by reference).
f.4 Debenture dated June 27, 1990 for $2,000,000 loan with SBA (previously filed as
Exhibit 4(b)(5)(n) to Amendment No. 9 to the Registration Statement, dated April 29,
1991, and incorporated herein by reference).
f.5 Debenture dated September 26, 1990 for $2,810,000 loan with SBA (previously filed as
Exhibit 4(b)(5)(o) to Amendment 9 to the Registration Statement, dated April 29, 1991,
and incorporated herein by reference).
f.6 Debenture dated September 26, 1990 for $1,500,000 loan with SBA (previously filed as
Exhibit 4(b)(5)(p) to Amendment 9 to the Registration Statement, dated April 29, 1991,
and incorporated herein by reference).
f.7 Debenture dated March 29, 1990 for $1,000,000 loan with SBA (previously filed as
Exhibit 5(q) to Amendment No. 3 to the Registration Statement, dated August 18, 1992,
and incorporated herein by reference).
f.8 Debenture dated September 27, 1989 for $1,000,000 loan with SBA (previously filed as
Exhibit 5(r) to Amendment No. 3 to the Registration Statement, dated August 18, 1992,
and incorporated herein by reference).
f.9 Debenture dated September 27, 1989 for $1,500,000 loan with SBA (previously filed as
Exhibit 5(s) to Amendment No. 3 to the Registration Statement, dated August 18, 1992,
and incorporated herein by reference).
f.10 Debenture dated January 2, 1990 for $3,000,000 loan with SBA (previously filed as
Exhibit 5(t) to Amendment No. 3 to the Registration Statement,
</TABLE>
E-2
<PAGE> 125
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ------------ --------
<S> <C> <C>
dated August 18, 1992, and incorporated herein by reference).
f.11 Debenture dated August 18, 1989 for $1,000,000 loan with SBA (previously filed as
Exhibit 5(u) to Amendment No. 3 to the Registration Statement, dated August 18, 1992,
and incorporated herein by reference).
f.12 Debenture dated September 28, 1994 for $3,000,000 loan with SBA (previously filed as
Exhibit 4.13 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.13 Debenture dated September 28, 1994 for $3,000,000 loan with SBA (previously filed as
Exhibit 4.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.14 Senior Note dated July 19, 1993 for $6,000,000 with Columbine Life Insurance Company
(previously filed as Exhibit 4.15 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
f.15 Senior Note dated July 19, 1993 for $9,000,000 with Life Insurance Company of Georgia
(previously filed as Exhibit 4.16 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
f.16 Senior Note dated July 19, 1993 for $5,000,000 with SouthLand Life Insurance Company
(previously filed as Exhibit 4.17 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
f.17 Senior Note dated December 15, 1993 for $2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.18 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
</TABLE>
E-3
<PAGE> 126
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ------------ --------
<S> <C> <C>
f.18 Senior Note dated December 15, 1993 for $3,000,000 with Security Life of Denver
Insurance Company (previously filed as Exhibit 4.19 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1994 and incorporated herein by reference).
f.19 Debenture dated March 29, 1995 for $3,000,000 loan with SBA (previously filed as
Exhibit 4.20 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.20 Debenture dated June 28, 1995 for $5,000,000 loan with SBA (previously filed as
Exhibit 4.21 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.21 Debenture dated September 27, 1995 for $7,000,000 loan with SBA (previously filed as
Exhibit 4.22 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.22 Debenture dated September 29, 1987 for $800,000 loan with SBA (previously filed as
Exhibit 4.23 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.23 Debenture dated December 20, 1989 for $650,000 loan with SBA (previously filed as
Exhibit 4.24 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.24 Debenture dated June 27, 1990 for $300,000 loan with SBA (previously filed as Exhibit
4.25 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
</TABLE>
E-4
<PAGE> 127
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ------------ --------
<S> <C> <C>
f.25 Debenture dated December 6, 1992 for $510,000 loan with SBA (previously filed as
Exhibit 4.26 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.26 Senior Note Dated April 19, 1995 for $5,000,000 with Security Life of Denver Insurance
Company (previously filed as Exhibit 4.27 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995 and incorporated herein by reference).
f.27 Senior Note Dated April 19, 1995 for $2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.28 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference).
f.28 Senior Note Dated April 19, 1995 for $2,000,000 with Indiana Insurance Company
(previously filed as Exhibit 4.29 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference).
f.29 Senior Note Dated April 19, 1995 for $1,000,000 with Security Life of Denver Insurance
Company (previously filed as Exhibit 4.30 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995 and incorporated herein by reference).
f.30 Debenture dated June 27, 1990 for $1,030,000 with SBA (previously filed as Exhibit
4.31 to the Registrant's Form 10-K for the fiscal year ended December 31, 1996 and
incorporated herein by reference)
f.31 Master Promissory Note for $15,000,000 with Bank One, Texas N.A. (previously filed as
Exhibit 10.7 to the Registrant's Form 10-K for the fiscal year ended December 31, 1996
and incorporated herein by reference.)
g. Not applicable.
</TABLE>
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<PAGE> 128
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ------------ --------
<S> <C> <C>
h. Not applicable.
i. Not applicable.
j. Not applicable.
k. Material Contracts
k.1 Employment contract between the Registrant and Lance B. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.1 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated herein by reference).
k.2 Employment contract between the Registrant and Andrew S. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.2 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated herein by reference).
k.3 Employment contract between the Registrant and Fredric M. Rosemore dated June 30, 1996
(previously filed as Exhibit 10.3 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated herein by reference).
k.4 Employment contract between the Registrant and Jan F. Salit dated June 30, 1996
(previously filed as Exhibit 10.4 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated herein by reference).
k.5 Employment contract between the Registrant and Barry N. Berlin dated June 30, 1996
(previously filed as Exhibit 10.5 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated herein by reference).
k.6 Employment contract between the Registrant and Mary J. Brownmiller dated June 30, 1996
(previously filed as Exhibit 10.6 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated herein by reference).
</TABLE>
E-6
<PAGE> 129
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ------------ --------
<S> <C>
k.7 Servicing Agreement by and among Sun Trust, PMC Capital Limited Partnership and PMC
Capital (previously filed as Exhibit 10.8 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and incorporated herein by reference).
l. Opinion of counsel, as to the legality of the shares being registered.*
m. Not applicable
n. Consents
n.1 Consent of Coopers & Lybrand L.L.P. as to inclusion of their report.**
o. Not applicable.
p. Not applicable.
q. Not applicable.
r. Financial Data Schedule**
</TABLE>
---------------
* Previously filed as an exhibit to the Registrant's
Registration Statement on Form N-2 Registration No.
333-33151.
** Filed herewith
E-7
<PAGE> 1
EXHIBIT N.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post Effective Amendment No. 2 to this
registration statement on Form N-2 (File No. 333-3315) of our reports dated
February 28, 1998 on our audits of the consolidated financial statements,
consolidated schedule of investments and financial highlights of PMC Capital,
Inc. and subsidiaries and of the financial statements of the PMC Capital
Limited Partnership. We also consent to the reference to our firm under the
caption "Experts" and "Selected Consolidated Financial Data."
Coopers & Lybrand L.L.P.
Dallas, Texas
April 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FORM 10-K OF PMC CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 265
<SECURITIES> 17,237
<RECEIVABLES> 129,988<F1>
<ALLOWANCES> (794)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 555
<DEPRECIATION> (318)
<TOTAL-ASSETS> 165,839<F2>
<CURRENT-LIABILITIES> 10,281<F3>
<BONDS> 76,290
4,000<F4>
3,000<F4>
<COMMON> 68,671
<OTHER-SE> 1,495
<TOTAL-LIABILITY-AND-EQUITY> 165,839<F5>
<SALES> 0
<TOTAL-REVENUES> 26,766<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,054
<LOSS-PROVISION> 542
<INTEREST-EXPENSE> 5,548
<INCOME-PRETAX> 15,622
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,622
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<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 $ 3,708
(ii) Restricted investments 2,798
(iii) Real property owned 296
(iv) Due from unconsolidated subsidiaries 1,302
(v) Deferred charges, deposits and
other assets, net 1,398
(vi) Investment in unconsolidated subsidiaries 7,797
(vii) Servicing asset 1,607
-------
$ 18,906
========
<F3>Includes the following:
(i) Accrued interest payable $ 1,316
(ii) Borrower advances 1,678
(iii) Dividends payable 4,018
(iv) Accounts payable 3,269
------
$10,281
======
<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 $ 571
(ii) Other liabilities 1,252
(iii) Due to unconsolidated subsidiaries 279
-------
$ 2,102
=======
<F6>Revenues consist primarily of interest, other yield on investments, premium
income and equity in income of unconsolidated subsidiaries and gain from sale
of assets as follows:
(i) Interest $ 17,136
(ii) Premium income 1,776
(iii) Other investment income, net 504
(iv) Other income, net 2,430
(v) Equity in income of unconsolidated subsidiaries 2,560
(vi) Gain on sale of assets 2,360
--------
$ 26,766
========
</FN>
</TABLE>
