<PAGE> 1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission File Number 811-3780
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PMC CAPITAL, INC.
-----------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2338439
- ---------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
18111 Preston Road, Suite 600, Dallas, TX 75252 (972) 349-3200
- ------------------------------------------------ -------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of May 14, 1999, Registrant had outstanding 11,829,116 shares of Common
Stock, par value $.01 per share.
<PAGE> 2
PMC CAPITAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1999 2
Consolidated Statements of Income (Unaudited) -
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
1
<PAGE> 4
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Investments at value:
Loans receivable, net .............................................. $ 128,450 $ 116,711
Cash equivalents ................................................... 7,537 18,489
Investment in unconsolidated subsidiaries .......................... 12,824 12,930
Interest-only strip receivables .................................... 3,790 4,168
Restricted investments ............................................. 2,627 2,525
Mortgage-backed security of affiliate .............................. 2,055 2,168
Real property owned ................................................ 109 109
--------- ---------
Total investments at value ........................................... 157,392 157,100
--------- ---------
Other assets:
Receivable for loans sold .......................................... 168 156
Due from unconsolidated subsidiaries ............................... 1,668 2,579
Servicing asset .................................................... 1,146 1,330
Deferred charges, deposits and other assets ........................ 1,096 1,140
Accrued interest receivable ........................................ 626 581
Cash ............................................................... 250 235
Property and equipment, net ........................................ 240 228
--------- ---------
Total other assets ................................................... 5,194 6,249
--------- ---------
Total assets ......................................................... $ 162,586 $ 163,349
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
SBA debentures payable ............................................. $ 39,790 $ 39,790
Notes payable ...................................................... 35,000 35,000
Accounts payable ................................................... 2,071 1,728
Dividends payable .................................................. 3,019 3,020
Borrower advances .................................................. 1,506 1,598
Accrued interest payable ........................................... 893 1,264
Due to unconsolidated subsidiaries ................................. 21 1
Deferred fee revenue ............................................... 804 666
Other liabilities .................................................. 606 1,131
--------- ---------
Total liabilities .................................................... 83,710 84,198
--------- ---------
Commitments and contingencies
Cumulative preferred stock of subsidiary ............................. 7,000 7,000
--------- ---------
Shareholders' equity:
Common stock, authorized 30,000,000 shares of $.01 par value,
11,829,000 shares issued and outstanding
at March 31, 1999 and December 31, 1998 ....................... 118 118
Additional paid-in capital ......................................... 71,312 71,312
Undistributed net operating income ................................. 851 1,495
Net unrealized depreciation on investments ......................... (405) (774)
--------- ---------
71,876 72,151
--------- ---------
Total liabilities and shareholders' equity ........................... $ 162,586 $ 163,349
========= =========
Net asset value per common share ..................................... $ 6.08 $ 6.10
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
2
<PAGE> 5
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
----------- ----------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest ........................................................... $ 3,769 $ 4,093
Premium income ..................................................... 169 389
Other investment income, net ....................................... 221 170
-------- --------
Total investment income .............................................. 4,159 4,652
Equity in income of unconsolidated subsidiaries, net ................. 863 588
Other income ......................................................... 582 550
-------- --------
Total income ......................................................... 5,604 5,790
-------- --------
EXPENSES:
Interest ........................................................... 1,303 1,332
Salaries and related benefits ...................................... 965 1,016
General and administrative ......................................... 251 164
Profit sharing plan ................................................ 38 38
Rent ............................................................... 53 61
Legal and accounting ............................................... 61 71
Small Business Administration fees ................................. 20 29
Directors and shareholders expense ................................. 10 11
-------- --------
Total expenses ....................................................... 2,701 2,722
-------- --------
Net operating income ................................................ 2,903 3,068
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Loans written-off ................................................ (527) (133)
Change in unrealized appreciation
(depreciation) on investments .................................. 369 357
-------- --------
Total realized and unrealized gain (loss) on investments ............. (158) 224
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ......................................... $ 2,745 $ 3,292
======== ========
PREFERRED DIVIDENDS .................................................. $ 62 $ 62
======== ========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ......... 11,829 11,731
======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE .......................... $ 0.23 $ 0.28
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE> 6
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments ............ $ 2,745 $ 3,292
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 ...................................................... (1,538) (2,570)
Proceeds from sale of guaranteed loans ........................................... 2,172 3,308
Change in unrealized depreciation on investments and loans written-off ........... 158 (224)
Unrealized premium income, net ................................................... (17) (8)
Depreciation and amortization .................................................... 323 254
Accretion of loan discount and deferred fees ..................................... (242) (189)
Deferred fees collected .......................................................... 46 (27)
Loss on sale of assets ........................................................... -- 12
Equity in income of subsidiaries, net ............................................ (863) (588)
Net change in operating assets and liabilities:
Accrued interest receivable ................................................... (45) (45)
Other assets .................................................................. (7) 213
Accrued interest payable ...................................................... (371) (424)
Borrower advances ............................................................. (92) 206
Other liabilities ............................................................. (72) (1,433)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................................ 2,197 1,777
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ........................................................................... (15,693) (8,367)
Principal collected and other adjustments .............................................. 3,384 4,110
Proceeds from interest-only strip receivable ........................................... 148 316
Proceeds from partnership distributions ................................................ 1,135 640
Proceeds from mortgage-backed security of affiliate .................................... 113 --
Proceeds from sale of assets ........................................................... -- 66
Purchase of furniture and fixtures and other assets .................................... (31) (38)
Investment in restricted cash .......................................................... (102) (228)
Advances to (from) unconsolidated affiliates, net ...................................... 931 (477)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................................................... (10,115) (3,978)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................................ -- 2,061
Payment of SBA debentures ............................................................. -- (1,500)
Payment of dividends on common stock .................................................. (2,957) (3,702)
Payment of dividends on preferred stock ............................................... (63) (61)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES .................................................... (3,020) (3,202)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................................ (10,938) (5,403)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 18,725 17,502
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 7,787 $ 12,099
======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ......................................................................... $ 1,663 $ 1,746
======== ========
Reclassification from loans receivable to real property owned
by an Unconsolidated Subsidiary ................................................... $ 323 $ 45
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 7
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet of PMC Capital, Inc. ("PMC") and its
wholly-owned regulated investment company subsidiaries (collectively, the
"Company") as of March 31, 1999 and the consolidated statements of income and
cash flows for the three months ended March 31, 1999 and 1998 have not been
audited by independent accountants. In the opinion of the Company's management,
the financial statements reflect all adjustments necessary to present fairly the
Company's financial position at March 31, 1999 and the results of operations and
cash flows for the three months ended March 31, 1999 and 1998. These adjustments
are of a normal recurring nature.
Certain notes and other information have been omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q. Therefore, these
financial statements should be read in conjunction with the Company's 1998
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results for the three months ended March 31, 1999 are not necessarily
indicative of future financial results.
NOTE 2. RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to the current
year presentation.
NOTE 3. BUSINESS:
PMC 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 ("PMCIC") and
Western Financial Capital Corporation ("Western Financial"). First Western,
PMCIC and Western Financial are registered under the 1940 Act as diversified,
closed-end management investment companies. In addition, PMC is directly or
indirectly either the sole shareholder or partner of several non-investment
company act subsidiaries. These are: PMC Advisers, Ltd. and its subsidiary ("PMC
Advisers"); PMC Funding Corp. and its subsidiary ("PMC Funding"); PMC Capital
Limited Partnership (the "96 Partnership") and its related general partner and
trust; and PMC Capital, L.P. 1998-1 and its related general partner (the "98
Partnership" and together with the 1996 Partnership, the "Limited
Partnerships"). PMC has elected to be taxed as a regulated investment company
and consequently distributes substantially all of its taxable income as
dividends to shareholders.
NOTE 4. BASIS FOR CONSOLIDATION:
The consolidated financial statements include the accounts of PMC and its
wholly-owned regulated investment company subsidiaries. Intercompany
transactions have been eliminated in consolidation.
The accounts of PMC Advisers, PMC Funding, and the Limited Partnerships are
accounted for by the equity method of accounting in conformity with Federal
securities laws.
Consolidated Subsidiaries
First Western is a small business lending company ("SBLC") that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration ("SBA") pursuant to its Section 7(a) Program (the "7(a)
Program").
5
<PAGE> 8
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BASIS FOR CONSOLIDATION: (CONTINUED)
PMCIC is a licensed specialized small business investment company ("SSBIC")
under the Small Business Investment Act of 1958, as amended ("SBIA"). PMCIC 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 PMCIC are either fixed rate or a variable
rate which is based on the prime lending rate ("Prime Rate"). As an SSBIC, PMCIC
is eligible to obtain long-term, fixed-rate funding from the SBA through the
issuance of debentures (which are guaranteed by the SBA and on which the
interest rate was reduced through an SBA subsidy by 3% during the first five
years). The SBA subsidy is no longer provided on new issuances under the SSBIC
program.
Western Financial is a licensed small business investment company ("SBIC") under
the SBIA that provides loans to borrowers whether or not they qualify as
"disadvantaged." The interest rates on loans originated by Western Financial are
either fixed rate or a variable rate which is based on the Prime Rate. As an
SBIC, Western Financial is eligible to obtain long-term, fixed-rate funding from
the SBA through the issuance of debentures.
PMC originates loans to borrowers on a non-SBA supported basis using similar
criteria as that used for other loans that are funded under the SBA programs
utilized by the subsidiaries. These loans are made to borrowers who exceed the
eligibility requirements of the 7(a) Program or SBIC programs.
Unconsolidated Subsidiaries
PMC Advisers, acts as the investment advisor for PMC Commercial Trust ("PMC
Commercial"), a Texas real estate investment trust and an affiliate of PMC
Capital.
PMC Funding is a Florida corporation that holds assets on behalf of the Company.
PMC Capital is the sole shareholder of PMC Funding.
The 1996 Partnership was formed as a Delaware limited partnership in November
1996 to act as a special purpose affiliate of the Company. The 1996 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.
The 1998 Partnership was formed as a Delaware limited partnership in November
1998 to act as a special purpose affiliate of the Company. The 1998 Partnership
was established to acquire loans from the Company and to issue fixed-rate debt
through a private placement. PMC Capital Corp. 1998-1 is a Delaware corporation
formed in November 1998 to be the general partner of the 1998 Partnership.
NOTE 5. DIVIDENDS PAID AND DECLARED:
During January 1999, the Company paid $0.250 per share in dividends to common
shareholders of record on December 31, 1998. During March 1999, the Company
declared a $0.250 per share dividend to common shareholders of record on March
31, 1999 which was paid on April 12, 1999.
NOTE 6. INVESTMENT IN LIMITED PARTNERSHIPS:
As described in Note 4, the accounts of the Limited Partnerships are accounted
for by the equity method of accounting in conformity with Federal securities
law. During the three months ended March 31, 1999, the Limited Partnerships had
$1,599,000 in total income and net income of $666,000 before the elimination of
the net cash flow relating to the interest-only strip receivable.
6
<PAGE> 9
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS:
As described in Note 4, the consolidated financial statements include the
accounts of PMC and its wholly-owned regulated investment company subsidiaries.
The following are condensed combined financial statements of the Unconsolidated
Entities as of March 31, 1999 and December 31, 1998 and for the three months
ended March 31, 1999 and 1998.
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
(Unaudited)
ASSETS (IN THOUSANDS)
<S> <C> <C>
Investments at value:
Loans receivable, net ................................. $ 58,808 $ 61,768
Cash equivalents ...................................... 95 64
Restricted investments and real property owned ........ 6,447 9,096
-------- --------
65,350 70,928
Other assets ............................................... 465 1,673
-------- --------
Total assets .......................................... $ 65,815 $ 72,601
======== ========
LIABILITIES AND OWNERS' EQUITY
LIABILITIES:
Notes payable ......................................... $ 51,295 $ 57,053
Other liabilities ..................................... 1,696 2,618
-------- --------
52,991 59,671
-------- --------
OWNERS' EQUITY:
Common Stock and additional paid-in capital ........... 526 526
Partners' Capital ..................................... 12,271 12,740
Retained earnings (deficit) ........................... 27 (336)
-------- --------
12,824 12,930
-------- --------
Total liabilities and owners' equity .................. $ 65,815 $ 72,601
======== ========
</TABLE>
CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
INCOME: (Unaudited)
Investment income ............................................... $1,552 $1,109
Other income, net ............................................... 452 35
------ ------
Total income .................................................... 2,004 1,144
------ ------
EXPENSES:
Interest ........................................................ 905 472
General and administrative expenses ............................. 69 84
------ ------
Total expense ................................................... 974 556
------ ------
NET INCOME ...................................................... 1,030 588
Less: elimination of the net cash flow relating to the
interest-only strip receivable in consolidation ........ 167 --
------ ------
Equity in income of unconsolidated subsidiaries, net ............ $ 863 $ 588
====== ======
</TABLE>
7
<PAGE> 10
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
Included in restricted investments and real property owned on the accompanying
condensed combined balance sheet of the Unconsolidated Entities at March 31,
1999 is $350,000 in real property owned including $323,000 which was transferred
from loans receivable. During the three months ended March 31, 1999, PMC Funding
acquired the property as part of liquidating a loan receivable owned primarily
by PMCIC. The asset was recorded at the expected net realizable value as
determined by the Company's Board of Directors.
NOTE 8. EARNINGS PER COMMON SHARE COMPUTATIONS:
The computations of basic earnings per common share are based on the weighted
average number of shares outstanding during the period. For the purposes of
determining the diluted earnings per share, there was no change in the weighted
average shares outstanding for the effect of stock options during the three
months ended March 31, 1999 and 1998 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 PMCIC. Preferred stock dividend requirements were approximately
$62,000 during each of the three months ended March 31, 1999 and 1998. The
weighted average number of shares used in the computations of basic and diluted
earnings per common share were 11.8 million and 11.7 million for the three
months ended March 31, 1999 and 1998, respectively.
NOTE 9. COMMITMENTS AND CONTINGENCIES:
Loan commitments outstanding at March 31, 1999, to various prospective small
business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $63.7 million. Of these
commitments, $19.5 million are for loans to be originated by First Western, a
portion of which will be sold into the secondary market. 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.
8
<PAGE> 11
PART I
FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
GENERAL
The Company's operations include originating and servicing commercial loans for
its own account. In addition, the Company operates as an investment manager to
evaluate properties and loans and to service loans and lease contracts pursuant
to a fee arrangement with PMC Commercial. The Company sells the government
guaranteed portion of its loans originated under the SBA 7(a) Program. Further,
the Company has completed several structured sales of its loan portfolio.
Historically, the Company has retained servicing rights and residual interests
in all loans sold.
The Company's revenue sources include the following:
o Interest earned on commercial loans originated and retained
including the effect of commitment fees collected at the inception
of the loan.
o Fee income from the management of PMC Commercial.
o An equity interest in the income of non-investment company
subsidiaries.
o Premiums recognized from the sale of the government guaranteed
portion of SBA 7(a) Program loans into the secondary market.
o Interest earned on temporary (short-term) investments.
o Other fees, including: late fees, prepayment fees, construction
monitoring and site visit fees.
The following table sets forth information concerning the aggregate gross loans
funded by the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- ------------------------
1999 1998 1998 1997
------- ------- ------- -------
COMPANY FUNDED FUNDED FUNDED FUNDED
(IN MILLIONS)
<S> <C> <C> <C> <C>
PMCIC ................... $ 4.7 $ 2.9 $ 14.1 $ 24.1
Western Financial ....... -- 4.3 12.0 12.9
First Western ........... 2.2 3.4 10.6 29.5
PMC Capital ............. 10.3 0.3 29.7 19.9
------- ------- ------- -------
Total .......... $ 17.2 $ 10.9 $ 66.4 $ 86.4
======= ======= ======= =======
</TABLE>
PMC Advisers, either directly or through its wholly-owned subsidiary,
has acted as the investment manager for PMC Commercial since PMC Commercial's
initial public offering in December 1993. During the three months ended March
31, 1999 and the years ended December 31, 1998 and 1997, PMC Advisers and its
wholly-owned subsidiary earned management fees from PMC Commercial of
approximately $0.6 million, $2.6 million and $1.6 million, respectively. The
fees during the three months ended March 31, 1999 and the year ended December
31, 1998 include fees earned related to the structured financing and property
acquisitions by PMC Commercial. The fee of PMC Advisers is primarily based on
the amount and value of assets. As a result, any increases in the dollar amount
of PMC Commercial's assets will benefit PMC Advisers, and PMC Advisers will have
a potential conflict in determining whether to advise PMC Commercial to acquire
assets and write down the value of any assets. In order to mitigate the risk to
PMC Commercial from increasing its asset base through leveraged transactions,
the Investment Management Agreements provide PMC Advisers with a reduced fee for
any loans originated through additional borrowings. Additionally, the potential
conflict for the management of PMC Advisers between PMC Commercial and the
Company is mitigated through a loan origination agreement among PMC Advisers,
PMC Commercial and the Company.
9
<PAGE> 12
Pursuant to the Investment Management Agreements between PMC Commercial
and PMC Advisers, fees of between 0.875% and 1.67%, annually, are charged by the
Company based upon the average principal outstanding of PMC Commercial's loans.
In addition, one Investment Management Agreement includes compensation to PMC
Advisers for its assistance in the issuance of PMC Commercial's debt and equity
securities. During June 1998, one Investment Management Agreement was amended to
provide for payment of fees relating to property acquisitions by PMC Commercial
(the "Property Management Agreement"). The Property Management Agreement
provides for a one time fee of 0.75% of the purchase price paid by PMC
Commercial to Amerihost Properties, Inc. and its subsidiaries ("Amerihost") (the
"Amerihost Purchase Price") in connection with the purchase of hotels from
Amerihost and an annual management fee equal to the product of 0.70% multiplied
by the Amerihost Purchase Price (the "Amerihost Fee"). In the event the Property
Management Agreement with PMC Advisers is terminated or not renewed by PMC
Commercial (other than as a result of a material breach by PMC Advisers) or by
PMC Advisers (as a result of a material breach by PMC Commercial), PMC Advisers
would be entitled to receive the Amerihost Fee for a period of five years from
the termination date.
The Company also earns income through its equity ownership in the
unconsolidated subsidiaries, primarily the limited partnerships established by
the Company in connection with the structured sale/financing of the Company's
loans. The differential between the interest received by the limited
partnerships on the loans transferred to it by PMC Capital and the interest paid
by the limited partnerships on the notes issued by the limited partnerships in
connection with the structured sales (see Note 7 to the accompanying
consolidated financial statements), less (i) the net cash flow relating to the
interest-only strip receivable on PMC's balance sheet, (ii) any loan losses and
(iii) amortization of transaction fees, contributes to the revenues of PMC
Capital through its equity ownership in the limited partnerships.
As a result of several factors, the number and dollar volume of loans
originated by First Western under the SBA SBA 7(a) Program have decreased. The
factors which contributed to this decrease included an increase in guarantee
fees due to the SBA by the borrower under the SBA 7(a) Program, increased
competition for SBA 7(a) Program loans, and an increase in competition from
alternative loan products. These other products often provide prospective
borrowers with fixed interest rates at less than the floating interest rates
available through the SBA 7(a) Program. Accordingly, SBA 7(a) Program funding
has decreased and the premiums earned on the sales of the government guaranteed
portions of these loan have been significantly reduced. For the three months
ended March 31, 1999 and the years ended December 31, 1998 and 1997, revenues
generated by such loan sales were $169,000, $776,000 and $1,776,000,
respectively. Because of the above factors and an increase in the number of
borrowers requesting fixed-rate financing, the Company believes that revenues
generated from the sales of the guaranteed portion of the SBA 7 (a) Program
loans will continue at present levels or may possibly diminish in the
foreseeable future. The Company has attempted to offset First Western's
decreased revenues through emphasizing the Company's other lending activities
and offering lower fixed interest rates.
As a result of the general downward trend in interest rates, the
Company has experienced an increased rate in the prepayment of its loans. During
the three months ended March 31, 1999 and the years ended December 31, 1998 and
1997, the Company received $3.4 million, $24.7 million and $10.1 million,
respectively, in collections of principal on retained loans including
prepayments. For the three months ended March 31, 1999 and the years ended
December 31, 1998 and 1997, principal collections including prepayments (as an
annualized percentage of the Company's total retained loan portfolio), were 10%,
19% and 11%, respectively. Prepayments generally increase during times of
declining interest rates. On such prepayments, to the extent the loans were at a
fixed rate of interest, the Company received the immediate benefit of the
prepayment charge. Prepayment fees result in one-time increases in the Company's
other income. However, the proceeds from the prepayments were invested initially
in temporary investments and have been re-loaned or committed to be re-loaned at
lower rates. These lower interest rates have had an adverse effect on the
Company's results of operations and dependent upon the rate of future
prepayments may have an impact on the Company's ability to maintain
shareholders' distributions at current levels. The impact of the lower lending
rates may partially be offset (based on current market conditions) by the
reduced cost of the Company's borrowings. First Western's loans (all
variable-rate) have no prepayment fees in accordance with SBA policy. Loans
originated pursuant to the Company's prime lending program (the "Prime Lending
Program") generally have prepayment fees equal to 95 days' interest. The Company
believes that the prepayments may continue at accelerated levels in the second
quarter of 1999, however, as a result of recent changes in the credit markets,
the pace of prepayment activity may decrease later in the current fiscal year.
See "Prepayment Risk".
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<PAGE> 13
Late in the fourth quarter of 1996 the Company began marketing its
Prime Lending Program which is a variable interest rate lending program based on
the Prime Rate (as defined below). The Prime Lending Program is separate from
the SBA 7(a) Program of First Western, the Company's other variable rate lending
program. The Prime Lending Program provides funds to refinance existing real
estate secured commercial loans with borrowers who have proven timely payment
histories and loan-to-value and debt coverage ratios within the Company's
underwriting criteria. Several of the loans refinanced under this program were
originally SBA 7(a) Program loans and some of these loan originations have
refinanced First Western's loans.
Substantially all of the First Western loans and all loans originated
pursuant to the Prime Lending Program 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% and the
weighted average spread over the Prime Rate for the Prime Lending Program is
approximately 1.3%.
The Prime Rates utilized for variable-rate loans were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
First Quarter 7.75% 8.50% 8.25%
Second Quarter 8.50% 8.50%
Third Quarter 8.50% 8.50%
Fourth Quarter 8.25% 8.50%
</TABLE>
The Company's working capital requirements for loan originations, as
well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, require it to maintain temporary
short-term investments. In order to minimize its short-term investment
positions, the Company may establish a bank warehouse facility and expects to
more fully utilize its revolving credit facility to fund these working capital
requirements. See "Liquidity and Capital Resources."
The Company receives other investment income from various sources
including prepayment fees, late fees, construction monitoring fees and site
visit fees. The amount of other investment income earned will vary based on
volume of loans funded, the timing and amount of financings, volume of loans
which prepay, the mix of loans (construction versus non-construction), the rate
and type of loans originated (whether fixed or variable) as well as the general
level of interest rates.
Expenses primarily consist of interest expense and company overhead.
The Company's operations are centralized in its Dallas, Texas headquarters. The
Company presently has additional business development offices located in
Atlanta, Georgia and Phoenix, Arizona.
General and administrative expenditures consist primarily of insurance,
advertising and promotional expense, telephone services, corporate printing
costs, commissions and general office expenses. It is anticipated that general
and administrative expenses will remain at present levels during the remainder
of the year ending December 31, 1999.
In addition, the Company has other administrative costs ("Other
Administrative Costs") which consist of profit sharing plan, rent, legal and
accounting, SBA fees and directors and shareholders expense. It is anticipated
that Other Administrative Costs will remain at present levels during the
remainder of the year ending December 31, 1999.
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
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<PAGE> 14
values. The Company typically receives cash and retains the right to receive
contractual servicing fees and the right to receive future interest income on
loans sold that exceed the contractually specified servicing fee (the
interest-only strip receivable) in exchange for a portion of the loan, typically
the guaranteed portion of an SBA 7(a) Program loan. The difference between (i)
the carrying value of the portion of loans sold and (ii) the sum of (a) cash
received, (b) the relative fair values of the servicing rights, and (c) the
interest-only strip receivable retained, constitutes the gain on sale.
In accordance with SFAS No. 125, the Company establishes a servicing
asset to the extent the Company receives contractual compensation for servicing
loans which is in excess of adequate compensation to service these loans.
Servicing the sold portion of government guaranteed loans requires First Western
to retain a minimum servicing spread of 1%. This spread is in excess of adequate
compensation to service these loans. Accordingly, the Company has recorded a
servicing asset relating to the servicing of the sold portion of First Western's
loans. 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.
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, 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 as of the
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 three months ended March 31,
1999 and the years ended December 31, 1998 and 1997, the Company recorded a net
unrealized loss of $160,000, a net unrealized gain of $120,000 and a net
unrealized loss of $300,000, respectively, related to the interest-only strip
receivables. At March 31, 1999 and December 31, 1998 and 1997, an unrealized
loss was recorded on the interest-only strip receivable of $340,000, $180,000
and $300,000, respectively.
The estimated net servicing income and the investment in the
interest-only strip receivable are based in part upon management's estimate of
prepayment speeds, default rates and future loan losses. There can be no
assurance of the accuracy of these estimates. If the prepayment speeds occur at
a faster rate than anticipated, the amortization of the servicing asset will be
accelerated and the value of the interest-only strip receivable will decline. If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and total income in future periods would be enhanced.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Net income decreased by $547,000 from $3,292,000 during the three
months ended March 31, 1998 to $2,745,000 during the three months ended March
31, 1999. The weighted average common shares outstanding increased by
approximately 1% from 11,731,000 during the three months ended March 31, 1998 to
11,829,000 during the three months ended March 31, 1999 as a result of shares
issued pursuant to the dividend reinvestment and cash purchase plan. As more
fully detailed below, the most significant reasons for the declines in net
income when comparing the three months ended March 31, 1999 and 1998 was (i) the
reduced amount of income recognized from interest income as a result of the
structured sale of loan portfolio in November 1998, (ii) the reduction in
premium income and (iii) the valuation gain (loss) related to the interest only
strip receivables.
Interest income: Interest income decreased by $324,000, from $4,093,000
for the three months ended March
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<PAGE> 15
31, 1998 to $3,769,000 for the three months ended March 31, 1999. Interest
income includes the interest earned on loans, the interest earned on short-term
("temporary") investments, up-front fees collected including the accretion of
up-front fees and the interest earned on the interest only strip receivables.
This overall decrease was primarily attributable to a continued decline in
interest rates on new loan originations and the structured sale of over $40
million in loans in November 1998.
Interest on short-term investments for the three months ended March 31,
1999 was $37,000 greater than for the three months ended March 31, 1998 due to
the higher daily balances in the restricted investments. The average outstanding
temporary investments fluctuate based on the size and timing of receipt of
capital resources and the volume of loan originations and prepayment activities.
Interest income on loans decreased by $361,000, or 9%, from $3,921,000
during the three months ended March 31, 1998 to $3,560,000 during the three
months ended March 31, 1999. The decrease in interest income on loans was
primarily a result of the decrease in the weighted average outstanding principal
amount of loans which decreased as a result of the structured sale of loans in
November 1998. The average retained loan portfolio decreased by 5% to $122.6
million during the three months ended March 31, 1999 from $128.9 million during
the three months ended March 31, 1998. This decrease was also caused by a
continuation of lower interest rates charged on new loan originations and the
prepayment of the higher interest rate loans. As competition has increased and
acceptability of hospitality lending was increased by loan programs of major
investment banks (commonly known as "conduit" programs), the rate able to be
charged by the Company was decreasing while prepayments were increasing. The
proceeds from the prepayments were invested initially in temporary investments
and have been re-loaned at lower interest rates.
Premium income: Premium income decreased by $220,000 (57%) from
$389,000 for the three months ended March 31, 1998 to $169,000 for the three
months ended March 31, 1999. This decrease was primarily attributable to (i) a
$1,136,000 (34%) decrease in the government guaranteed portion of loans held for
sale or sold (under the SBA 7(a) Program) from $3,308,000 during the three
months ended March 31, 1998 to $2,172,000 during the three months ended March
31, 1999 and (ii) the diminished premiums paid by purchasers of government
guaranteed loans. As a result of several factors, the number and dollar volume
of loans originated by First Western under the SBA 7(a) Program have decreased.
The factors which contributed to this decrease included an increase in guarantee
fees due to the SBA by the borrower under the SBA 7(a) Program, increased
competition for SBA 7(a) Program loans, and an increase in competition from
alternative loan products. These other products often provide prospective
borrowers with fixed interest rates at less than the floating interest rates
available through the SBA 7(a) Program. Accordingly, premiums earned have been
significantly reduced. It is anticipated that future fundings, and sales of the
guaranteed portion of loans, may continue at levels experienced during the
latter half of 1998 and the first quarter of 1999.
Other investment income, net: Other investment income, net, increased
by $51,000 (30%) from $170,000 for the three months ended March 31, 1998 to
$221,000 for the three months ended March 31, 1999. This increase was primarily
attributable to an increase in prepayment fees received and recognition of
discounts related to fixed-rate loans which were prepaid in full and forfeited
commitment fees during the three months ended March 31, 1999 as compared to the
three months ended March 31, 1998.
Equity in income (loss) of unconsolidated subsidiaries: Equity in
income (loss) of unconsolidated subsidiaries increased by $275,000 (47%), from
$588,000 during the three months ended March 31, 1998 to $863,000 during the
three months ended March 31, 1999. The primary reason for the increase was the
partnership formed by the Company in November 1998, the income from PMC Funding
Corp. and its subsidiary and the income from PMC Advisers. The Company
recognized $130,000 in net income related to the 1998 limited partnership during
the three months ended March 31, 1999. The net income of PMC Advisers was
$190,000 during the three months ended March 31, 1999 primarily related to fees
generated on the Investment Management Agreement entered into in June 1998. No
net income was earned by PMC Advisers during the three months ended March 31,
1998. PMC Funding which had a gain of $174,000 during the three months ended
March 31, 1999 as compared to a $22,000 loss during the three months ended March
31, 1998 as a result of a gain on the sale of an asset. These increases were
partially offset by a decrease in profits from the 1996 Partnership. The
Partnership formed by the Company in 1996 had net income of $369,000 and
$611,000 during the three months ended March 31, 1999 and 1998, respectively.
The decrease is primarily due to the continued reduction
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<PAGE> 16
in outstanding principal balance of loans held by the 1996 partnership.
Accordingly, the interest earned on the 1996 partnership assets is decreasing
resulting in less net profits. The loans held by the 1996 partnership will
continue to be reduced resulting in a decline in profits to the Company in
future periods of operations. The 1996 partnership profits include all yield
generated from the loans transferred by PMC Capital less the cost of the notes
issued by the 1996 partnership.
Other income, net: Other income, net, increased by $32,000 (6%) from
$550,000 during the three months ended March 31, 1998 to $582,000 during the
three months ended March 31, 1999. Other income increased during the three
months ended March 31, 1999 primarily due to increased investment management
fees generated by PMC Advisers.
Operating expenses: Operating expenses, not including interest,
increased by $8,000 from $1,390,000 during the three months ended March 31, 1998
to $1,398,000 during the three months ended March 31, 1999. Operating expenses
are comprised of salaries and related benefits, general and administrative,
profit sharing plan, rent, legal and accounting, SBA fees and director's and
shareholder's expense. The largest operating expense is salaries and related
benefits which consist of salaries for the Company's officers and employees who
provide all of the Company's management, advisory, and portfolio functions,
including marketing, servicing, accounting and portfolio analysis. The Company
had a decrease in salaries and related benefits of $51,000 (5%) from $1,016,000
during the three months ended March 31, 1998, to $965,000 during the three
months ended March 31, 1999. The decrease in salaries and related benefits was
attributable to a decrease in the number of employees. It is anticipated that
operating expenses will remain at present levels during the remainder of 1999.
The decrease in salaries and related benefits was offset by an increase in
general and administrative expenses which increased $87,000 (53%) from $164,000
during the three months ended March 31, 1998, to $251,000 during the three
months ended March 31, 1999. This increase was primarily attributable to an
increase in commissions paid on loans closed during the three months ended March
31, 1999.
Interest expense: Interest expense decreased by $29,000 (2%) from
$1,332,000 during the three months ended March 31, 1998 to $1,303,000 during the
three months ended March 31, 1999. Interest expense results primarily from
interest payments made on (i) the Company's $35 million of unsecured notes with
a weighted average interest rate of 7.3% and weighted average remaining maturity
of 2.5 years as of March 31, 1999, and (ii) $39,790,000 of debentures due to the
SBA as a result of borrowings made by the Company's subsidiaries, with a
weighted average interest rate of approximately 6.6% and weighted average
remaining maturity of 4.0 years as of March 31, 1999. The decrease was
attributable to the repayment at maturity of approximately $1.5 million in SBA
debentures during February 1998.
Realized and unrealized gain (loss) on investments: Realized and
unrealized gain (loss) on investments changed from a gain of $224,000 during the
three months ended March 31, 1998 to a loss of $158,000 during the three months
ended March 31, 1999. The primary reason for this change was the recorded
unrealized gains (losses) relating to the Company's interest only strip
receivables. During the three months ended March 31, 1998, the Company
recognized valuation gains of $255,000 compared to valuation losses of $160,000
during the three months ended March 31, 1999 as a result of increased prepayment
speeds.
CASH FLOW ANALYSIS
The Company generated $2,197,000 and $1,777,000 from operating
activities during the three months ended March 31, 1999 and 1998, respectively.
The primary source of the Company's funds is net income. The source of funds
from net income is adjusted primarily by the change in other assets and
liabilities and First Western's lending activities. Included in cash flows from
operating activities is the lending activity of First Western relating to the
government guaranteed portion of the SBA 7(a) Program loans originated which are
sold into the secondary market ("Government Guaranteed Lending"). During the
three months ended March 31, 1999 and 1998, the Company had a net source of cash
of $634,000 and $738,000, respectively, from Government Guaranteed Lending
activities representing a decrease in source of funds of $104,000. During the
three months ended March 31, 1999 and 1998, the Company used net cash of
$587,000 and $1,483,000, respectively, from the change in operating assets and
liabilities.
The Company used $10,115,000 and $3,978,000, respectively from
investing activities during the three months ended March 31, 1999 and 1998,
respectively. The Company increased its use of funds relating to loan activity
from a net use of funds of $4,257,000 during the three months ended March 31,
1998 to a net use of funds of $12,309,000
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<PAGE> 17
during the three months ended March 31, 1999. This increase of $8,052,000 was
due to an increase in loans funded of approximately $7.3 million. Principal
collected decreased by $0.7 million from $4.1 million during the three months
ended March 31, 1998 to $3.4 million during the three months ended March 31,
1999.
The Company had a net use of $3,020,000 and $3,202,000 from financing
activities during the three months ended March 31, 1999 and 1998, respectively.
Dividends paid on common stock during the three months ended March 31, 1999 were
$2,957,000 as compared to $3,702,000 during the three months ended March 31,
1998, a decrease of $745,000 (20%). The Company also had a decrease in funds
received from the issuance of common stock of $2,061,000 due to the curtailment
of the cash portion of the Company's dividend reinvestment plan during 1998 and
the utilization of the market purchase option for plan purchases. Under the
market purchase option, the Company does not receive any of the proceeds from
plan participants. In addition, the Company did not have any SBA debenture
repayments during the three months ended March 31, 1999 while a $1,500,000 SBA
debenture was repaid at maturity during the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF FUNDS: As a regulated investment company, pursuant
to the Internal Revenue Code of 1986, the Company is required to pay out
substantially all of its net investment company taxable income to the common
shareholders (see "Dividends"). Consequently, the Company must procure funds
from sources other than earnings in order to meet its capital requirements. In
addition, as a Business Development Company ("BDC"), the Company will be
generally required to maintain a ratio of at least 200% of total assets to total
borrowings, which may restrict its ability to borrow in certain circumstances.
The primary use of the Company's funds is to originate loans. The
Company also expends funds for payment of (i) dividends to shareholders, (ii)
principal due on borrowings, (iii) interest and related financing costs, (iv)
general and administrative expenses, (v) capital expenditures and (vi) advances
on loan liquidations.
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 medium-term notes,
the securitization and sale of a portion of its loan portfolio and the
utilization of its short-term, unsecured revolving credit facility. During 1998,
the Company structured a collateralized financing of its variable-rate loans
primarily originated as part of the Prime Lending Program. Prospectively, in
order to generate growth in the size of its investment portfolio, the Company
will continually review the need for obtaining additional funds from: (i)
securitization and sale of a portion of the loan portfolio, (ii) borrowings
under its credit facility, (iii) medium-term debt offerings and/or (iv) equity
offerings. It is anticipated that during the year ending December 31, 1999 the
Company will generally rely on its revolving credit facility, the proceeds from
principal payments on loans and the issuance of SBA debentures to the extent
funds are necessary to originate loans. In addition, the Company has identified
approximately $60 million of fixed-rate loans for securitization and anticipates
finalizing a transaction during the second quarter of 1999. As a result of the
recent volatile market conditions for asset backed securities such as securities
sold by the Company, there can be no assurances that the Company will be able to
complete this transaction. During 1999, the Company will have $6.7 million in
senior unsecured notes and $4.2 million in SBA debentures which will mature. The
Company has received a commitment to have the senior unsecured notes renewed
under substantially the same terms and conditions presently outstanding. The SBA
debentures are expected to be "rolled-over" into new SBA debentures with 10 year
maturities. As part of the SBA's commitment to Western Financial and PMCIC to
provide guaranties on $11.5 million in future debentures, $4.2 million will be
utilized for the "roll-over" debentures. Management believes that these
financing sources will enable the Company to generate funds sufficient to meet
both its short-term and long-term capital needs.
COMMITMENTS: Loan commitments outstanding at March 31, 1999 to various
prospective small business companies, including the unfunded portion of projects
in the construction phase, amounted to approximately $63.7 million. Of these
commitments, $19.5 million were for loans partially guaranteed by the SBA of
which approximately $16.3 million would be sold (when fully funded) into the
secondary market. Such commitments are made in the ordinary course of the
Company's business. Commitments to extend credit are agreements to lend to a
customer provided that the terms established in the contract are met.
Commitments generally have fixed expiration dates and require payment of a fee.
Since some commitments expire without the proposed loan closing, the total
commitment amounts do not necessarily represent future cash requirements.
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<PAGE> 18
REVOLVING CREDIT FACILITY: PMC Capital has a $15 million revolving
credit facility which expires in March 2000. At March 31, 1999, the Company had
no borrowings outstanding under this revolving credit facility, and had
availability of $15 million. Since March 31, 1999 the Company has borrowed
approximately $5 million in the aggregate under the revolving credit facility.
Advances pursuant to the credit facility bear interest at the Company's option
at either the lender's prime rate less 50 basis points or LIBOR plus 175 basis
points. The credit facility requires the Company to meet certain covenants, the
most restrictive of which provides that the ratio of net charge-offs to net
loans receivable may not exceed 2%, and the ratio of assets to senior debt (as
defined in the credit facility) will not fall below 135%. At March 31, 1999 the
Company was in compliance with all covenants of this facility.
SBA DEBENTURES: Due to changes in the SBIC program increasing the cost
and availability of SBA debentures, the Company had been utilizing 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 had been able to issue debt
through private placement of notes and generate working capital through the
securitization and sale of a portion of its portfolio at rates generally better
than available through the issuance of SBA debentures under the relative terms
in existence during the first half of 1998. As the cost of funds through the
issuance of asset-backed securities increased during the latter half of 1998,
the Company determined that the cost of debentures through the SBIC program was
again cost efficient. As a result, the Company applied for and was approved by
the SBA for the issuance of up to $11.5 million in SBA debentures. It is
anticipated that a significant portion of these debentures will be issued during
the year ended December 31, 1999 including $4.2 million for the "rollover" of
SBA debentures which mature in 1999.
INVESTMENT COMPANY ACT REQUIREMENTS: PMC Capital is in compliance with
the requirement to maintain a minimum of 200% asset coverage of debt as defined
in sections 18 and 61 of the 1940 Act as modified by exemptive orders obtained
by the Company from the Securities and Exchange Commission.
DIVIDENDS: PMC Capital has historically paid out 100% of its investment
company taxable income and not paid any return of capital. There are certain
timing differences between book and tax income, most notably the recognition of
commitment fees received and the recognition of income relating to the 1998
structured sale of loans. A portion of dividends paid during 1998 pertained to
earnings in 1997 including the effect of the gain from a securitization and sale
of certain loans originated by First Western completed in December 1997 (these
amounts being referred to as the "Carry-Forward Amounts"). As a result of these
timing differences and the Carry-Forward Amounts, the payment and amount of
dividends does not necessarily coincide with the Company's earnings. The Company
utilized a substantial portion of its Carry-Forward Amounts during 1998 to pay
dividends. The Company presently anticipates that the dividend will be
stabilized at $0.25 per share, per quarter during 1999. Each of the dividends
paid on January 11, 1999 and April 12, 1999 were $0.25 per share. The Company
may amend this stabilized dividend policy as warranted by earnings.
YEAR 2000 COMPLIANCE UPDATE
The Year 2000 issue concerns the potential impact of historic computer
software code that only utilized two digits to represent the calendar year (e.g.
"98" for "1998"). Software so developed, and not corrected, could produce
inaccurate or unpredictable results commencing January 1, 2000, when current and
future dates present a lower two digit year number than dates in the prior
century. The Company, similar to most financial services providers, is subject
to the potential impact of the Year 2000 issue due to the nature of financial
information. Potential impacts to the Company may arise from software, computer
hardware, and other equipment both within the Company's direct control and
outside of the Company's ownership, yet with which the Company electronically or
operationally interfaces. Regulators have intensively focused upon Year 2000
exposures, issuing guidance concerning the responsibilities of senior management
and directors. Year 2000 testing and certification is being addressed as a key
safety and soundness issue in conjunction with these regulatory concerns.
During 1998, the Company formed an internal review team to address,
identify and resolve any Year 2000 issues that encompasses operating and
administrative areas of the Company. In addition, executive management monitors
the status of the Company's Year 2000 remediation plans, where necessary, as
they relate to internally used
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<PAGE> 19
software, computer hardware and use of computer applications in the Company's
servicing processes. In addition, the Company is engaged in assessing the Year
2000 issue with significant suppliers.
The assessment process relating to the Company's loan receivable
servicing operations has commenced. In addition, the Company has initiated
formal communications with its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company intends to use internal resources to test the software for
Year 2000 modifications. The Company plans to substantially complete its Year
2000 assessment and remediation by the end of the second quarter of 1999. The
total project cost (while not considered to be material) has not yet been
determined. However, based on preliminary information, the majority of the
project cost will be attributable to employee time necessary to test the present
system and to meet future industry requirements and will accordingly be
expensed. To date, the Company has installed new personal computer terminals at
a cost of approximately $25,000 which was not related to any specific Year 2000
concern. In addition, the Company has not incurred any material costs related to
the assessment of, and preliminary efforts in connection with its Year 2000
issues. The costs of the project and the date on which the Company plans to
complete its Year 2000 assessment and remediation are based on management's
estimates, which were derived utilizing assumptions of future events including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ significantly from those plans.
Specific factors that might cause differences from management's estimates
include, but are not limited to, completion by third parties (primarily the
Company's bank) of their Year 2000 evaluations and their required modifications.
Management believes that the Company is devoting the necessary resources to
identify and resolve significant Year 2000 issues in a timely manner.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results will fluctuate based on a number of
factors. These include, among others, the completion of a securitization
transaction in a particular calendar quarter, the interest rates on the
securities issued in connection with its securitization transactions, the volume
of loans originated by the Company, the timing of prepayment of loans, changes
in and the timing of the recognition of realized and unrealized gains or losses
on investments, the degree to which the Company encounters competition in its
markets and general economic conditions. As a result of these factors, results
for any one quarter should not be relied upon as being indicative of performance
in future quarters.
IMPACT OF INFLATION
The Company does not believe that inflation materially affects its
business other than the impact that it may have on the securities markets, the
valuation of collateral underlying the loans and the relationship of the
valuations to underlying earnings. Those could all influence the value of the
Company's investments.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
17
<PAGE> 20
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in interest rates.
The Company's balance sheet consists of two items subject to interest rate risk.
First, a majority of the Company's investment portfolio consists of fixed
interest rate loans. Given that the loans are priced at a fixed rate of
interest, changes in interest rates should not have a direct impact on interest
income. In addition, changes in market interest rates have not typically been a
significant factor in the board of directors' determination of fair value of
these loans. However, a significant rise in interest rates (greater than 2% for
long-term lending rates) may cause the Board of Directors to revalue the
Company's loan portfolio which may result in a material devaluation of the
Company's loan portfolio. The amount of such revaluation can not be quantified
at this time since it involves "marking to market" the loan portfolio which is a
procedure involving various factors depending upon then existing market
conditions. Significant reductions in interest rates, however, can prompt
increased prepayments of the Company's loans, resulting in possible decreases in
long-term revenues due to the relending of the prepayment proceeds at lower
interest rates. Second, the Company's liabilities consist of debt payable to the
SBA and the Company's senior unsecured debt. The SBA debentures and the senior
unsecured debt are payable at fixed rates of interest, so changes in interest
rates do not affect the Company's interest expense.
18
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
None
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 1999.
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Capital, Inc.
Date: 5/17/99 /s/ Lance B. Rosemore
------------- ----------------------------------
Lance B. Rosemore
President
Date: 5/17/99 /s/ Barry N. Berlin
------------- ----------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
20
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
ITEM
NO. DESCRIPTION
- ---- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 FORM 10-Q OF PMC CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 250
<SECURITIES> 9,592
<RECEIVABLES> 129,309<F1>
<ALLOWANCES> (65)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 628
<DEPRECIATION> (388)
<TOTAL-ASSETS> 162,586<F2>
<CURRENT-LIABILITIES> 7,489<F3>
<BONDS> 74,790
4,000<F4>
3,000<F4>
<COMMON> 71,430
<OTHER-SE> 446
<TOTAL-LIABILITY-AND-EQUITY> 162,586<F5>
<SALES> 5,604
<TOTAL-REVENUES> 5,604<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,398
<LOSS-PROVISION> 158
<INTEREST-EXPENSE> 1,303
<INCOME-PRETAX> 2,745
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,745
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
<FN>
<F2>INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE.
(i) INTEREST - ONLY STRIP RECEIVABLE, LESS 340,000 RESERVE 3,790
(ii) RESTRICTED INVESTMENTS 2,627
(iii) REAL PROPERTY OWNED 109
(iv) DUE FROM UNCONSOLIDATED SUBSIDIARIES 1,668
(v) DEFERRED CHARGES, DEPOSITS AND OTHER ASSETS, NET 1,096
(vi) INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES 12,824
(vii) SERVICING ASSET 1,146
------
$23,260
=======
<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.
<F3>INCLUDES THE FOLLOWING:
(i) ACCRUED INTEREST PAYABLE $ 893
(ii) BORROWER ADVANCES 1,506
(iii) DIVIDENDS PAYABLE 3,019
(iv) ACCOUNTS PAYABLE 2,071
------
$7,489
======
<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 804
(ii) OTHER LIABILITIES 606
(iii) DUE TO UNCONSOLIDATED SUBSIDIARIES 21
------
$1,431
======
<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 3,769
(ii) PREMIUM INCOME 169
(iii) OTHER INVESTMENT INCOME, NET 221
(iv) OTHER INCOME, NET 582
(v) EQUITY IN INCOME OF UNCONSOLIDATED SUBSIDIARIES 863
(vi) GAIN ON SALE OF ASSETS --
------
$5,604
======
</FN>
</TABLE>
