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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to _______.
Commission File Number: 811-3780
PMC CAPITAL, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2338539
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18111 PRESTON ROAD, SUITE 600, DALLAS, TX 75252 (972) 349-3200
(Address of principal executive offices) (Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on February
26, 1999 as reported on the American Stock Exchange, was approximately $79
million. Common Stock held by each officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded because
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of February 26, 1999, the Registrant had 11,829,116 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the year covered by this Form
10-K with respect to the Annual Meeting of Shareholders to be held on May 12,
1999 are incorporated by reference into Part III.
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PMC CAPITAL, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form
10-K
Report
Item Page
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<S> <C> <C>
PART I
1. Business................................................................................ 1
2. Properties.............................................................................. 9
3. Legal Proceedings....................................................................... 9
4. Submission of Matters to a Vote of Security Holders..................................... 9
PART II
5. Market for the Registrant's Common Stock and Related Shareholder Matters............... 10
6. Selected Consolidated Financial Data.................................................... 11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 12
7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 22
8. Consolidated Financial Statements and Supplementary Data................................ 22
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................... 22
PART III
10. Directors and Executive Officers of the Registrant...................................... 23
11. Executive Compensation.................................................................. 23
12. Security Ownership of Certain Beneficial Owners and Management.......................... 23
13. Certain Relationships and Related Transactions.......................................... 23
PART IV
14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K........................................................................ 24
Signatures..................................................................................... 25
Financial Statements........................................................................... F-1
Exhibits....................................................................................... E-1
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
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." 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 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"). 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 is a
national lender that 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 generally employ
proven business concepts, have national reservation systems, 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 years ended December 31, 1998 and 1997, the Company funded $66.4
million and $86.4 million in loans, respectively. The decrease of $20.0 million
was primarily related to a decrease in lending by First Western of
approximately $19 million. In addition, fundings by PMC, PMCIC, and Western
Financial were predominately through fixed-rate loan originations during 1998
as compared to a majority of variable-rate loan originations during 1997.
In addition to the Company's lending operations, it earns revenue
through its investment advisor subsidiary, PMC Advisers, Ltd., which evaluates
and services loans and other investment alternatives pursuant to a fee
arrangement with PMC Commercial Trust ("PMC Commercial"). PMC Commercial is a
real estate investment trust and an affiliate of the Company. PMC Commercial
provides loans to persons or entities whose borrowing needs and/or strength and
stability exceed the limitations set for SBA approved loan programs and invests
in commercial real estate. As a result, PMC Commercial and the Company
generally pursue different prospective borrowers. In order to further mitigate
the potential for conflicts of interest, PMC Commercial, PMC Capital and PMC
Advisers, Ltd. have entered into a Loan Origination Agreement. Pursuant to the
Loan Origination Agreement, loans which meet PMC Commercial's underwriting
criteria are to be first presented to PMC Commercial for funding. If PMC
Commercial does not have available funds, origination opportunities presented
to PMC Commercial may be originated by the Company.
PMC Capital was incorporated in Florida under the name of Pro-Med
Capital, Inc. in June 1983 and changed its name to "PMC Capital, Inc." in March
1991. First Western, PMCIC and Western Financial are registered under the 1940
Act as diversified closed-end management investment companies. The principal
executive offices of the Company are located at 18111 Preston Road, Suite 600,
Dallas, Texas 75252.
Earnings per share on a quarterly basis since 1989 were as follows:
<TABLE>
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1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $0.28 $0.29 $0.27 $0.23 $0.19 $0.18 $0.18 $0.15 $0.13 $0.09
2nd Quarter 0.28 0.31 0.30 0.25 0.23 0.23 0.23 0.15 0.12 0.11
3rd Quarter 0.29 0.30 0.30 0.27 0.26 0.25 0.19 0.18 0.13 0.10
4th Quarter* 0.31 0.45 0.31 0.28 0.44 0.21 0.19 0.16 0.14 0.11
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$1.16 $1.35 $1.18 $1.03 $1.12 $0.87 $0.79 $0.64 $0.52 $0.41
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
* Includes $0.08 in 1998, $0.21 in 1997 and $0.24 in 1994 relating to
structured sales of portions of the loan portfolio.
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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 SBA 7(a)
Program (the "SBA 7(a) Program").
At December 31, 1998 and 1997, First Western had outstanding loans
receivable, net, in an aggregate amount of $8.9 million and $8.2 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, 1998
and 1997, First Western originated $10.6 million and $29.5 million,
respectively, in loans and sold $10.0 million and $21.6 million, respectively,
of the government guaranteed portion of its loans into the secondary market
(without recourse to the Company). At December 31, 1998 and 1997, First Western
had loans receivable with aggregate balances of approximately $263,000 and
$104,000 (2.9% and 1.2%, respectively, of First Western's outstanding loans
receivable, net) greater than 60 days past due, respectively. Realized and
unrealized gains (losses) on First Western's retained loans were a net $39,000
gain and a $111,000 loss during the years ended December 31, 1998 and 1997,
respectively.
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. These fees, which are
passed directly to the borrower, have increased by up to 73% since 1996. First
Western's decrease in loan origination volume during 1998 and 1997 results from
these increased fees, an increase in competition from other SBA lenders and
other alternative loan products. Due to the decrease in First Western's loan
origination volume as well as declines in the market for premiums, the premiums
recognized from the sale of the government guaranteed portion of SBA 7(a)
Program loans sold in the secondary market decreased from $1,942,000 during
1996 to $1,776,000 in 1997 and $776,000 in 1998.
The difficulties in finding suitable lending opportunities due to
higher fees and increased competition caused the Company to place less reliance
during 1997 and 1998 on the SBA 7(a) Program lending activities. Despite this
reduced emphasis on SBA lending, continued program and market changes may have
an adverse effect on future periods of operations. The impact of the Company's
SBA 7(a) Program lending activities on the Company's earnings have been and
will be affected by a number of factors including: (i) the timing and
availability of portfolio for securitizations (see "Securitization and
Structured Financing Programs"), (ii) the volume of SBA 7(a) Program lending,
(iii) the length of SBA 7(a) Program loans, (iv) the structure of sales to the
secondary market, (v) the interest rates charged and related terms, (vi) the
quality of the SBA 7(a) Program portfolio, (vii) prepayment experience (see
"Prepayment Considerations") 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. Presently, the SBA is
considering amending the program which may enhance the ability of the Company
to increase originations through the SBA 7(a) Program. Some of these changes
relate to a reduction in the fees charged to the borrower and an increase in
the guaranty percentage of smaller loans. However, the SBA is also considering
for the first time in many years the issuance of new licenses to non-bank
lenders to permit their use of the SBA 7(a) Program. 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" .
PMCIC. 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. As an SBIC, PMCIC 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 PMCIC prior to 1996, the interest rate
has been reduced through an SBA subsidy by 3% during the first five years.
Issuance of debentures is subject to SBA approval and availability. At December
31, 1998, PMCIC had received a commitment from the SBA for issuance of up to $5
million of SBA debentures. See "Overview of SBA Regulations."
At December 31, 1998 and 1997, PMCIC had loans receivable, net, in an
aggregate amount of $43.2 million and $48.9 million, respectively. During the
years ended December 31, 1998 and 1997, PMCIC originated $14.1 million
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and $24.1 million in loans, respectively. During the year ended December 31,
1998, PMCIC transferred $14.5 million in loans to PMC Capital in conjunction
with a structured sale of loans (the "1998 Structured Sale"). At December 31,
1998 and 1997, PMCIC had loans receivable with aggregate balances greater than
60 days past due of approximately $713,000 and $873,000, respectively (1.7% and
1.8%, respectively, of PMCIC's loans receivable, net). Realized and unrealized
losses on PMCIC's investments were $350,000 and $124,000 during the years ended
December 31, 1998 and 1997, 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. At December 31, 1998, Western
Financial has received a commitment from the SBA for issuance of up to $6.5
million of SBA debentures. See "Overview of SBA Regulations."
At December 31, 1998 and 1997, Western Financial had loans receivable,
net, in an aggregate amount of $21.2 million and $21.9 million, respectively.
During the years ended December 31, 1998 and 1997, Western Financial originated
$12.0 million and $12.9 million in loans, respectively. During the year ended
December 31, 1998, Western Financial transferred $7.8 million in loans to PMC
Capital in conjunction with the 1998 Structured Sale. At December 31, 1998 and
1997, Western Financial had loans receivable with aggregate principal balances
greater than 60 days past due of approximately $116,000 and $153,000,
respectively (0.5% and 0.7%, respectively, of Western Financial's loans
receivable, net). Realized and unrealized losses on Western Financial's
investments were $8,000 and $7,000, respectively, during the years ended
December 31, 1998 and 1997.
PMC CAPITAL. PMC Capital originates 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 SBA 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, (iv) contain prepayment
fee provisions and (v) 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.
At December 31, 1998 and 1997, PMC Capital had loans receivable, net,
in an aggregate amount of $43.4 million and $48.3 million, respectively. During
the years ended December 31, 1998 and 1997, PMC Capital originated $29.7
million and $19.9 million in loans, respectively, and during the year ended
December 31, 1998 contributed $43.4 million in loans to the 1998 Partnership
(including the $22.3 million in loans transferred from PMCIC and Western
Financial to PMC Capital in conjunction with the 1998 Structured Sale). At
December 31, 1998 and 1997, PMC Capital had a loan receivable with an aggregate
balance greater than 60 days past due of approximately $464,000 and $461,000,
respectively (1.0% and 1.0% of PMC Capital's loans receivable, net). PMC
Capital had no realized or unrealized losses during the years ended December
31, 1998 and 1997.
PRIME LENDING PROGRAM. Late in the fourth quarter of 1996, the Company
through PMC, PMCIC and Western Financial, began marketing a new variable rate
lending program (the "Prime Lending Program") which is separate from the SBA
7(a) Program of First Western, the Company's other variable rate lending
program. The Prime Lending Program was designed to refinance existing real
estate collateralized commercial loans with applicants 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
have variable interest rates based on the Prime Rate (as defined below). As of
December 31, 1998, the Company had funded over $50 million in the Prime Lending
Program with a weighted average interest rate of approximately 1.3% above the
Prime Rate. Substantially all of these loans were originated during the year
ended December 31, 1997. During 1998, the Company reduced its marketing effort
to originate new loans under the Prime Lending Program until a securitization
transaction of such loans was completed. Most of the loans originated under the
Prime Lending Program were sold as part of the 1998 Structured Sale. Management
of the Company is presently assessing increasing the marketing effort for the
Prime Lending Program.
B & I LOAN PROGRAM. 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
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repayment generally up to 80% of the principal amount of loans originated under
the B&I Loan Program. The Company has not originated any B&I Loan Program loans
to date. While the Company has approved several loans, none have been closed.
The Company still intends to originate loans pursuant to the B&I Loan Program.
Management of the Company does not anticipate a substantial amount of loans to
be originated pursuant to the B&I Loan Program during the year ended December
31, 1999.
NON INVESTMENT COMPANY SUBSIDIARIES
PMC Capital is either directly or indirectly the sole shareholder or
partner of several non-investment company subsidiaries. These are: PMC
Advisers, Ltd. and its subsidiary ("PMC Advisers"); PMC Funding Corp. and its
subsidiary ("PMC Funding"); PMC Capital Limited Partnership (the "1996
Partnership") and its related general partner and trust; and PMC Capital, L.P.
1998-1 (the "1998 Partnership", and together with the 1996 Partnership, the
"Partnerships") and its related general partner.
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, and the Partnerships 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 (either
directly or through its subsidiary PMC Asset Management, Inc.) as the
investment advisor for PMC Commercial. PMC Advisers provides investment
advisory services to PMC Commercial pursuant to investment management
agreements (the "Investment Management Agreements") entered into between PMC
Capital, PMC Advisers and PMC Commercial. As the investment advisor for PMC
Commercial, PMC Advisers has earned $2,563,000, $1,622,000 and $1,562,000 in
advisory fees during the years ended December 31, 1998, 1997 and 1996,
respectively.
LIMITED PARTNERSHIPS. The 1996 Partnership was formed as a special
purpose affiliate of the Company. On November 13, 1996, the 1996 Partnership, a
Delaware limited partnership, completed a structured financing (the "1996
Structured Financing") through a private placement (the "1996 Private
Placement") of approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "1996 Notes"). The 1996 Notes were issued at par and have a
stated maturity in 2011. These notes were issued with an interest rate of
6.725% per annum and were originally collateralized by approximately $45.7
million of loans (the "Initial Loan Contribution") contributed by PMC Capital
to the 1996 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
1996 Private Placement, the 1996 Notes were given a rating of "Aa2" by Moody's
Investors Service. The terms of the 1996 Notes provide that the partners of the
1996 Partnership are not liable for any payments on the 1996 Notes.
Accordingly, if the 1996 Partnership fails to pay the 1996 Notes, the sole
recourse of the holders of the 1996 Notes is against the assets of the 1996
Partnership. The Company, therefore, has no obligation to pay the 1996 Notes,
nor do the holders of the 1996 Notes have any recourse against the assets of
the Company. The net proceeds from the issuance of the 1996 Notes
(approximately $37.5 million prior to payment of issuance costs of
approximately $396,000 and after 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 1996 Partnership and owns a 1%
general partnership interest in the 1996 Partnership. PMC Capital owns a 99%
limited partnership interest in the 1996 Partnership. PMC is the servicer for
all loans held by the 1996 Partnership.
The 1998 Partnership was formed as a special purpose affiliate of the
Company. On November 24, 1998, the 1998 Partnership, a Delaware limited
partnership, completed the 1998 Structured Sale through a private placement
(the "1998 Private Placement") of approximately $39.6 million of its 1998
Loan-Backed Adjustable Rate Notes - Class A, (the "1998 Class A Notes"). The
1998 Class A Notes were issued at par and have a stated maturity in 2021. These
notes were issued with an interest rate of the prime rate less 1%, adjusted on
a quarterly basis and were originally collateralized by approximately $43
million of loans (the "1998 Initial Loan Contribution") contributed by PMC
Capital to the 1998 Partnership. In connection with the 1998 Private Placement,
the 1998 Class A Notes were given a rating of "Aaa" by Moody's Investors
Service. The terms of the 1998 Class A Notes provide that the partners of the
1998 Partnership are not liable for any payments on the 1998 Class A Notes.
Accordingly, if the 1998 Partnership fails to pay the 1998 Class A Notes, the
sole recourse of the holders of the 1998 Class A Notes is against the assets of
the 1998 Partnership. The Company, therefore, has no obligation to pay the 1998
Class A Notes, nor do the holders of the 1998 Class A Notes have any recourse
against the assets of the Company. The net proceeds from the issuance of the
1998
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Class A Notes (approximately $39.8 million prior to payment of issuance costs
of approximately $500,000 and the funding of approximately $2.6 million for a
reserve fund held by the trustee as collateral) were distributed to PMC
Capital. In addition, approximately $2.2 million of the 1998 Partnership's
Loan-Backed Adjustable Rate Notes - Class B, (the "1998 Class B Notes" which
were issued at par, have a stated maturity in 2021 and bear interest at the
prime rate less 0.9% adjusted on a quarterly basis), were purchased by PMC
Capital in the 1998 Private Placement. The 1998 Class B Notes were given a
rating of "A1" by Moody's Investors Service. PMC Capital Corp. 1998-1 was
formed in November 1998 to act as the general partner of the 1998 Partnership
and owns a 1% general partnership interest in the 1998 Partnership. PMC Capital
owns a 99% limited partnership interest in the 1998 Partnership. PMC is the
servicer for all loans held by the 1998 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 consisted 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 and sold the airplane during February, 1999.
ELECTION TO BE A BUSINESS DEVELOPMENT COMPANY
In 1994, PMC Capital elected to become a business development company
("BDC") rather than a registered investment company under the 1940 Act. BDCs
must register their shares under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and are subject to the Exchange Act's periodic
reporting requirements rather than the 1940 Act's reporting requirements.
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.
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.
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
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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. PMCIC 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 PMCIC 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, 1998 and 1997, loans to
businesses in the lodging industry comprised 61% and 59% of its total assets,
respectively.
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, 1998, loans to
businesses located in Texas and California comprised approximately 35% 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 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.
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 "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 it 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 it would
without
6
<PAGE> 9
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 increase in the number and the dollar amount of
loans prepaid. On prepayments of fixed-rate loans, 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 Condition 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.
Net income of the Company is affected by the spread between the rate at
which it borrows funds and the rate at which it loans these funds. PMC Capital,
Western Financial and PMCIC have originated both variable and fixed interest
rate loans and the borrowed funds of these companies are typically long-term
and at fixed interest rates. The variable-rate loans in the portfolios of PMC,
PMCIC and Western Financial have been originated under the Prime Lending
Program. Substantially all of the variable-rate loans originated under the
Prime Lending Program were sold in the 1998 Structured Sale. As a result, the
portfolios of PMC, PMCIC, and Western Financial consist primarily of fixed-rate
loans as of December 31, 1998. First Western originates variable-rate loans and
has utilized both advances from PMC Capital and the structured sale of its
portfolio (transactions were completed 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, if any,
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 on loans
not securitized could negatively impact the Company's net income, dividend
yield and the market price of the Common Stock. Generally, 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 in accordance with SBA policy.
SECURITIZATION AND STRUCTURED FINANCING PROGRAMS
The Company has relied upon its ability to utilize 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. Such
gains may cause timing differences between net income in accordance with
generally accepted accounting principles ("GAAP") and investment company
taxable income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Dividends". 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. Accordingly, adverse changes in the Company's
"Asset-Backed Securities Program" or in the asset-backed securities market for
the type of product generated by the Company could adversely affect the
Company's ability to originate and securitize loans on a timely basis and upon
terms favorable to the Company. During the latter half of 1998, the liquidity
of the asset-backed securities market was significantly impacted by several
factors. Several publications identified the ongoing global financial crisis in
overseas currencies coupled with the potential for a recession in the United
States as a cause for investors in the type of asset-backed securities placed
by the Company to widen the "spreads" they require to receive in order to
purchase asset-backed securities. Accordingly, the 1998 Private Placement was
completed under less than ideal market conditions and the interest rate payable
on the 1998 Class A Notes was negatively impacted by market conditions. As a
result, the Company recognized less profit on the transfer of the loans in
November 1998 to the 1998 Partnership than would have been attainable in
previous quarters.
The Company retains a substantial portion of the default and prepayment
risk associated with the loan portfolio that it 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 the value of
7
<PAGE> 10
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
value of 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.
Greater than anticipated prepayments of principal will decrease the
fair value attributed to the interest-only strip receivable. Fewer than
anticipated prepayments of principal will increase the fair value attributed to
the interest-only strip receivable. The effect on the Company's yield due to
principal prepayments on the underlying securitized loans occurring at a rate
that is faster (or slower) than the rate anticipated by the Company in the
period immediately following the completion of the securitization will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
principal payments. The weighted average lives of the underlying securitized
loans will also be affected by the amount and timing of delinquencies and
defaults on the underlying securitized loans and the recoveries, if any, on
defaulted underlying securitized loans. In addition, the Company is required to
deposit substantial amounts of the cash flows generated by its interests in the
Company sponsored securitizations ("restricted cash") into spread accounts
which are pledged to the security holders.
The Company regularly measures its default, prepayment and other
assumptions against the actual performance of securitized receivables including
the guaranteed portion of loans sold. If the Company were to determine, as a
result of such regular review or otherwise, that it underestimated (or
overestimated) defaults and/or prepayments, or that any other material
assumptions were inaccurate, the Company would be required to adjust the
carrying value of its interest-only strip receivable by making a charge to
income and adjusting the carrying value of the interest-only strip receivable
on its balance sheet. An impairment of the interest-only strip receivable (i.e.
reduction of estimated future cash flows) and the corresponding decreases in
earnings and cash flow could affect the Company's ability to service debt and
effect future securitizations and other financings. During 1997, as a result of
increased prepayment speeds, the Company recorded an unrealized loss of
$300,000 on its interest-only strip receivables. During 1998, the continued
high rate of prepayment speeds was more than offset by better than anticipated
loss rates on the portfolios. As a result, during the year ended December 31,
1998 the Company recorded a net unrealized gain and corresponding reduction in
the valuation allowance of $120,000 on the interest-only strip receivables. The
net unrealized loss on the interest-only strip receivables were $180,000 and
$300,000 at December 31, 1998 and 1997, respectively. 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 issuing entity. 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, 1998, the Company had 53 employees. Management of the
Company believes its relationship with its employees is good.
OVERVIEW OF SBA REGULATIONS
The lending operations of First Western, PMCIC and Western Financial
are regulated by the SBA, which establishes, among other things, maximum
interest rates that borrowers may be charged (which currently for PMCIC and
Western Financial 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 4 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.
8
<PAGE> 11
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 for fees, 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 legislative
change has no effect on previously issued debentures or preferred stock of
SSBICs including PMCIC.
While the eligibility requirements of the SBA 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.
ITEM 2. PROPERTIES
The Company's headquarters are located at 18111 Preston Road, Suite
600, Dallas, Texas 75252. The Company leases its approximately 13,000 square
foot facility pursuant to a five year lease which commenced in December 1998.
In addition, at December 31, 1998, the Company also leased office space in
Phoenix, Arizona and Atlanta, Georgia. The aggregate annual lease payments for
the year ended December 31, 1998 were approximately $244,000.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the last
quarter of the year ended December 31, 1998.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Common Stock is traded on the American Stock Exchange ("AMEX") under
the symbol "PMC." The following table sets forth, for the periods indicated,
the high and low sales prices as reported on the AMEX and the dividends per
share declared by the Company for each such period.
<TABLE>
<CAPTION>
Regular Special
Dividends Dividends
Per Per
Quarter Ended High Low Share Share
- ------------- ------ ------ --------- ---------
<S> <C> <C> <C> <C>
December 31, 1998 ...................... $11.00 $ 8.00 $0.250 --
September 30, 1998 ..................... $13.75 $ 9.00 $0.325 --
June 30, 1998 .......................... $14.38 $13.56 $0.325 --
March 31, 1998 ......................... $15.00 $13.75 $0.325 --
December 31, 1997 ...................... $15.25 $14.00 $0.320 $0.020
September 30, 1997 ..................... $15.50 $13.75 $0.315 --
June 30, 1997 .......................... $14.88 $12.50 $0.310 --
March 31, 1997 ......................... $14.50 $13.38 $0.305 --
December 31, 1996 ...................... $14.75 $12.88 $0.300 $0.020
September 30, 1996 ..................... $14.25 $11.75 $0.295 --
June 30, 1996 .......................... $13.38 $12.38 $0.280 --
March 31, 1996 ......................... $13.63 $11.88 $0.270 --
</TABLE>
On February 26, 1999, there were approximately 1,600 shareholders of
record of Common Stock and the last reported sales price of the Common Stock
was $8.94 per share.
10
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of Selected Consolidated Financial Data of
the Company as of and for the five years in the period ended December 31, 1998.
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 Form 10-K. The selected consolidated financial data
presented below has been derived from the consolidated financial statements of
the Company, audited by PricewaterhouseCoopers LLP., independent public
accountants, whose report with respect thereto is included elsewhere in this
Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In thousands, except per share information)
<S> <C> <C> <C> <C> <C>
Operating:
Operating income ...................... $ 24,314 $ 24,406 $ 23,821 $ 21,262 $ 16,450
Operating expenses .................... $ (11,091) $ (10,602) $ (10,454) $ (9,541) $ (7,578)
Realized and unrealized gain (loss)
on investments ..................... $ 726 $ 1,818 $ (147) $ (359) $ 3,151
Net Operating Income and realized
and unrealized gain (loss)
on investments ..................... $ 13,949 $ 15,622 $ 13,220 $ 11,362 $ 12,023
Dividends declared, common ............ $ 14,473 $ 14,543 $ 12,853 $ 11,600 $ 11,244
Basic and diluted earnings per
common share ...................... $ 1.16 $ 1.35 $ 1.18 $ 1.03 $ 1.12
Dividends per common share ............ $ 1.23 $ 1.27 $ 1.16 $ 1.08 $ 1.06
Weighted average common shares
outstanding ....................... 11,800 11,411 11,002 10,768 10,650
Loans funded .......................... $ 66,450 $ 86,361 $ 70,154 $ 77,567 $ 75,349
At end of period:
Loans receivable, net ................. $ 116,711 $ 127,240 $ 93,354 $ 110,499 $ 75,264
Total assets .......................... $ 163,349 $ 165,839 $ 163,431 $ 159,002 $ 125,416
SBA debentures payable ................ $ 39,790 $ 41,290 $ 44,570 $ 43,540 $ 26,280
Notes payable ......................... $ 35,000 $ 35,000 $ 35,000 $ 35,001 $ 25,001
Preferred stock of consolidated
subsidiary ........................ $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 5,000
Common shareholders' equity ........... $ 72,151 $ 70,166 $ 62,903 $ 59,088 $ 57,371
Number of common shares
outstanding ....................... 11,829 11,631 11,162 10,871 10,684
Ratios:
Return on average assets .............. 8.5% 9.7% 8.3% 8.0% 10.3%
Return on common shareholders'
equity ............................ 19.2% 23.3% 21.3% 19.2% 21.2%
</TABLE>
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<PAGE> 14
ITEM 7. 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. 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 for 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 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>
Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ---------------------
(In millions)
Increase Increase Increase
Funded (decrease) Funded (decrease) Funded (decrease)
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
PMCIC ................... $ 14.1 (41)% $ 24.1 25% $ 19.3 (9)%
Western Financial ....... 12.0 (7)% 12.9 72% 7.5 (6)%
First Western ........... 10.6 (64)% 29.5 1% 29.2 (28)%
PMC ..................... 29.7 49% 19.9 40% 14.2 84%
------ ------ ------
$ 66.4 (23)% $ 86.4 23% $ 70.2 (9)%
====== ====== ======
</TABLE>
During the years ended December 31, 1998 and 1997, the Company funded
$66.4 million and $86.4 million in loans, respectively. The decrease of $20.0
million was primarily related to a decrease in lending by First Western of
approximately $19 million. In addition, PMC, PMCIC, and Western Financial
predominately funded fixed-rate originations during 1998 as compared to a
predominance of variable-rate loan originations during 1997.
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 years ended December
31,1998 and 1997, PMC Advisers and its wholly-owned subsidiary earned
management fees from PMC Commercial of approximately $2.6 million and $1.6
million, respectively. The fees during 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
12
<PAGE> 15
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 the Loan Origination
Agreement described above.
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 the Company's
loans. In addition, during 1996 the Investment Management Agreement was amended
to include compensation to PMC Advisers for its assistance in the issuance of
PMC Commercial's debt and equity securities. During June 1998, the 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 provided 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 1996 Partnership. The differential
between the interest received by the 1996 Partnership on the loans transferred
to it by PMC Capital and the interest paid by the 1996 Partnership on the 1996
Notes, less any loan losses and amortization of transaction fees, contributes
to the revenues of PMC Capital through its equity ownership in the 1996
Partnership.
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 years ended
December 31, 1998 and 1997, revenues generated by such loan sales were $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 years ended December 31, 1998 and 1997, the Company received $24.7
million and $10.1 million, respectively, in collections of principal on
retained loans including prepayments. For 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 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
which has an adverse effect on the Company's future results of operations and
dependant upon the rate of future prepayments may have an impact on the
Company's ability to maintain shareholder's 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 on
subsequent leverage. First Western's loans (all variable-rate) have no
prepayment fees in accordance with SBA policy. Loans originated pursuant to 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 near term. 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".
Substantially all of the First Western loans and all loans originated
pursuant to the Prime Lending Program (described below) 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%.
13
<PAGE> 16
The Prime Rates utilized for variable-rate loans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
First Quarter 8.50% 8.25% 8.50%
Second Quarter 8.50% 8.50% 8.25%
Third Quarter 8.50% 8.50% 8.25%
Fourth Quarter 8.25% 8.50% 8.25%
</TABLE>
Late in the fourth quarter of 1996 the Company began marketing a
variable interest rate lending program based on the Prime Rate (the "Prime
Lending Program") which is separate from the SBA 7(a) Program of First Western,
the Company's other variable rate lending program. The Prime Lending Program
provides funds to refinance existing real estate secured commercial loans with
borrowers who have proven timely payment histories and loan-to-value and debt
coverage ratios within the Company's underwriting criteria. Several of the
loans refinanced under this program were originally SBA 7(a) Program loans and
some of these loan originations have refinanced First Western's loans.
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.
The Company receives other investment income from various sources
including late fees, prepayment fees, construction monitoring fees and site
visit fees. The net amount of other investment income earned during the years
ended December 31, 1998 and 1997 was $807,000 and $504,000, respectively. The
amount earned will vary based on volume of loans funded, the timing and amount
of financings, volume of loans which prepay, the mix of loans (construction
versus non-construction), the rate 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.
Expenses were 46% and 43% of total income during the years ended December 31,
1998 and 1997, respectively. 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 and general office expenses. General and administrative expenses were 3%
of total income during both the years ended December 31, 1998 and 1997. It is
anticipated that general and administrative expenses will maintain at present
levels during the year ending December 31, 1999.
Profit sharing plan, rent, legal and accounting, SBA fees and directors
and shareholders expense (collectively the "Other Administrative Costs")
aggregated $838,000 and $822,000 during the years ended December 31, 1998 and
1997, respectively. The Other Administrative Costs were 3% of total income
during both the years ended December 31, 1998 and 1997. It is anticipated that
Other Administrative Costs will maintain at present levels during 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 values. The Company
typically receives cash and retains the right to receive contractual servicing
fees and the right to receive future interest income on loans sold that exceed
the contractually specified servicing fee (the interest-only strip receivable)
in exchange for a portion of the loan, typically the guaranteed portion of an
SBA 7(a) loan. The difference between (i) the carrying value of the portion of
loans sold and (ii) the sum of (a) cash received, (b) the relative fair values
of the servicing rights, and (c) the interest-only strip receivable retained,
constitutes the gain on sale.
14
<PAGE> 17
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 the cost of servicing 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 the costs
associated with servicing 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.
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 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 years ended December
31, 1998 and 1997, the Company recorded a net unrealized gain of $120,000 and a
net unrealized loss of $300,000, respectively, related to the interest-only
strip receivables. At December 31, 1998 and 1997, an unrealized loss was
recorded on the interest-only strip receivable of $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, including default rates. There can be no assurance of the
accuracy of these estimates. If the prepayment speeds occur at a faster rate
than anticipated, the amortization of the servicing asset will be accelerated
and the value of the interest-only strip receivable will decline. If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and total income in future periods would be enhanced. During the years
ended December 31, 1998 and 1997, 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, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Net income decreased by $1,673,000 from $15,622,000 during the year
ended December 31, 1997 to $13,949,000 during the year ended December 31, 1998.
The weighted average common shares outstanding increased by approximately 3%
from 11,411,000 during the year ended December 31, 1997 to 11,800,000 during
the year ended December 31, 1998 as a result of shares issued pursuant to the
dividend reinvestment and cash purchase plan. The most significant reason for
the decline in net income was the reduced amount of income recognized on
structured sales of loan portfolio when comparing the years ended December 31,
1998 and 1997. The income for the year ended December 31, 1998 includes the
effect of the following, as more fully described below: (i) reduced interest
income earned as a result of the sale by First Western of $22.8 million of
loans in December 1997 and a general decline in the interest rate on
outstanding loans, (ii) reduced premium income, (iii) increased investment
management fees, (iv) the gain resulting from the 1998 Structured Sale and (v)
changes in valuation reserves.
Interest income: Interest income increased by $78,000, from $17,136,000
for the year ended December 31, 1997 to $17,214,000 for the year ended December
31, 1998. 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 Spread
Assets ("Spread Income"). This overall decrease was primarily attributable to a
decrease in interest on temporary investments and the continued decline in
interest rates on new loan originations.
Interest on short-term investments for the year ended December 31, 1997
was greater than for 1998 due to the fact that the average temporary
investments outstanding during the year ended December 31, 1998 were $13.8
million, a 52%
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<PAGE> 18
decrease from $28.9 million during the year ended December 31, 1997. The
average outstanding temporary investments fluctuates based on the size and
timing of receipt of capital resources and the volume of loan originations and
prepayment activities. Accordingly, interest on temporary investments decreased
by $782,000, or 58%, from $1,358,000 during the year ended December 31, 1997 to
$576,000 during the year ended December 31, 1998.
Interest income on loans increased by $860,000, or 5%, from $15,778,000
during the year ended December 31, 1997 to $16,638,000 during the year ended
December 31, 1998. The increase in interest income was primarily a result of
the increase in outstanding principal on loans. The average retained loan
portfolio increased by 18% to $134.4 million during the year ended December 31,
1998 from $113.8 million during the year ended December 31, 1997. This increase
was partially offset 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. As a result, the weighted average interest rates on outstanding
retained loans decreased to 10.0% at December 31, 1998 from 10.5 % at December
31, 1997.
Premium income: Premium income decreased by $1,000,000 (56%) from
$1,776,000 for the year ended December 31, 1997 to $776,000 for the year ended
December 31, 1998. This decrease was primarily attributable to a $11,660,000
(53%) decrease in the government guaranteed portion of loans held for sale or
sold (under the SBA 7(a) Program) from $21,638,000 during the year ended
December 31, 1997 to $9,978,000 during the year ended December 31, 1998. 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 1998.
Other investment income, net: Other investment income, net, increased
by $303,000 (60%) from $504,000 for the year ended December 31, 1997 to
$807,000 for the year ended December 31, 1998. This increase was primarily
attributable to an increase in prepayment fees received and recognition of
discount related to fixed-rate loans which were prepaid in full and forfeited
commitment fees during the year ended December 31, 1998 as compared to the year
ended December 31, 1997.
Equity in income (loss) of unconsolidated subsidiaries: Equity in
income (loss) of unconsolidated subsidiaries increased by $64,000 (3%), from
$2,560,000 during the year ended December 31, 1997 to $2,624,000 during the
year ended December 31, 1998. The 1996 Partnership had net income of $2,377,000
and $2,608,000 during the years ended December 31, 1998 and 1997, respectively.
The decrease is primarily due to the continued reduction 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 1996 Notes issued by the
1996 Partnership. During the year ended December 31, 1998 and 1997, the net
income from the 1996 Partnership included $584,000 and $208,000, respectively,
in prepayment fees received on loans paid-off prior to their contractual
maturity. Also included in equity in income of unconsolidated subsidiaries is
the net income of PMC Advisers and the 1998 Partnership of $179,000 and
$178,000, respectively, during the year ended December 31, 1998 and the
operations of PMC Funding which had losses of $109,000 and $48,000 during the
years ended December 31, 1998 and 1997, respectively.
Other income, net: Other income, net, increased by $463,000 (19%) from
$2,430,000 during the year ended December 31, 1997 to $2,893,000 during the
year ended December 31, 1998. Other income increased during the year ended
December 31, 1998 primarily due to increased investment management fees
generated by PMC Advisers related to the completion of a structured financing
by PMC Commercial (approximately $167,000) and fees related to the acquisition
by PMC Commercial of the Amerihost hotel properties (approximately $466,000).
Operating expenses: Operating expenses, not including interest,
increased by $570,000 (11%) from $5,054,000 during the year ended December 31,
1997 to $5,624,000 during the year ended December 31, 1998. This increase was
primarily a result of an increase in salaries and related benefits of $530,000
(15%) from $3,435,000 during the year ended December 31, 1997, to $3,965,000
during the year ended December 31, 1998. The increase in salaries and related
benefits was attributable to a decrease in the salaries and related benefits
which were capitalized during the year ended December 31, 1998
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<PAGE> 19
as compared to the year ended December 31, 1997. 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 the 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.
Salaries and related benefits were 16% and 14%, respectively, of total income
during the years ended December 31, 1998 and 1997. It is anticipated that
operating expenses will maintain at present levels during the year ending
December 31, 1999.
Interest expense: Interest expense decreased by $81,000 (1%) from
$5,548,000 during the year ended December 31, 1997 to $5,467,000 during the
year ended December 31, 1998. 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 2.8 years as of December 31, 1998, and (ii) $39,790,000 of debentures due to
the SBA as a result of borrowings made by the Company's SBIC subsidiaries, with
a weighted average interest rate of approximately 6.6% and weighted average
remaining maturity of 4.3 years as of December 31, 1998. The decrease was
primarily attributable to the repayment at maturity of approximately $2.5
million in SBA debentures during February 1997 and $1.5 million in February
1998.
Realized and unrealized gain (loss) on investments: Realized and
unrealized gain (loss) on investments decreased from a gain of $1,818,000
during the year ended December 31, 1997 to a gain of $726,000 during the year
ended December 31, 1998. The primary reason for the decrease in gain was the
reduction in the gain on sale of assets (related to the sale of loan pools) by
the Company. The Company recognized a $2,360,000 gain from the sale of First
Western loans in 1997 and a $925,000 gain from the sale of loans to the 1998
Partnership. The gain in 1997 was greater since; (i) in the 1997 sale, the
notes were sold at par and the underlying loans were previously reflected at a
discount of approximately $1.6 million (in accordance with Emerging Issues Task
Force 88-11) while in the 1998 Structured Sale the loans were sold at par and
the underlying loans receivable were previously reflected at par, and (ii) the
1997 sale was at a greater spread between the weighted average interest rate of
the loans receivable and the coupon due to the security holders as compared to
the 1998 Structured Sale.
During the years ended December 31, 1998 and 1997, the Company recorded
unrealized gains of $120,000 and losses of $300,000, respectively, relating to
the interest-only strip receivables in accordance with SFAS No. 125.
Additionally, net unrealized and realized losses on retained loans receivable
were $319,000 and $242,000 during the years ended December 31, 1998 and 1997,
respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net income increased by $2,402,000 from $13,220,000 during the year
ended December 31, 1996 to $15,622,000 during the year ended December 31, 1997.
The weighted average common shares outstanding increased by approximately 4%
from 11,002,000 during the year ended December 31, 1996 to 11,411,000 during
the year ended December 31, 1997 as a result of shares issued pursuant to the
dividend reinvestment and cash purchase plan. The most significant reason for
the increase in net income was the gain recognized on the sale of loan
portfolio during the year ended December 31, 1997.
Interest income: 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 1996 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 1996 Partnership) decreased by $1,726,000, or 10%, from
$17,504,000 during the year ended December 31, 1996 to $15,778,000 during the
year ended December 31, 1997. Including the interest earned by the 1996
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.
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<PAGE> 20
Premium income: 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: 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: 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 during the year ended December 31, 1997. The increase is
primarily due to the formation of the 1996 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 1996 Partnership
profits include all yield generated from the loans contributed by PMC Capital
less the cost of the Notes issued by the 1996 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: 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 realized 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: 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: 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 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.
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CASH FLOW ANALYSIS
The Company generated $12,052,000 and $10,581,000 from operating
activities during the years ended December 31, 1998 and 1997, respectively. The
primary source of the Company's funds are from 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 years ended December 31, 1998 and 1997, the Company had a net source of
cash of $2,571,000 and $1,016,000, respectively, from Government Guaranteed
Lending activities representing an increase in source of funds of $1,555,000.
During the years ended December 31, 1998 and 1997, the Company used net cash of
$1,376,000 and $2,070,000, respectively, from the change in operating assets
and liabilities.
The Company used $37,126,000 and $31,401,000, respectively from
investing activities during the years ended December 31, 1998 and 1997,
respectively. During the year ended December 31, 1997, the Company received
approximately $23.0 million from the First Western securitization completed in
December 1997. The Company decreased its use of funds relating to loan activity
from a net use of funds of $55,670,000 during the year ended December 31, 1997
to a net use of funds of $34,382,000 during the year ended December 31, 1998.
This decrease of $21,288,000 was due to a decrease in loans funded of
approximately $6.7 million and an increase in prepayment activity. Principal
collected increased by $14.7 million from $10.0 million during the year ended
December 31, 1997 to $24.7 million during the year ended December 31, 1998.
The Company had a net source of $29,267,000 and a net use of
$11,695,000 from financing activities during the years ended December 31, 1998
and 1997, respectively. The primary reason for the change was the source of
$40.9 million in proceeds from the 1998 Structured Sale. There was no
comparable transaction during the year ended December 31, 1997. Dividends paid
on common stock during the year ended December 31, 1998 were $14,771,000 as
compared to $13,197,000 during the year ended December 31, 1997, an increase of
$1,574,000 (12%). The Company also had a decrease in funds received from the
issuance of common stock of $3,414,000 (62%) from $5,475,000 during the year
ended December 31, 1997 to $2,061,000 during the year ended December 31, 1998.
This decrease was a result of the curtailment of the cash portion of the
Company's dividend reinvestment plan during March 1998 and the utilization of
the market purchase option for plan participants. Under the market purchase
option, the Company does not receive any of the proceeds from plan
participants. SBA debenture repayments required at maturity decreased by
$1,780,000 from $3,280,000 during the year ended December 31, 1997 to
$1,500,000 during the year ended December 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.
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. Approximately $4.8 million of the Company's SBA
debentures were paid in full during 1997 and 1998 as these debentures matured.
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 its loan portfolio (see "Business - Leverage")
and the utilization of its short-term, unsecured revolving credit facility (as
described below). During 1998, the Company structured a collateralized
financing of its variable-rate loans primarily originated as part of the Prime
Lending Program ( see "Business - Leverage" ). 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. As a result of the current volatile market conditions for asset
backed securities such as securities sold by the Company, alternative sources
of funds have been identified by management. It is anticipated that during the
year ended December 31, 1999 the Company will primarily 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. The
Company will continue to monitor the asset backed securities market and to the
extent the pricing appears cost efficient, may structure and sell a pool of
fixed-rate loans. Presently, the Company has identified approximately $60
million of fixed-rate loans for securitization. During the year ended December
31, 1999, the
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Company will have $6.7 million in senior unsecured notes and $4.2 million in
SBA debentures which will mature. It is expected that the senior unsecured
notes will be 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 December 31, 1998 to
various prospective small business companies, including the unfunded portion of
projects in the construction phase, amounted to approximately $57.3 million. Of
these commitments, $19.8 million were for loans partially guaranteed by the SBA
of which approximately $16.7 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.
REVOLVING CREDIT FACILITY: PMC Capital has a $15 million
uncollateralized revolving credit facility which expires in March 2000. At
December 31, 1998, the Company had no borrowings outstanding under this
revolving credit facility, and had availability of $15 million. 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 December 31, 1998
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 through December 31, 1998. 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 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 "roll-over" 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
Private Placement. 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 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. The dividend paid on
January 11, 1999 was $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
20
<PAGE> 23
ownership, yet with which the Company electronically or operationally
interfaces. Regulators have intensively focused upon Year 2000 exposures,
issuing guidance concerning the responsibilities of senior management and
directors. Year 2000 testing and certification is being addressed as a key
safety and soundness issue in conjunction with these regulatory concerns.
During 1998, the Company formed an internal review team to address,
identify and resolve any Year 2000 issues that encompasses operating and
administrative areas of the Company. In addition, executive management monitors
the status of the Company's Year 2000 remediation plans, where necessary, as
they relate to internally used software, computer hardware and use of computer
applications in the Company's servicing processes. In addition, the Company is
engaged in assessing the Year 2000 issue with significant suppliers.
The assessment process relating to the Company's loan receivable
servicing operations has commenced. In addition, the Company has initiated
formal communications with its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company intends to use internal resources to test the software for
Year 2000 modifications. The Company plans to substantially complete its Year
2000 assessment and remediation by the 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.
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-K
This Form 10-K 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-K 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.
21
<PAGE> 24
ITEM 7A. 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 are not typically a significant factor in the board of
directors' determination of fair value of these loans. 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 (See "Item 1. Business - Interest Rate and
Prepayment Risk"). 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 (See "Business - Leverage and Interest Rate and
Prepayment Risk").
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included in this
report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
22
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year end covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 12, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year end covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 12, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year end covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 12, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year end covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 12, 1999.
23
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
See index to Financial Statements set forth on page F-1 of
this Form 10-K.
(2) Financial Statement Schedules
All schedules are omitted because they are not required
under the related instructions or not applicable, or because
the required information is included in the consolidated
financial statements or notes thereto.
(3) Exhibits
See Exhibit Index beginning on page E-1 of this Form 10-K.
(b) Reports on Form 8-K:
None
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) or 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.
By: /s/ Lance B. Rosemore
-------------------------------
Lance B. Rosemore, President
Dated March 30, 1999
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ DR. FREDRIC M. ROSEMORE Chairman of the Board March 30, 1999
- --------------------------------- and Treasurer
DR. FREDRIC M. ROSEMORE
/s/ LANCE B. ROSEMORE President, Chief Executive March 30, 1999
- --------------------------------- Officer, Secretary and Director
LANCE B. ROSEMORE (Principal Executive Officer)
/s/ DR. ANDREW S. ROSEMORE Executive Vice President, March 30, 1999
- --------------------------------- Chief Operating Officer
DR. ANDREW S. ROSEMORE and Director
/s/ BARRY N. BERLIN Chief Financial Officer March 30, 1999
- --------------------------------- (Principal Financial and
BARRY N. BERLIN Accounting Officer)
Director
- ---------------------------------
LEE RUWITCH
/s/ DR. MARTHA GREENBERG Director March 30, 1999
- ---------------------------------
DR. MARTHA GREENBERG
/s/ DR. IRVIN BORISH Director March 30, 1999
- ---------------------------------
DR. IRVIN BORISH
/s/ THOMAS HAMILL Director March 30, 1999
- ---------------------------------
THOMAS HAMILL
/s/ ROBERT DIAMOND Director March 30, 1999
- ---------------------------------
ROBERT DIAMOND
/s/ BARRY IMBER Director March 30, 1999
- ---------------------------------
BARRY IMBER
</TABLE>
25
<PAGE> 28
PMC CAPITAL, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<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, 1998 and 1997...............................................F-6
Consolidated Schedule of Investments as of December 31, 1998...............................................F-7
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996.....................F-9
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996.......F-10
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.................F-11
Notes to Consolidated Financial Statements.................................................................F-12
Consolidating Financial Statements:
Report of Independent Accountants on Consolidating Financial Statements ...................................F-28
Consolidating Balance Sheet as of December 31, 1998........................................................F-29
Consolidating Statement of Income for the Year Ended December 31, 1998.....................................F-30
Consolidating Statement of Shareholders' Equity for the Year Ended December 31, 1998.......................F-31
Consolidating Statement of Cash Flows for the Year Ended December 31, 1998.................................F-32
PMC CAPITAL LIMITED PARTNERSHIP
Report of Independent Accountants..............................................................................F-33
Statements of Assets, Liabilities and Partners' Capital as of December 31, 1998 and 1997.......................F-34
Statements of Income for the years ended December 31, 1998 and 1997 and for the Period From
November 8, 1996 (Inception) to December 31, 1996........................................................F-35
Statements of Partners' Capital for the years ended December 31, 1998 and 1997 and for the Period From
November 8, 1996 (Inception) to December 31, 1996........................................................F-36
Statements of Cash Flows for the years ended December 31, 1998 and 1997 and for the Period From
November 8, 1996 (Inception) to December 31, 1996........................................................F-37
Notes to Financial Statements..................................................................................F-38
PMC CAPITAL, L.P. 1998-1
Report of Independent Accountants..............................................................................F-42
Statement of Assets, Liabilities and Partners' Capital as of December 31, 1998.................................F-43
Statement of Income for the Period From November 24, 1998 (Inception) to December 31, 1998.....................F-44
Statement of Partners' Capital for the Period From November 24, 1998 (Inception) to December 31, 1998..........F-45
Statement of Cash Flows for the Period From November 24, 1998 (Inception) to December 31, 1998.................F-46
Notes to Financial Statements..................................................................................F-47
</TABLE>
F-1
<PAGE> 29
PMC CAPITAL, INC. AND SUBSIDIARIES
SUMMARY OF SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Operating:
Operating income ...................................... $ 24,314 $ 24,406 $ 23,821 $ 21,262 $ 16,450
Operating expenses .................................... (11,091) (10,602) (10,454) (9,541) (7,578)
Realized and unrealized gain (loss) on investments .... 726 1,818 (147) (359) 3,151
---------- ---------- ---------- ---------- ----------
Net operating income and realized and unrealized
gain (loss) on investments .......................... $ 13,949 $ 15,622 $ 13,220 $ 11,362 $ 12,023
========== ========== ========== ========== ==========
Dividends declared, common ............................ $ 14,473 $ 14,543 $ 12,853 $ 11,600 $ 11,244
========== ========== ========== ========== ==========
Earnings per common share ............................. $ 1.16 $ 1.35 $ 1.18 $ 1.03 $ 1.12
========== ========== ========== ========== ==========
Dividends per common share ............................ $ 1.23 $ 1.27 $ 1.16 $ 1.08 $ 1.06
========== ========== ========== ========== ==========
Weighted average common shares outstanding ............ 11,800 11,411 11,002 10,768 10,650
========== ========== ========== ========== ==========
Loans funded .......................................... $ 66,450 $ 86,361 $ 70,154 $ 77,567 $ 75,349
========== ========== ========== ========== ==========
At end of period:
Loans receivable, net ................................. $ 116,711 $ 127,240 $ 93,354 $ 110,499 $ 75,264
========== ========== ========== ========== ==========
Total assets .......................................... $ 163,349 $ 165,839 $ 164,964 $ 159,002 $ 125,416
========== ========== ========== ========== ==========
SBA debentures payable ................................ $ 39,790 $ 41,290 $ 44,570 $ 43,540 $ 26,280
========== ========== ========== ========== ==========
Notes payable ......................................... $ 35,000 $ 35,000 $ 35,000 $ 35,001 $ 25,001
========== ========== ========== ========== ==========
Preferred stock of consolidated subsidiary ............ $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 5,000
========== ========== ========== ========== ==========
Common shareholders' equity ........................... $ 72,151 $ 70,166 $ 62,903 $ 59,088 $ 57,371
========== ========== ========== ========== ==========
Number of common shares outstanding ................... 11,829 11,631 11,162 10,871 10,684
========== ========== ========== ========== ==========
Ratios:
Return on average assets .............................. 8.5% 9.7% 8.3% 8.0% 10.3%
========== ========== ========== ========== ==========
Return on average common shareholders' equity ......... 19.2% 23.3% 21.3% 19.2% 21.2%
========== ========== ========== ========== ==========
</TABLE>
F-2
<PAGE> 30
PMC CAPITAL, INC. AND SUBSIDIARIES
QUARTERLY STATISTICS
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating income ....................... $ 5,790 $ 6,441 $ 6,049 $ 6,034 $ 24,314
Net operating income ................... $ 3,068 $ 3,788 $ 3,369 $ 2,998 $ 13,223
Net gain (loss) on investments ......... $ 224 $ (457) $ 90 $ 869 $ 726
Net increase in net assets
resulting from operations ......... $ 3,292 $ 3,331 $ 3,459 $ 3,867 $ 13,949
- -------------------------------------------------------------------------------------------------------------
PER SHARE
- -------------------------------------------------------------------------------------------------------------
Operating income ....................... $ 0.494 $ 0.545 $ 0.511 $ 0.510 $ 2.060
Net operating income ................... $ 0.262 $ 0.321 $ 0.285 $ 0.253 $ 1.121
Net gain (loss) on investments ......... $ 0.019 $ (0.039) $ 0.008 $ 0.073 $ 0.061
Net increase in net assets
resulting from operations ......... $ 0.281 $ 0.282 $ 0.293 $ 0.326 $ 1.182
</TABLE>
<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>
F-3
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
PMC Capital, Inc.:
In our opinion, the accompanying consolidated balance sheets as of December 31,
1998 and 1997, including the schedule of investments as of December 31, 1998
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998
and the financial highlights for each of the five years in the period ended
December 31, 1998 present fairly, in all material respects, the financial
position of PMC Capital, Inc. and its subsidiaries at December 31, 1998 and
1997 and the results of their operations and their cash flows and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
examination or confirmation of securities owned as of December 31, 1998 and
1997, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
March 4, 1999
Dallas, Texas
F-4
<PAGE> 32
- --------------------------------------------------------------------------------
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 PricewaterhouseCoopers LLP,
independent accountants.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per share operating performance (1):
Net asset value, beginning of period ................ $ 6.03 $ 5.64 $ 5.44 $ 5.37 $ 5.24
---------- ---------- ---------- ---------- ----------
Net operating income ................................ 1.12 1.21 1.21 1.09 0.83
Net gains or losses on securities
realized and unrealized (2) ....................... 0.20 0.47 0.17 0.08 0.37
---------- ---------- ---------- ---------- ----------
Total from investment operations ................ 1.32 1.68 1.38 1.17 1.20
---------- ---------- ---------- ---------- ----------
Less distributions:
Preferred shareholder of consolidated subsidiary .. 0.02 0.02 0.02 0.02 0.01
Common shareholders ............................... 1.23 1.27 1.16 1.08 1.06
---------- ---------- ---------- ---------- ----------
Total distributions ............................ 1.25 1.29 1.18 1.10 1.07
---------- ---------- ---------- ---------- ----------
Net asset value, end of period ...................... $ 6.10 $ 6.03 $ 5.64 $ 5.44 $ 5.37
========== ========== ========== ========== ==========
Per share market value, end of period ............... $ 8.56 $ 14.56 $ 14.00 $ 12.63 $ 13.50
========== ========== ========== ========== ==========
Total investment return ............................. (33)% 13% 20% 2% 0%
========== ========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ............ $ 72,151 $ 70,166 $ 62,903 $ 59,088 $ 57,371
========== ========== ========== ========== ==========
Ratio of expenses to average net assets ............. 16% 16% 17% 16% 13%
========== ========== ========== ========== ==========
Ratio of operating income to average net assets ..... 19% 21% 22% 20% 16%
========== ========== ========== ========== ==========
Ratio of net operating income and realized and
unrealized gain (loss) on investments to
average net assets ................................ 20% 24% 22% 20% 21%
========== ========== ========== ========== ==========
Portfolio turnover (3) .............................. 58% 20% 16% 30% 65%
========== ========== ========== ========== ==========
</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> 33
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
( IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Investments at value:
Loans receivable, net ............................................ $ 116,711 $ 127,240
Cash equivalents ................................................. 18,489 17,237
Investment in unconsolidated subsidiaries ........................ 12,930 7,797
Interest-only strip receivables .................................. 4,168 3,708
Restricted investments ........................................... 2,525 2,798
Mortgage-backed security of affiliate ............................ 2,168 --
Real property owned .............................................. 109 296
--------- ---------
TOTAL INVESTMENTS AT VALUE ......................................... 157,100 159,076
--------- ---------
OTHER ASSETS:
Receivable for loans sold ........................................ 156 1,346
Due from unconsolidated subsidiaries ............................. 2,579 1,302
Servicing asset .................................................. 1,330 1,607
Deferred charges, deposits and other assets ...................... 1,140 1,398
Accrued interest receivable ...................................... 581 608
Cash ............................................................. 235 265
Property and equipment, net ...................................... 228 237
--------- ---------
TOTAL OTHER ASSETS ................................................. 6,249 6,763
--------- ---------
TOTAL ASSETS ....................................................... $ 163,349 $ 165,839
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ........................................... $ 39,790 $ 41,290
Notes payable .................................................... 35,000 35,000
Accounts payable ................................................. 1,728 3,269
Dividends payable ................................................ 3,020 4,018
Borrower advances ................................................ 1,598 1,678
Accrued interest payable ......................................... 1,264 1,316
Due to unconsolidated subsidiaries ............................... 1 279
Deferred fee revenue ............................................. 666 571
Other liabilities ................................................ 1,131 1,252
--------- ---------
TOTAL LIABILITIES .................................................. 84,198 88,673
--------- ---------
Commitments and contingencies
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY ........................... 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares of $.01 par value,
11,829,000 and 11,631,000 shares issued and outstanding
at December 31, 1998 and 1997, respectively ................. 118 116
Additional paid-in capital ....................................... 71,312 68,555
Undistributed net operating income ............................... 1,495 2,289
Net unrealized depreciation on investments ....................... (774) (794)
--------- ---------
72,151 70,166
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................... $ 163,349 $ 165,839
========= =========
NET ASSET VALUE PER COMMON SHARE ................................... $ 6.10 $ 6.03
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 34
PMC CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
(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 ....................... 54 $ 4,383 3.8% $ 4,554 3.9% 100 $ 71,293 24.9%
Gasoline / service stations ............. 10 107 -- 117 -- 14 4,041 1.4%
Restaurants ............................. 27 1,039 0.9% 1,127 1.0% 57 11,066 3.9%
Laundromats ............................. 8 163 0.2% 170 0.2% 11 1,504 0.5%
Retail, other ........................... 29 1,671 1.4% 1,721 1.5% 53 7,480 2.6%
Health care ............................. 8 33 -- 36 -- 11 678 0.2%
Food and grocery stores ................. 6 104 0.1% 104 -- 8 1,805 0.6%
Services ................................ 41 837 0.7% 897 0.8% 77 11,871 4.2%
Manufacturing ........................... 10 67 0.1% 70 0.1% 11 2,226 0.8%
Wholesale ............................... 12 137 0.1% 142 0.1% 16 2,654 0.9%
Car washes .............................. 1 382 0.3% 382 0.3% 2 468 0.2%
------ -------- ----- -------- ----- ----- -------- -----
Total ..................................... 206 8,923 7.6% 9,320 7.9% 360 115,086 40.2%
------ -------- ----- -------- ----- ----- -------- -----
SMALL BUSINESS INVESTMENT COMPANY LOANS:
WESTERN FINANCIAL CAPITAL CORPORATION
Hotels and motels ....................... 27 17,272 14.8% 17,370 14.7% 34 22,697 7.9%
Gasoline / service stations ............. 1 321 0.3% 321 0.3% 5 1,905 0.7%
Restaurants ............................. -- -- -- -- -- 2 1,299 0.4%
Retail, other ........................... 2 1,473 1.3% 1,515 1.3% 3 1,614 0.6%
Services ................................ 6 828 0.7% 842 0.7% 13 3,573 1.2%
Health care ............................. 13 377 0.3% 394 0.3% 15 907 0.3%
Food and grocery stores ................. 1 116 0.1% 116 0.1% 1 116 --
Manufacturing ........................... 1 39 -- 39 -- 1 39 --
Agriculture ............................. 1 495 0.4% 499 0.4% 2 861 0.3%
Other notes receivable .................. 5 311 0.3% 341 0.3% 6 750 0.3%
------ -------- ----- -------- ----- ----- -------- -----
Total ..................................... 57 21,232 18.2% 21,437 18.1% 82 33,761 11.7%
------ -------- ----- -------- ----- ----- -------- -----
SPECIALIZED SMALL BUSINESS INVESTMENT
COMPANY LOANS:
PMC INVESTMENT CORPORATION
Hotels and motels ....................... 50 39,300 33.7% 39,723 33.6% 81 63,856 22.3%
Gasoline / service stations ............. 6 2,486 2.1% 2,515 2.1% 11 4,434 1.6%
Retail, other ........................... 1 35 -- 35 -- 1 35 --
Services ................................ 2 102 -- 102 -- 3 443 0.2%
Health care ............................. 7 289 0.2% 289 0.3% 7 289 0.1%
Food and grocery stores ................. 3 740 0.6% 745 0.6% 4 776 0.3%
Other notes receivable .................. 2 217 0.2% 717 0.6% 2 717 0.2%
------ -------- ----- -------- ----- ----- -------- -----
Total ..................................... 71 43,169 37.0% 44,126 37.2% 109 70,550 24.7%
------ -------- ----- -------- ----- ----- -------- -----
COMMERCIAL LOANS:
PMC CAPITAL, INC ..........................
Hotels and motels ....................... 36 38,650 33.1% 38,672 32.7% 60 60,360 21.2%
Gasoline / service stations ............. 2 492 0.4% 493 0.4% 2 493 0.2%
Retail, other ........................... 2 1,816 1.6% 1,818 1.5% 2 1,818 0.6%
Services ................................ 3 533 0.5% 533 0.5% 4 1,430 0.5%
Commercial real estate .................. 3 1,117 1.0% 1,124 1.0% 4 1,682 0.6%
Apartment complex ....................... 1 779 0.7% 784 0.7% 1 784 0.3%
------ -------- ----- -------- ----- ----- -------- -----
Total ..................................... 47 43,387 37.2% 43,424 36.8% 73 66,567 23.4%
------ -------- ----- -------- ----- ----- -------- -----
TOTAL LOANS RECEIVABLE (4) ................ 381 $116,711 100.0% $118,307 100.0% 624 $285,964 100.0%
====== ======== ===== ======== ===== ===== ======== =====
</TABLE>
(Continued on next page )
F-7
<PAGE> 35
PMC CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
( CONTINUED -- DOLLARS IN THOUSANDS, EXCEPT FOOTNOTES)
<TABLE>
<CAPTION>
CATEGORY / ISSUER VALUE % COST %
----------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
TOTAL LOANS RECEIVABLE (FROM PRIOR PAGE) .................................. $ 116,711 74.3% $ 118,307 74.5%
--------- ----- --------- -----
MONEY MARKET AND FUND DEPOSIT ACCOUNTS (5):
Bank money market saving accounts ............................... 7,104 4.5% 7,104 4.5%
SunTrust, overnight repo account ................................ 1,327 0.8% 1,327 0.8%
Dreyfus, Cash Management Plus money market fund ................. 4,026 2.6% 4,026 2.5%
Goldman Sachs, money market fund ............................... 2,011 1.3% 2,011 1.3%
Goldman Sachs, Prime Obligation money market fund .............. 4,021 2.6% 4,021 2.5%
--------- ----- --------- -----
Total money market and fund deposit accounts ...................... 18,489 11.8% 18,489 11.6%
--------- ----- --------- -----
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES:
Investment in PMC Limited Partnership and affiliates ............ 7,092 4.5% 7,092 4.5%
Investment in PMC Advisers, Ltd. and subsidiary ................. 205 -- 205 --
Investment in PMC Capital L.P. 1998-1 and affiliate ............. 5,649 3.6% 5,649 3.6%
Investment in PMC Funding Corp. and subsidiary .................. (16) -- (16) --
--------- ----- --------- -----
Total investment in unconsolidated subsidiaries ................... 12,930 8.2% 12,930 8.1%
--------- ----- --------- -----
OTHER INVESTMENTS:
Interest-only strip receivable .................................. 4,168 2.7% 4,348 2.7%
Investment in Class B certificate of PMC Capital L.P. 1998-1 .... 2,168 1.4% 2,168 1.4%
SunBank Miami, restricted investments ........................... 817 0.5% 817 0.7%
Bank One Trust Company, restricted investments .................. 1,708 1.1% 1,708 0.7%
Real property owned ............................................. 109 0.1% 109 0.1%
--------- ----- --------- -----
Total other investments ........................................... 8,970 5.7% 9,150 4.8%
--------- ----- --------- -----
TOTAL INVESTMENTS (6) ..................................................... $ 157,100 100.0% $ 158,876 100.0%
========= ===== ========= =====
</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 (
$82.9 million ), the loans contributed to the Partnerships ( $61.9
million ) and the unguaranteed portion of First Western loans sold and
serviced ( $22.9 million ). The balance does not include approximately
$121.4 million of loan portfolio serviced on behalf of PMC Commercial
Trust.
(3) Interest rates on loans receivable range from 8.0% to 14.5%.
(4) Balances are at face value of loans, less discounts aggregating $330,000
in accordance with Emerging Issues Task Force 88-11, discounts on
purchased loans of $61,000, unamortized fee revenue of $611,000 and
reserves of $594,000.
(5) Interest or dividend rates on money market and fund deposit accounts
range from 4% to 5%.
(6) The aggregate cost of investments for Federal income tax purposes is
approximately $160 million.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE> 36
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Investment income:
Interest ................................................. $ 17,214 $ 17,136 $ 18,571
Premium income ........................................... 776 1,776 1,942
Other investment income, net ............................. 807 504 608
-------- -------- --------
Total investment income .................................... 18,797 19,416 21,121
Other income, net .......................................... 2,893 2,430 2,331
Equity in income of unconsolidated subsidiaries, net ....... 2,624 2,560 369
-------- -------- --------
Total income ............................................... 24,314 24,406 23,821
-------- -------- --------
EXPENSES:
Interest ................................................. 5,467 5,548 5,708
Salaries and related benefits ............................ 3,965 3,435 3,180
General and administrative ............................... 821 797 843
Profit sharing plan ...................................... 243 243 217
Rent ..................................................... 244 229 213
Legal and accounting ..................................... 182 192 149
Small Business Administration fees ....................... 106 108 99
Directors and shareholders expense ....................... 63 50 45
-------- -------- --------
Total expenses ............................................. 11,091 10,602 10,454
-------- -------- --------
Net operating income ...................................... 13,223 13,804 13,367
-------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ...................................... (219) (183) (214)
Recoveries on loans written-off ........................ -- -- 35
Sale of assets ......................................... 925 2,360 --
Change in unrealized appreciation
(depreciation) on investments ........................ 20 (359) 32
-------- -------- --------
Total realized and unrealized gain (loss) on investments ... 726 1,818 (147)
-------- -------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................... $ 13,949 $ 15,622 $ 13,220
======== ======== ========
PREFERRED DIVIDENDS ........................................ $ 250 $ 250 $ 251
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 11,800 11,411 11,002
======== ======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE ................ $ 1.16 $ 1.35 $ 1.18
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<PAGE> 37
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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, 1996 ............. $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
Issuances of common stock pursuant
to dividend reinvestment and cash
purchase plan, 198,329 shares ...... 2 2,757 -- -- 2,759
Net income ........................... -- -- 13,929 20 13,949
Dividends:
Preferred .......................... -- -- (250) -- (250)
Common ($1.23 per common share) .... -- -- (14,473) -- (14,473)
---- ------- -------- ----- --------
BALANCE, DECEMBER 31, 1998 .......... $118 $71,312 $ 1,495 $(774) $ 72,151
==== ======= ======== ===== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<PAGE> 38
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments ....... $ 13,949 $ 15,622 $ 13,220
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 ................................................. (7,407) (20,622) (21,915)
Proceeds from sale of guaranteed loans ...................................... 9,978 21,638 19,988
Change in unrealized depreciation on investments and loans written-off ...... 199 543 182
Unrealized premium income, net .............................................. (7) 215 (5)
Depreciation and amortization ............................................... 1,340 1,032 1,084
Accretion of loan discount and deferred fees ................................ (1,163) (1,623) (957)
Deferred fees collected ..................................................... 91 766 785
Gain on sale of assets, net ................................................. (928) (2,360) --
Equity in income of unconsolidated subsidiaries, net ........................ (2,624) (2,560) (369)
Net change in operating assets and liabilities:
Accrued interest receivable ............................................. 29 (231) 347
Other assets ............................................................ 338 (527) 357
Accrued interest payable ................................................ (52) (127) 8
Borrower advances ....................................................... (81) (116) (465)
Other liabilities ....................................................... (1,610) (1,069) 1,812
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................................... 12,052 10,581 14,072
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ...................................................................... (59,043) (65,739) (48,239)
Principal collected and other adjustments ......................................... 24,661 10,069 22,647
Proceeds from interest-only strip receivables ..................................... 792 648 --
Purchase of furniture and fixtures and other assets ............................... (146) (139) (127)
Purchase of mortgage-backed security of affiliate ................................. (2,168) -- --
Proceeds from sale of assets ...................................................... 301 22,986 --
Proceeds from partnership distributions ........................................... 3,012 3,347 --
Release of (investment in) restricted cash ........................................ 273 (1,569) 556
Advances from (to) unconsolidated affiliates, net ................................ (1,555) (1,004) 1,114
Investment in unconsolidated subsidiaries ......................................... (3,253) -- (893)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................................. (37,126) (31,401) (24,942)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption of SBA debentures ........................... -- -- 941
Proceeds from issuance of common stock ........................................... 2,061 5,475 2,834
Proceeds from unconsolidated subsidiary .......................................... 40,876 -- 37,803
Payment of dividends on common stock ............................................. (14,771) (13,197) (11,935)
Payment of dividends on preferred stock .......................................... (250) (250) (250)
Payment of SBA debentures ........................................................ (1,500) (3,280) --
Payment of issuance costs on notes and debentures ................................ (119) (443) (80)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................................. 26,297 (11,695) 29,313
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 1,223 (32,515) 18,443
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................................ 17,502 50,017 31,574
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR .............................................. $ 18,725 $ 17,502 $ 50,017
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid .................................................................... $ 5,474 $ 5,631 $ 5,433
======== ======== ========
Dividends reinvested ............................................................. $ 700 $ 963 $ 880
======== ======== ========
Loans receivable acquired in exchange for SBA debentures ......................... $ -- $ -- $ 158
======== ======== ========
Reclassification from loans receivable to real property owned .................... $ 109 $ 203 $ 453
======== ======== ========
Loans to facilitate sale of real property owned .................................. $ 73 $ -- $ --
======== ======== ========
Loans contributed to unconsolidated subsidiary, net .............................. $ 43,144 $ -- $ 45,145
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE> 39
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
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." PMC Capital has elected to be taxed as a regulated investment company
under the Internal Revenue Code 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 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"). 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 is a national lender
that 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
national reservation systems, 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. In addition to the
Company's lending operations, it earns revenue as an investment advisor who
evaluates and services loans and other investment alternatives pursuant to a
fee arrangement with PMC Commercial Trust ("PMC Commercial"). PMC Commercial is
a real estate investment trust and an affiliate of the Company.
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. First Western, PMCIC 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 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").
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 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 SBA 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.
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 or variable 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 is
being 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 Western
Financial 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.
F-12
<PAGE> 40
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 acts as the investment advisor for 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.
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 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.
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.
Deferred fees consist of non-refundable fees less direct loan origination
costs. For loans originated prior to January 1, 1998, these fees are being
recognized over the expected life of the related loan. For loans originated
subsequent to December 31, 1997 these fees are being recognized currently. The
change did not materially impact the Company's financial statements.
F-13
<PAGE> 41
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Interest-only Strip Receivable and Servicing Asset: Effective January 1, 1997,
the Company 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 loan, typically the guaranteed portion of an SBA
7(a) loan. The difference between (i) the carrying value of the portion of
loans sold and (ii) the sum of (a) cash received, (b) the relative fair values
of the servicing rights and (c) the interest-only strip receivable retained,
constitutes the gain on sale.
In accordance with SFAS No. 125, the Company establishes a servicing asset to
the extent the Company receives contractual compensation for servicing loans
which is in excess of the cost of servicing 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 the costs
associated with servicing 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.
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, 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 investment. As of December 31, 1998 and 1997, there
was an unrealized loss of $180,000 and $300,000, respectively, related to the
interest-only strip receivable. During the years ended December 31, 1998 and
1997, the Company recorded an unrealized gain of $120,000 and an unrealized
loss of $300,000 relating 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, 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.
Real Property Owned: Real property owned is carried at the Board of Directors'
estimate of fair value, based upon appraisals and other factors.
F-14
<PAGE> 42
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Mortgage-Backed Security of Affiliate: The Mortgage-backed security represents
the ownership of the Class B notes of the 1998 Partnership and is valued at
amortized cost which approximates fair value.
Cash equivalents: Cash equivalents are carried at value, which approximates
cost.
VALUATION OF DEBT
Debt incurred by the Company is valued at cost.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are carried at their value,
which is cost less accumulated depreciation and amortization. Depreciation and
amortization are 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 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, if any).
INTEREST INCOME
Interest income includes income on loans and the yield on the interest-only
strip receivables. Interest income on loans is accrued as earned and the
accrual of interest is generally suspended when the related loan becomes 60
days past due (a "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.
F-15
<PAGE> 43
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
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.
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 80% 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, 1998, included in loans receivable are
approximately $2.4 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 $105.8 million and $133.7 million at December 31,
1998 and 1997, 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.
PMCIC and Western Financial originate loans that are payable in monthly
installments of principal and interest based upon five 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 SBA 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, (iv) contain prepayment fees
and (iv) are generally guaranteed by the principals of the borrower.
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 retained loans were to borrowers in Texas, California, Florida
and Georgia, as noted below:
<TABLE>
<CAPTION>
Percentage of Loan Portfolio
State December 31,
----- ----------------------------
1998 1997
----------------------------
<S> <C> <C>
Texas 35% 33%
California 8% 8%
Florida 6% 4%
Georgia 4% 9%
Other 47% 46%
---- ----
100% 100%
==== ====
</TABLE>
F-16
<PAGE> 44
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LOANS RECEIVABLE: (CONTINUED)
The activity in net unrealized depreciation on loans receivable is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Balance, beginning of period................... $ 494,000 $ 435,000
Provision for losses........................... 319,000 242,000
Loans written-off.............................. (219,000) (183,000)
--------- ---------
Balance, end of period......................... $ 594,000 $ 494,000
========= =========
</TABLE>
Loans receivable with an aggregate retained balance of $1.6 million and $1.5
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,
1998 and 1997, respectively.
At December 31, 1998 and 1997, the recorded investment in loans identified as
impaired in accordance with SFAS No. 114 totaled $1.8 million and $3.1 million,
respectively. Of this total, at December 31, 1998 and 1997, approximately
$600,000 and $1.9 million, 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 $1.3 million and $1.2 million of
these loans at December 31, 1998 and 1997, have a corresponding valuation
allowance of $588,000 and $472,000, respectively. At December 31, 1998 and
1997, the Company has recognized $6,000 and $22,000 in valuation allowances on
identified problem loans of $44,000 and $95,000, 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 $180,000 and $264,000, respectively, would
have been recognized during the years ended December 31, 1998 and 1997.
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 PMCIC and Western Financial to PMC Capital) of loans to
the 1996 Partnership without recourse (see Note 15). At December 31, 1998, the
remaining principal balance outstanding on those loans was $16.1 million.
During November 1998, PMC Capital contributed approximately $43 million
(aggregate of principal balance, including $22.3 million in loans transferred
from PMCIC and Western Financial to PMC Capital) of loans to the 1998
Partnership without recourse (see Note 15). At December 31, 1998, the remaining
principal balance outstanding on those loans was $41.3 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 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.
F-17
<PAGE> 45
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SERVICING ASSET AND PREMIUM INCOME: (CONTINUED)
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,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Aggregate balance, beginning of year.......... $ 1,607,000 $ 1,753,000 $ 7,514,000
Aggregate additions, net of allowances........ 222,000 328,000 707,000
Amortization, net............................. (499,000) (474,000) (1,792,000)
------------ ------------ ------------
1,330,000 1,607,000 6,429,000
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................ $ 1,330,000 $ 1,607,000 $ 1,753,000
============ ============ ============
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT:
At December 31, 1998 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Furniture and equipment .......................... $ 536,000 $ 392,000
Leasehold improvements ........................... -- 150,000
Automobiles ...................................... 13,000 13,000
------------ ------------
549,000 555,000
Less:accumulated depreciation .................... 321,000 318,000
------------ ------------
$ 228,000 $ 237,000
============ ============
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1998,
1997 and 1996 was approximately $151,000, $59,000 and $49,000, respectively.
Included in amortization is approximately $89,000 during the year ended
December 31, 1998 relating to the write-off of leasehold improvements relating
to the previously occupied leased office space. The lease was terminated on
January 1, 1999.
NOTE 5. NOTES PAYABLE:
PMC has a $15 million uncollateralized revolving credit facility which expires
May 2000. 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
requires that the ratio of net charge-offs to net loans receivable will not
exceed 2%, and the ratio of assets to senior debt (as defined in the note
agreement) will not fall below 135%, as amended. At December 31, 1998 and 1997,
the Company had no amounts outstanding pursuant to this credit facility and the
Company was in compliance with all covenants of this facility. 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, 1998, the Company was in compliance with all of the covenants of
these
F-18
<PAGE> 46
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. NOTES PAYABLE: (CONTINUED)
notes. At December 31, 1998 and 1997 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, 6.52% at December 31, 1998.
(2) Payable in three equal annual installments commencing July
19, 1999.
Principal payments required on the notes at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------------
<S> <C>
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, 1998, 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>
August 18, 1999 8.125% $ 1,000,000
September 1, 1999 8.800% 2,500,000
December 1, 1999 (2) 8.600% 650,000
January 2, 2000 7.875% 3,000,000
March 1, 2000 9.350% 1,000,000
June 1, 2000 (2) 9.300% 300,000
June 1, 2000 9.300% 2,000,000
June 1, 2000 (3) 9.300% 1,030,000
September 1, 2000 9.600% 4,310,000
December 1, 2002 (2) 7.510% 510,000
September 1, 2004 (4) 5.200% 3,000,000
September 1, 2004 8.200% 3,000,000
March 1, 2005 (5) 4.840% 3,000,000
June 1, 2005 (6) 3.690% 5,000,000
September 1, 2005 (7) 3.875% 7,000,000
September 1, 2006 7.590% 2,490,000
-----------
$39,790,000
===========
</TABLE>
(1) During the year ended December 31, 1998 and 1997, the Company
paid off $1,500,000 and $3,280,000, respectively, in
debentures payable at their maturity. Total debentures
outstanding at December 31, 1997 were $41,290,000.
(2) 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.
F-19
<PAGE> 47
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. SBA DEBENTURES PAYABLE: (CONTINUED)
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.
(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 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.
(4) The interest rate will increase to 8.200% in September 1999
until maturity.
(5) The interest rate will increase to 7.840% in March 2000 until
maturity.
(6) The interest rate will increase to 6.690% in June 2000 until
maturity.
(7) 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 were paid to the corporation for costs incurred during the build-out
of the leased premises. The lease had been amended to allow the Company to
terminate such lease without penalty upon 60 days written notice to the
corporation. During September 1998, the Company exercised the option to
terminate the Lease effective January 1, 1999.
In September 1998, the Company entered into a five year lease for office space
commencing December, 1998. The Company may at its option, renew the term of the
lease for two additional five year periods. At December 31, 1998, the Company
has additional agreements to lease office space in Phoenix, Arizona; and
Atlanta, Georgia. Rental expense amounted to approximately $244,000, $229,000
and $213,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
Future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ----------
<S> <C>
1999 $ 284,000
2000 284,000
2001 284,000
2002 284,000
2003 284,000
Thereafter 24,000
----------
$1,444,000
==========
</TABLE>
LOAN COMMITMENTS
Loan commitments outstanding at December 31, 1998, to various prospective small
business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $57.3 million. Of these
commitments, $16.7 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.
F-20
<PAGE> 48
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain of its officers and/or
employees for terms expiring June 2001. Annual remuneration during the term of
the contracts do not exceed $315,000 for any one individual. Future minimum
payments under these contracts are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ----------
<S> <C>
1999 $1,442,000
2000 1,442,000
2001 721,000
----------
$3,605,000
==========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996 compensation to
officers was approximately $1,503,000, $1,639,000 and $1,382,000, 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 sales of the unguaranteed portion
of SBA loans and the structured sale of loans during 1998, 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
$443,000 at December 31, 1998), (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 (valued at $2,691,000 at December
31, 1998, included in interest-only strip receivable on the accompanying
balance sheet) and (iii) the subordination of Class B certificate held by PMC
Capital with a value of approximately $2.2 million, (iv) the investment in the
1998 Partnership with a value of $5.5 million and (v) cash deposits provided by
the Company. At December 31, 1998, approximately $2.3 million of cash deposits
held by the Company 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, 1998 and 1997, 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, the sale of the unguaranteed
portion of SBA loans in 1994 and 1997 (the "SBA Unguaranteed Sales") and the
structured sale in 1998. Based upon current prepayment assumptions, estimates
of default rates and a discount factor considering the current interest rate
environment, the Company has recorded an unrealized gain and unrealized loss of
$120,000 and $300,000 during the years ended December 31, 1998 and 1997,
respectively. At December 31, 1998 and 1997, the net unrealized loss related to
the interest-only strip receivables was $180,000 and $300,000, respectively.
In connection with the Company's investment in the Limited Partnerships, all
payments of principal and interest on the loans contributed to the Limited
Partnerships are to be deposited with the respective trustee and are used to
pay the respective noteholders the required monthly principal and interest then
due on the notes pursuant to the respective Trust Indenture (as defined below)
prior to releasing any excess funds to the Limited Partnerships free and clear
of the respective Trust Indenture. The Limited Partnerships' obligations to the
respective noteholders are also collateralized by: (i) the differential between
the outstanding principal balance remaining due on the underlying loans held by
the Limited Partnerships and the balance due the respective 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
Limited Partnerships to the extent they are restricted pursuant to the terms of
the respective Trust Indenture established by the noteholders, the Company and
the Limited Partnerships (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
respective partnership noteholders (the "Excess Cash"), be retained in the
Reserve Account until the covenants are in compliance. Of the assets of the
Limited Partnerships at December 31, 1998, approximately $93,000 was Excess
Cash which was distributed to the Company in January 1999.
F-21
<PAGE> 49
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CREDIT AND INTEREST RATE RISK: (CONTINUED)
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, 1998 and 1997, loans to
businesses in the lodging industry comprised 61% and 59% of its total assets,
respectively, and 85% 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 currently comprise
approximately 35% of the Company's outstanding loan portfolio. A decline in
economic conditions in Texas 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 PMCIC have
typically been long-term and at fixed rates and the borrowed funds of these
companies are typically long-term and at fixed rates. PMCIC, Western Financial
and PMC have also originated variable-rate loans which were part of the
structured securitization and sale which was completed in November 1998 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. At present interest rate levels or if interest rates
continue to 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.
NOTE 9. CUMULATIVE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY:
PMCIC 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.
PMCIC 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,
1998, 1997 and 1996.
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 were recognized on the 4%
Preferred Stock during each of the years ended December 31, 1998, 1997 and
1996, 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 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, 1998, 1997 and
1996, the Company issued 198,329; 468,706; and 291,042; shares of common stock
pursuant to the Plan for proceeds (through cash and the reinvestment of
dividends) of approximately $2.8 million; $6.4 million; and $3.7 million,
respectively.
F-22
<PAGE> 50
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 years
ended December 31, 1998 and 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 PMCIC. Preferred stock dividend requirements were approximately
$250,000 during each of the years ended December 31, 1998, 1997 and 1996. The
weighted average number of shares used in the computations of basis earnings
per common share were 11.8 million, 11.4 million and 11.0 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
NOTE 12. BORROWER ADVANCES:
The Company finances several projects during the construction phase. At
December 31, 1998, the Company was in the process of funding approximately
$18.4 million in construction projects, of which $10.9 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 $1.6
million and $1.7 million in funds held on behalf of borrowers at December 31,
1998 and 1997, 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, $243,000 and $217,000 during the years ended
December 31, 1998, 1997 and 1996, respectively. Contributions to the profit
sharing plan are at the discretion of the Board of Directors.
NOTE 14. RELATED PARTY TRANSACTIONS:
Pursuant to agreements between PMC Capital and its wholly owned subsidiaries,
during the three years ended December 31, 1998, 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 ($769,000, $1,991,000, and $1,937,000
during the years ended December 31, 1998, 1997 and 1996, respectively) as
compensation for these services and for working capital provided by PMC Capital
to First Western.
Pursuant to SBA rules and regulations, distributions of the net assets of the
Company's wholly-owned regulated investment company subsidiaries are limited.
As of December 31, 1998 and 1997, the amount of dividends available for
distribution were approximately $1.9 million and $0.7 million, respectively.
See the accompanying consolidating financial statements.
Pursuant to the investment management agreements entered into 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 the
Company's loans. In addition, during 1996 the investment management agreement
was amended to include compensation to PMC Advisers for its assistance in the
issuance of PMC Commercial's debt and equity securities. During 1998, a second
investment management agreement was entered into which provides a fee to be
paid to the PMC Advisers for providing services relating to the supervision of
leases entered into by PMC Commercial and charged a fee relating to the
acquisition by
F-23
<PAGE> 51
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. UNCONSOLIDATED WHOLLY OWNED ENTITIES:
PMC Commercial of limited service hospitality properties. Fees for the three
years in the period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
Type of Fee 1998 1997 1996
----------- ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Loan servicing and origination fee $ 1,789 $ 1,662 $ 1,310
Lease supervision 218
Issuance of equity capital -- -- 251
Structured financing 167 -- --
Property acquisition 466 -- --
------------ ------------ ------------
$ 2,640 $ 1,622 $ 1,561
============ ============ ============
</TABLE>
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 1996 Partnership and the
1998 Partnership(the "Unconsolidated Entities") are accounted for by the equity
method of accounting in conformity with Federal securities law.
PMC Advisers. 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, 1998, 1997 and 1996, was
$1,470,000, $1,603,000, and $1,571,000 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.
PMC Funding Corp. PMC Funding Corporation is a corporation that holds assets on
behalf of the Company. PMC Funding Corp. owns a 99% limited partnership
interest in Asset Management Series A, L.L.C. The accounts of Asset Investments
Series A, L.L.C., have been consolidated with PMC Funding Corp.
PMC Capital Limited Partnership. On November 13, 1996, the 1996 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 "1996 Notes"). The 1996 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 1996 Partnership. In
connection with this private placement, the 1996 Notes were given a rating of
"Aa2" by Moody's Investors Service. The terms of the 1996 Notes provide that
the partners of the 1996 Partnership are not liable for any payment on the 1996
Notes. Accordingly, the 1996 Partnership has the exclusive obligation for the
repayment of the 1996 Notes, and the holders of the 1996 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 1996 Notes
were distributed to PMC Capital. The net effect of the contributed loans less
the distributed funds comprises the limited partners capital on the condensed
combining balance sheet. PMC Capital either directly or indirectly owns 100% of
the 1996 Partnership.
PMC Capital L.P. 1998-1. On November 24, 1998, the 1998 Partnership (a newly
formed special purpose affiliate of the Company) completed a private placement
of approximately $39.6 million of its Loan-Backed Variable Rate Notes, Series
1998-1 (the "1998 Notes"). The 1998 Notes, issued at par, which have a stated
maturity in 2021 and bear interest at the prime rate as published in the Wall
Street Journal (adjusted quarterly) less 1%, are collateralized by loans
contributed by PMC Capital to the 1998 Partnership. In connection with this
private placement, the Notes were given a rating of "Aaa" by Moody's Investors
Service. The terms of the 1998 Notes provide that the partners of the 1998
Partnership are not liable for any payment on the 1998 Notes. Accordingly,
the 1998 Partnership has the exclusive obligation for the repayment of the 1998
Notes, and the holders of the 1998 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 1998 Notes were distributed to PMC
Capital. The net effect of the contributed loans less the distributed funds
comprises the partners capital on the following condensed combining balance
sheet.
F-24
<PAGE> 52
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PMC Capital either directly or indirectly owns 100% of the 1998 Partnership.
NOTE 15. UNCONSOLIDATED WHOLLY OWNED ENTITIES: (CONTINUED)
The following are condensed combined financial statements of the Unconsolidated
Entities as of December 31, 1998 and 1997 and for the three years in the period
ended December 31, 1998:
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Investments at value:
Loans receivable, net ................................. $ 61,768 $ 33,975
Cash equivalents ...................................... 64 37
Restricted investments and real property owned ........ 9,096 2,686
------------ ------------
70,928 36,698
Other assets .......................................... 1,673 1,762
------------ ------------
Total assets .......................................... $ 72,601 $ 38,460
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Notes payable ......................................... $ 57,053 $ 29,007
Other liabilities ..................................... 2,618 1,656
------------ ------------
59,671 30,663
------------ ------------
OWNERS' EQUITY:
Common Stock and additional paid-in capital ........... 526 477
Partners' Capital ..................................... 12,740 7,726
Retained deficit ...................................... (336) (406)
------------ ------------
12,930 7,797
------------ ------------
Total liabilities and owners' equity .................. $ 72,601 $ 38,460
============ ============
</TABLE>
CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INCOME:
Investment income ...................... $ 4,536 $ 5,021 $ 714
Other income, net ...................... 1,677 1,716 173
------------ ------------ ------------
Total income ........................... 6,213 6,737 887
------------ ------------ ------------
EXPENSES:
Interest ............................... 1,833 2,287 362
General and administrative expenses .... 1,756 1,890 156
------------ ------------ ------------
Total expense .......................... 3,589 4,177 518
------------ ------------ ------------
NET INCOME ............................. $ 2,624 $ 2,560 $ 369
============ ============ ============
</TABLE>
NOTE 16. STOCK BASED COMPENSATION PLAN:
During fiscal year 1998 and 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.
F-25
<PAGE> 53
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. STOCK BASED COMPENSATION PLAN: (CONTINUED)
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 during the years ended December 31, 1998 and
1997 to certain employees and directors. The stock options granted all have
contractual terms 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 years ended
December 31, 1998 and 1997 was from $13.56 to $14.31. The options granted vest
100% on the first anniversary of the date of grant.
<TABLE>
<CAPTION>
1998 1997
-------------------------- ------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding January 1....................... 86,755 $ 14.21 -- n/a
Granted..................................... 51,000 $ 14.07 86,755 $14.21
Exercised................................... -- -- -- n/a
Forfeited and expired....................... 2,900 $ 14.13 -- n/a
------- ------
Outstanding December 31..................... 134,855 $ 14.18 86,755 $14.21
======= ======= ====== ======
Exercisable at December 31.................. 86,455 $ 14.21 -- n/a
======= ======= ====== ======
Weighted-average fair value of
options granted during the year.......... $ 0.78 $ 0.54
====== ======
</TABLE>
The weighted-average remaining term of the options outstanding as of December
31, 1998 is 3.81 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 during the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
ASSUMPTION 1998 1997
---------- ------ ------
<S> <C> <C>
Expected Term (years) 3.0 3.0
Risk-Free Interest Rate 5.55% 6.17%
Expected Dividend Yield 8.80% 8.77%
Expected Volatility 15.63% 11.41%
</TABLE>
F-26
<PAGE> 54
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 the years ended December 31, 1998 and 1997 would
approximate the pro forma amounts below (in thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
SFAS No. 123 Charge $ -- $ 44 $ -- $ 25
APB 25 Charge $ -- $ -- $ -- $ --
Net Income $13,949 $13,905 $15,622 $15,597
Basic and Diluted
Earnings Per Common Share $ 1.16 $ 1.16 $ 1.35 $ 1.35
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
F-27
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS ON
CONSOLIDATING FINANCIAL STATEMENTS
To the Board of Directors
PMC Capital, Inc.:
In our opinion, the accompanying consolidating balance sheet and related
consolidating statements of income, cash flows and shareholders' equity is
fairly stated, in all material respects, in relation to the consolidated
financial statements, taken as a whole, of PMC Capital, Inc. and subsidiaries
for the year ended December 31, 1998, which are covered by our report dated
March 4, 1999 presented on page F-4 of this Form 10-K. Our audit was conducted
for the purpose of forming an opinion on the consolidated financial statements
taken as a whole. This information is presented for purposes of additional
analysis and is not a required part of the consolidated financial statements.
Such information has been subjected to the auditing procedures applied in the
audit of the consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
March 4, 1999
Dallas, Texas
F-28
<PAGE> 56
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONSOLIDATED
BEFORE PMC
ELIMINATION ELIMINATION CAPITAL,
CONSOLIDATED ENTRIES ENTRIES INC.
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
Loans receivable, net ............................ $ 116,711 $ -- $ 116,711 $ 43,387
Cash equivalents ................................. 18,489 -- 18,489 10,430
Investment in unconsolidated subsidiaries ........ 12,930 (23,291) 36,221 36,221
Interest-only strip receivables .................. 4,168 -- 4,168 1,477
Restricted investments ........................... 2,525 -- 2,525 --
Mortgage-backed security of affiliate ............ 2,168 -- 2,168 2,168
Real property owned .............................. 109 -- 109 --
--------- --------- --------- ---------
Total investments .................................. 157,100 (23,291) 180,391 93,683
--------- --------- --------- ---------
OTHER ASSETS:
Receivable for loans sold ........................ 156 -- 156 12
Due from unconsolidated subsidiaries ............. 2,579 (15,178) 17,757 17,692
Servicing asset .................................. 1,330 -- 1,330 --
Deferred charges, deposits and other assets ...... 1,140 -- 1,140 270
Accrued interest receivable ...................... 581 -- 581 202
Cash ............................................. 235 -- 235 109
Property and equipment, net ...................... 228 -- 228 228
--------- --------- --------- ---------
Total other assets ................................. 6,249 (15,178) 21,427 18,513
--------- --------- --------- ---------
TOTAL ASSETS ....................................... $ 163,349 $ (38,469) $ 201,818 $ 112,196
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ........................... $ 39,790 $ -- $ 39,790 $ --
Notes payable .................................... 35,000 -- 35,000 35,000
Accounts payable ................................. 1,728 -- 1,728 52
Dividends payable ................................ 3,020 -- 3,020 2,957
Borrower advances ................................ 1,598 -- 1,598 356
Accrued interest payable ......................... 1,264 -- 1,264 430
Due to unconsolidated subsidiaries ............... 1 (15,178) 15,179 2
Deferred fee revenue ............................. 666 -- 666 428
Other liabilities ................................ 1,131 -- 1,131 820
--------- --------- --------- ---------
Total liabilities .................................. 84,198 (15,178) 99,376 40,045
--------- --------- --------- ---------
Cumulative preferred stock of subsidiary ........... 7,000 3,000 4,000 --
--------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Cumulative preferred stock of subsidiary, 3% ..... -- (3,000) 3,000 --
Common stock ..................................... 118 (22) 140 118
Additional paid-in capital ....................... 71,312 (22,373) 93,685 71,312
Undistributed net operating income ............... 1,495 (1,896) 3,391 721
Net unrealized depreciation on investments ....... (774) -- (774) --
--------- --------- --------- ---------
72,151 (27,291) 99,442 72,151
Less treasury stock .............................. -- 1,000 (1,000) --
--------- --------- --------- ---------
Total shareholders' equity ......................... 72,151 (26,291) 98,442 72,151
--------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 163,349 $ (38,469) $ 201,818 $ 112,196
========= ========= ========= =========
NET ASSET VALUE PER COMMON SHARE ................... $ 6.10
=========
<CAPTION>
FIRST WESTERN
WESTERN SBLC, FINANCIAL PMC
INC. AND CAPITAL INVESTMENT
SUBSIDIARIES CORPORATION CORPORATION
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
Loans receivable, net ............................ $ 8,923 $ 21,232 $ 43,169
Cash equivalents ................................. 2,099 3,882 2,078
Investment in unconsolidated subsidiaries ........ -- -- --
Interest-only strip receivables .................. 2,691 -- --
Restricted investments ........................... 2,311 -- 214
Mortgage-backed security of affiliate ............ -- -- --
Real property owned .............................. 9 55 45
-------- -------- --------
Total investments .................................. 16,033 25,169 45,506
-------- -------- --------
OTHER ASSETS:
Receivable for loans sold ........................ 144 -- --
Due from unconsolidated subsidiaries ............. -- -- 65
Servicing asset .................................. 1,330 -- --
Deferred charges, deposits and other assets ...... 328 170 372
Accrued interest receivable ...................... 25 103 251
Cash ............................................. 59 27 40
Property and equipment, net ...................... 0 -- --
-------- -------- --------
Total other assets ................................. 1,886 300 728
-------- -------- --------
TOTAL ASSETS ....................................... $ 17,919 $ 25,469 $ 46,234
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ........................... $ -- $ 15,790 $ 24,000
Notes payable .................................... -- -- --
Accounts payable ................................. 1,646 29 1
Dividends payable ................................ -- -- 63
Borrower advances ................................ 389 358 495
Accrued interest payable ......................... 20 416 398
Due to unconsolidated subsidiaries ............... 13,780 120 1,277
Deferred fee revenue ............................. 18 113 107
Other liabilities ................................ 279 9 23
-------- -------- --------
Total liabilities .................................. 16,132 16,835 26,364
-------- -------- --------
Cumulative preferred stock of subsidiary ........... -- -- 4,000
-------- -------- --------
SHAREHOLDERS' EQUITY:
Cumulative preferred stock of subsidiary, 3% ..... -- -- 3,000
Common stock ..................................... -- 21 1
Additional paid-in capital ....................... 2,000 7,934 12,439
Undistributed net operating income ............... 1,043 697 930
Net unrealized depreciation on investments ....... (256) (18) (500)
-------- -------- --------
2,787 8,634 15,870
Less treasury stock .............................. (1,000) -- --
-------- -------- --------
Total shareholders' equity ......................... 1,787 8,634 15,870
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 17,919 $ 25,469 $ 46,234
======== ======== ========
NET ASSET VALUE PER COMMON SHARE ...................
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS.
F-29
<PAGE> 57
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONSOLIDATED FIRST WESTERN
BEFORE PMC WESTERN SBLC, FINANCIAL PMC
ELIMINATION ELIMINATION CAPITAL, INC. AND CAPITAL INVESTMENT
CONSOLIDATED ENTRIES ENTRIES INC. SUBSIDIARIES CORPORATION CORPORATION
------------ ------- ------- ---- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest .................................... $ 17,214 $ -- $ 17,214 $ 5,567 $ 2,354 $ 3,236 $ 6,057
Premium income .............................. 776 -- 776 769 7 -- --
Other investment income, net ................ 807 -- 807 351 66 212 178
-------- -------- -------- -------- -------- -------- --------
Total investment income ....................... 18,797 -- 18,797 6,687 2,427 3,448 6,235
Other income, net ............................. 2,893 -- 2,893 2,425 194 99 175
Equity in income (loss) of subsidiaries ....... 2,624 (9,399) 12,023 12,023 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total income .................................. 24,314 (9,399) 33,713 21,135 2,621 3,547 6,410
-------- -------- -------- -------- -------- -------- --------
EXPENSES:
Interest .................................... 5,467 -- 5,467 2,774 10 1,400 1,283
Salaries and related benefits ............... 3,965 -- 3,965 3,965 -- -- --
General and administrative .................. 821 -- 821 644 64 46 67
Profit sharing plan ......................... 243 -- 243 243 -- -- --
Rent ........................................ 244 -- 244 244 -- -- --
Legal and Accounting ........................ 182 -- 182 180 1 1 --
Small Business Administration fees .......... 106 -- 106 -- 4 36 66
Directors and shareholders expense .......... 63 -- 63 61 2 -- --
-------- -------- -------- -------- -------- -------- --------
Total expense ................................. 11,091 -- 11,091 8,111 81 1,483 1,416
-------- -------- -------- -------- -------- -------- --------
Net operating income .......................... 13,223 (9,399) 22,622 13,024 2,540 2,064 4,994
-------- -------- -------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ......................... (219) -- (219) -- (57) (99) (63)
Sale of assets ............................ 925 -- 925 925 -- -- --
Change in unrealized appreciation
(depreciation) on investments ........... 20 -- 20 -- 216 91 (287)
-------- -------- -------- -------- -------- -------- --------
726 -- 726 925 159 (8) (350)
-------- -------- -------- -------- -------- -------- --------
NET OPERATING INCOME AND REALIZED AND
UNREALIZED GAIN (LOSS) ON INVESTMENTS ....... $ 13,949 $ (9,399) $ 23,348 $ 13,949 $ 2,699 $ 2,056 $ 4,644
======== ======== ======== ======== ======== ======== ========
PREFERRED DIVIDEND ............................ $ 250 $ (250) $ 500 $ 250 $ -- $ -- $ 250
======== ======== ======== ======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE ... $ 1.16
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS.
F-30
<PAGE> 58
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF SHAREHOLDERS' EQUITY
December 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL UNDISTRIBUTED
PREFERRED COMMON PAID-IN NET OPERATING
STOCK, 3% STOCK CAPITAL INCOME
--------- -------- -------- --------
<S> <C> <C> <C> <C>
PMC CAPITAL, INC
BALANCES, JANUARY 1, 1998 ...................... $ -- $ 116 $ 68,555 $ 1,495
Net income ..................................... -- -- -- 13,949
Preferred dividend of consolidated subsidiary .. -- -- -- (250)
Dividend reinvestment plan, 198,329 shares .... -- 2 2,757 --
Dividends on common stock ...................... -- -- -- (14,473)
-------- -------- -------- --------
BALANCES, DECEMBER 31, 1998 .................... $ -- $ 118 $ 71,312 $ 721
======== ======== ======== ========
FIRST WESTERN SBLC, INC. AND SUBSIDIARY
BALANCES, JANUARY 1, 1998 ...................... $ -- $ -- $ 2,000 $ 960
Net income ..................................... -- -- -- 2,483
Dividends to parent company .................... -- -- -- (2,400)
-------- -------- -------- --------
BALANCES, DECEMBER 31, 1998 .................... $ -- $ -- $ 2,000 $ 1,043
======== ======== ======== ========
WESTERN FINANCIAL CAPITAL CORPORATION
BALANCES, JANUARY 1, 1998 ...................... $ -- $ 21 $ 7,934 $ 257
Net income ..................................... -- -- -- 1,965
Dividends to parent company .................... -- -- -- (1,525)
-------- -------- -------- --------
BALANCES, DECEMBER 31, 1998 .................... $ -- $ 21 $ 7,934 $ 697
======== ======== ======== ========
PMC INVESTMENT CORPORATION
BALANCES, JANUARY 1, 1998 ...................... $ 3,000 $ 1 $ 12,439 $ 275
Net income ..................................... -- -- -- 4,931
Dividends to parent company .................... -- -- -- (4,026)
Dividends, preferred ........................... -- -- -- (250)
-------- -------- -------- --------
BALANCES, DECEMBER 31, 1998 .................... $ 3,000 $ 1 $ 12,439 $ 930
======== ======== ======== ========
ELIMINATION ADJUSTMENTS
Equity in income of subsidiaries ............... -- -- -- (9,399)
Dividends to parent ............................ -- -- -- 7,951
Preferred dividend of consolidated subsidiary .. -- -- -- 250
Stock of subsidiaries .......................... (3,000) (22) (22,373) --
Undistributed earnings of subsidiaries ......... -- -- -- (698)
-------- -------- -------- --------
(3,000) (22) (22,373) (1,896)
-------- -------- -------- --------
CONSOLIDATED ........................................... $ -- $ 118 $ 71,312 $ 1,495
======== ======== ======== ========
<CAPTION>
NET
UNREALIZED
APPRECIATION TOTAL
(DEPRECIATION) TREASURY SHAREHOLDERS'
ON INVESTMENTS STOCK EQUITY
-------------- ----- ------
<S> <C> <C> <C>
PMC CAPITAL, INC
BALANCES, JANUARY 1, 1998 ...................... $ -- $ -- $ 70,166
Net income ..................................... -- -- 13,949
Preferred dividend of consolidated subsidiary .. -- -- (250)
Dividend reinvestment plan, 198,329 shares .... -- -- 2,759
Dividends on common stock ...................... -- -- (14,473)
-------- --------- --------
BALANCES, DECEMBER 31, 1998 .................... $ -- $ -- $ 72,151
======== ========= ========
FIRST WESTERN SBLC, INC. AND SUBSIDIARY
BALANCES, JANUARY 1, 1998 ...................... $ (472) $ (1,000) $ 1,488
Net income ..................................... 216 -- 2,699
Dividends to parent company .................... -- -- (2,400)
-------- --------- --------
BALANCES, DECEMBER 31, 1998 .................... $ (256) $ (1,000) $ 1,787
======== ========= ========
WESTERN FINANCIAL CAPITAL CORPORATION
BALANCES, JANUARY 1, 1998 ...................... $ (109) $ -- $ 8,103
Net income ..................................... 91 -- 2,056
Dividends to parent company .................... -- -- (1,525)
-------- --------- --------
BALANCES, DECEMBER 31, 1998 .................... $ (18) $ -- $ 8,634
======== ========= ========
PMC INVESTMENT CORPORATION
BALANCES, JANUARY 1, 1998 ...................... $ (213) $ -- $ 15,502
Net income ..................................... (287) -- 4,644
Dividends to parent company .................... -- -- (4,026)
Dividends, preferred ........................... -- -- (250)
-------- --------- --------
BALANCES, DECEMBER 31, 1998 .................... $ (500) $ -- $ 15,870
======== ========= ========
ELIMINATION ADJUSTMENTS
Equity in income of subsidiaries ............... -- -- (9,399)
Dividends to parent ............................ -- -- 7,951
Preferred dividend of consolidated subsidiary .. -- -- 250
Stock of subsidiaries .......................... -- 1,000 (24,395)
Undistributed earnings of subsidiaries ......... -- -- (698)
-------- --------- --------
-- 1,000 (26,291)
-------- --------- --------
CONSOLIDATED ........................................... $ (774) $ -- $ 72,151
======== ========= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS.
F-31
<PAGE> 59
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED
BEFORE
ELIMINATION ELIMINATION PMC CAPITAL,
CONSOLIDATED ENTRIES ENTRIES INC.
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and
unrealized gain (loss) on investments .................. $ 13,949 $ (9,399) $ 23,348 $ 13,949
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 ........................ (7,407) -- (7,407) --
Proceeds from sale of guaranteed loans ............. 9,978 -- 9,978 --
Change in unrealized depreciation on
investments and loans written-off .............. 199 -- 199 --
Unrealized premium income, net ..................... (7) -- (7) --
Depreciation and amortization ...................... 1,340 -- 1,340 107
Accretion of loan discount and deferred fees ....... (1,163) -- (1,163) (277)
Deferred fees collected ............................ 91 -- 91 28
(Gain) loss on sale of assets ...................... (928) -- (928) (925)
Equity in income of subsidiaries, net .............. (2,624) -- (2,624) (2,624)
Net change in operating assets and liabilities:
Accrued interest receivable ..................... 29 -- 29 35
Other assets .................................... 338 -- 338 106
Accrued interest payable ........................ (52) -- (52) (1)
Borrower advances ............................... (81) -- (81) 299
Other liabilities ............................... (1,610) -- (1,610) 66
-------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 12,052 (9,399) 21,451 10,763
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ............................................. (59,043) -- (59,043) (29,723)
Principal collected and other adjustments ................ 24,661 -- 24,661 13,535
Proceeds from interest-only strip receivable ............. 792 -- 792 --
Proceeds from unconsolidated subsidiary .................. --
Purchase of furniture and fixtures and other
assets ................................................ (146) -- (146) (144)
Purchase of mortgage-backed security of affiliate ........ (2,168) -- (2,168) (2,168)
Proceeds from sale of assets ............................. 301 -- 301 (22,289)
Proceeds from partnership distributions .................. 3,012 3,012 -- --
Release of (investment in) restricted cash ............... 273 -- 273 --
Advances to (from) parent company ........................ (1,555) (3,840) 2,285 2,285
Investment in unconsolidated subsidiary .................. (3,253) 9,399 (12,652) (12,652)
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........ (37,126) 8,571 (45,697) (51,156)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................. 2,061 -- 2,061 2,061
Proceeds from unconsolidated subsidiary ................. 40,876 -- 40,876 40,876
Payment of dividends to parent .......................... -- (3,012) 3,012 10,962
Payment of dividends on common stock .................... (14,771) -- (14,771) (14,771)
Payment of dividends on preferred stock ................. (250) -- (250) --
Payment of SBA debentures ............................... (1,500) -- (1,500) --
Advances to (from) parent company........................ -- 3,840 (3,840) --
Payment of issuance costs on notes and debentures ....... (119) -- (119) (4)
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........ 26,297 828 25,469 39,124
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 1,223 -- 1,223 (1,269)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............... 17,502 -- 17,502 11,808
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ..................... $ 18,725 $ -- $ 18,725 $ 10,539
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ........................................... $ 5,474 $ -- $ 5,474 $ 2,731
======== ======== ======== ========
Dividends reinvested .................................... $ 700 $ -- $ 700 $ 700
======== ======== ======== ========
Reclassification from loans receivable
to real property owned ................................ $ 109 $ -- $ 109 $ --
======== ======== ======== ========
Loans contributed to unconsolidated subsidiary, net ..... $ 43,144 $ -- $ 43,144 $ 43,144
======== ======== ======== ========
<CAPTION>
FIRST WESTERN
WESTERN SBLC, FINANCIAL PMC
INC., AND CAPITAL INVESTMENT
SUBSIDIARY CORPORATION CORPORATION
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and
unrealized gain (loss) on investments .................. $ 2,699 $ 2,056 $ 4,644
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 ........................ (7,407) -- --
Proceeds from sale of guaranteed loans ............. 9,978 -- --
Change in unrealized depreciation on
investments and loans written-off .............. (159) 8 350
Unrealized premium income, net ..................... (7) -- --
Depreciation and amortization ...................... 1,091 58 84
Accretion of loan discount and deferred fees ....... (255) (200) (431)
Deferred fees collected ............................ 23 16 24
(Gain) loss on sale of assets ...................... (8) (7) 12
Equity in income of subsidiaries, net .............. -- -- --
Net change in operating assets and liabilities:
Accrued interest receivable ..................... (13) 21 (14)
Other assets .................................... 155 37 40
Accrued interest payable ........................ (5) (50) 4
Borrower advances ............................... (75) 146 (451)
Other liabilities ............................... (1,437) (208) (31)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 4,580 1,877 4,231
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ............................................. (3,174) (12,027) (14,119)
Principal collected and other adjustments ................ 816 4,954 5,356
Proceeds from interest-only strip receivable ............. 792 -- --
Proceeds from unconsolidated subsidiary ..................
Purchase of furniture and fixtures and other
assets ................................................ -- -- (2)
Purchase of mortgage-backed security of affiliate ........ -- -- --
Proceeds from sale of assets ............................. 104 7,961 14,525
Proceeds from partnership distributions .................. -- -- --
Release of (investment in) restricted cash ............... 283 -- (10)
Advances to (from) parent company ........................ -- -- --
Investment in unconsolidated subsidiary .................. -- -- --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........ (1,179) 888 5,750
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................. -- -- --
Proceeds from unconsolidated subsidiary ................. -- -- --
Payment of dividends to parent .......................... (2,400) (1,525) (4,025)
Payment of dividends on common stock .................... -- -- --
Payment of dividends on preferred stock ................. -- -- (250)
Payment of SBA debentures ............................... -- (1,500) --
Advances to (from) parent company........................ 62 124 (4,026)
Payment of issuance costs on notes and debentures ....... -- (65) (50)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........ (2,338) (2,966) (8,351)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 1,063 (201) 1,630
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............... 1,095 4,110 489
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ..................... $ 2,158 $ 3,909 $ 2,119
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ........................................... $ 14 $ 1,451 $ 1,278
======== ======== ========
Dividends reinvested .................................... $ -- $ -- $ --
======== ======== ========
Reclassification from loans receivable
to real property owned ................................ $ 9 $ 55 $ 45
======== ======== ========
Loans contributed to unconsolidated subsidiary, net ..... $ -- $ -- $ --
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-32
<PAGE> 60
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partner
PMC Capital Limited Partnership:
In our opinion, the accompanying statements of assets, liabilities and
partners' capital and the related statements of income, partners' capital and
cash flows present fairly, in all material respects, the financial position of
PMC Capital Limited Partnership at December 31, 1998 and 1997 and the results
of its operations and cash flows for each of the two years in the period ended
December 31, 1998 and for the period from November 8, 1996 (inception) to
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
March 4, 1999
Dallas, Texas
F-33
<PAGE> 61
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Investments at value:
Loans receivable, net ......................................... $ 20,513 $ 33,975
Restricted investments - money market funds and cash .......... 2,408 2,219
------------ ------------
22,921 36,194
------------ ------------
Other assets:
Due from affiliates ........................................... 5 15
Deferred borrowing costs ...................................... 162 296
Accrued interest receivable ................................... 104 189
------------ ------------
Total other assets .............................................. 271 500
------------ ------------
Total assets .................................................... $ 23,192 $ 36,694
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Notes payable ................................................. $ 16,070 $ 28,866
Accrued interest payable ...................................... 91 164
Other liabilities ............................................. 190 141
Due to affiliates ............................................. -- 46
------------ ------------
Total liabilities ............................................... 16,351 29,217
------------ ------------
Commitments and contingencies
Partners' capital:
General Partner's interest .................................... (2) 4
Limited Partner's interest .................................... 6,843 7,473
------------ ------------
6,841 7,477
------------ ------------
Total liabilities and partners' capital ......................... $ 23,192 $ 36,694
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 62
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
November 8,
Years Ended December 31, 1996 (Inception)
--------------------------- to December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Investment income:
Interest .................................... $ 3,443 $ 4,823 $ 599
Other investment income, net ................ 619 197 111
------------ ------------ ------------
Total investment income ..................... 4,062 5,020 710
------------ ------------ ------------
Expenses:
Interest .................................... 1,537 2,287 362
General and administrative .................. 148 125 20
------------ ------------ ------------
Total expenses .............................. 1,685 2,412 382
------------ ------------ ------------
Net income .................................. $ 2,377 $ 2,608 $ 328
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 63
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1998
(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
Net income ............................................ 2,353 24 2,377
Partnership distributions ............................. (2,983) (30) (3,013)
------------ ------------ ------------
Balance, December 31, 1998 ............................ $ 6,843 $ (2) $ 6,841
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 64
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NOVEMBER 8,
YEARS ENDED DECEMBER 31, 1996 (INCEPTION)
-------------------------- TO DECEMBER 31,
1998 1997 1996
-------- -------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,377 $ 2,608 $ 328
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization 134 99 16
Accretion of loan discount and deferred fees (225) (207) (28)
Net change in operating assets and liabilities:
Accrued interest receivable 85 50 (239)
Other assets and liabilities 49 152 (11)
Accrued interest payable (73) (69) 233
-------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,347 2,633 299
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected and other adjustments 13,687 8,037 3,904
Release of (investment in) restricted cash (189) 3,225 (5,444)
-------- -------- -------
Net cash provided by (used in) investing activities 13,498 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 (3,013) (3,347) (37,803)
Payment on notes payable (12,796) (11,317) --
Advances from (to) affiliates, net (36) 774 (743)
Payment of issuance costs on notes -- (5) (406)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (15,845) (13,895) 1,241
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR -- -- --
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ -- $ -- --
======== ======== =======
Supplemental disclosure:
Loans contributed from limited partner $ -- $ -- $45,145
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 65
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"), the 99%
limited partner. 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 (1% ownership) 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 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.
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-38
<PAGE> 66
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.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to
current year presentation.
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, 1998 and 1997 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,
----- ----------------------------
1998 1997
------ ------
<S> <C> <C>
Texas 39% 37%
Arizona 11% 7%
Virginia 8% 5%
Tennessee 8% 5%
Florida 5% 9%
Other 29% 37%
--- ---
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, 1998 and
1997.
NOTE 3. CREDIT RISK:
At December 31, 1998 and 1997 loans to businesses in the lodging
industry comprised 96% and 93% of loans receivable and 85% and 88% 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, 1998 loans to businesses located in
Texas and Arizona comprised approximately 39% and 11%, respectively,
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-39
<PAGE> 67
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. As
of December 31, 1998 and 1997, the balance outstanding on the notes
payable were $16,070,000 and $28,866,000, respectively.
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>
1998 1997
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Loans receivable, net $ 20,513 $ 20,908 $ 33,975 $ 34,749
Restricted investments 2,408 2,408 2,219 2,219
Liabilities:
Notes payable 16,070 16,192 28,866 29,075
</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-40
<PAGE> 68
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, 1998 and 1997, the balance in due from affiliates of
$5,000 and $15,000, respectively, were the result of payments on the
Partnership's loans receivable deposited directly by borrowers into an
affiliate's operating bank account. These balances were transferred to
the appropriate company subsequent to the respective year end.
F-41
<PAGE> 69
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partner
PMC Capital, L.P. 1998-1:
In our opinion, the accompanying statement of assets, liabilities and partners'
capital and the related statements of income, partners' capital and cash flows
present fairly, in all material respects, the financial position of PMC Capital,
L.P. 1998-1 at December 31, 1998 and the results of its operations and cash
flows for the period from October 23, 1998 (inception) to December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
March 4, 1999
Dallas, Texas
F-42
<PAGE> 70
PMC CAPITAL, L.P. 1998-1
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(IN THOUSANDS)
December 31,
1998
------------
<TABLE>
<S> <C>
ASSETS
Investments at value:
Loans receivable, net .................................... $41,255
Restricted investments - money market funds and cash ..... 5,898
-------
47,153
-------
Other assets:
Accrued interest receivable .............................. 168
-------
Total other assets ......................................... 168
-------
Total assets ............................................... $47,321
=======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Notes payable ............................................ $40,983
Accrued interest payable ................................. 239
Due to affiliates ........................................ 450
-------
Total liabilities .......................................... 41,672
-------
Commitments and contingencies
Partners' capital:
General Partner's interest ............................... --
Limited Partner's interest ............................... 5,649
-------
5,649
-------
Total liabilities and partners' capital .................... $47,321
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 71
PMC CAPITAL, L.P. 1998-1
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
October 23,
1998 (Inception)
to December 31,
1998
----------------
<S> <C>
Investment income:
Interest ................................ $421
Other investment income, net ............ 53
----
Total investment income ................... 474
----
Expenses:
Interest ................................ 296
----
Total expenses ............................ 296
----
Net income ............................... $178
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 72
PMC CAPITAL, L.P. 1998-1
STATEMENT OF PARTNERS' CAPITAL
PERIOD FROM OCTOBER 23, 1998 (INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Limited General
Partner's Partner's
Interest Interest Total
--------- --------- --------
<S> <C> <C> <C>
Balance, October 23, 1998 (inception) ................. $ -- $ -- $ --
Limited Partner's contribution of loans receivable
and other assets, net ............................ 46,347 -- 46,347
Partnership distributions ............................. (40,876) -- (40,876)
Net income ............................................ 178 -- 178
-------- -------- --------
Balance, December 31, 1998 ............................ $ 5,649 $ -- $ 5,649
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 73
PMC CAPITAL, L.P. 1998-1
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
October 23,
1998 (Inception)
to December 31,
1998
----------------
<S> <C>
Cash flows from operating activities:
Net income .......................................... $ 178
Adjustments to reconcile net income
to net cash provided by operating activities:
Net change in operating assets and liabilities:
Accrued interest receivable ............... (168)
Accrued interest payable .................. 239
--------
Net cash provided by operating activities ............. 249
--------
Cash flows from investing activities:
Principal collected and other adjustments ........... 1,889
Investment in restricted cash ....................... (5,898)
--------
Net cash used in investing activities ................. (4,009)
--------
Cash flows from financing activities:
Proceeds from issuance of notes payable ............ 41,861
Payment on notes payable ........................... (878)
Partner distributions .............................. (40,876)
Partner contributions .............................. 3,203
Advances from affiliates, net ...................... 450
--------
Net cash provided by financing activities ............ 3,760
--------
Net increase (decrease) in cash and cash equivalents .. --
Cash and cash equivalents, beginning of period ........ --
--------
Cash and cash equivalents, end of year ................ $ --
========
Supplemental disclosure:
Loans contributed from limited partner ............. $ 43,144
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE> 74
PMC CAPITAL L.P. 1998-1
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
PMC Capital L.P. 1998-1 ("the Partnership") was formed as a Delaware
limited partnership in October 1998 to act as a special purpose
affiliate of PMC Capital, Inc. ("PMC Capital"), the 99.9% limited
partner. 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 variable-rate debt through a private placement. PMC Capital is
either directly or indirectly the sole partner of the Partnership.
PMC Capital Corp. 1998-1 is a Delaware corporation formed in October
1998 to be the General Partner (0.1% ownership) 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, 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.
REALIZED 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.
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-47
<PAGE> 75
PMC CAPITAL L.P. 1998-1
NOTES TO 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 statement of cash flows.
NOTE 2. LOANS RECEIVABLE:
On November 24, 1998, PMC Capital either contributed or sold the
aggregate amount of $43.4 million of loans (the "Partnership Loans")
to the Partnership without recourse to PMC Capital.
At December 31, 1998 their were 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, 1998
----- ----------------------------
<S> <C>
Texas 23%
Arizona 9%
South Carolina 7%
Georgia 7%
Other 54%
---
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, 1998.
NOTE 3. CREDIT RISK:
At December 31, 1998 loans to businesses in the lodging industry
comprised 73% of loans receivable and 64% of total assets. 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, 1998 loans to businesses
located in Texas comprised approximately 23% of the Partnership's
outstanding loan portfolio. No other state had a concentration greater
than 10%. A decline in economic conditions in Texas may adversely
affect the Partnership.
F-48
<PAGE> 76
PMC CAPITAL L.P. 1998-1
NOTES TO FINANCIAL STATEMENTS
NOTE 4. NOTES PAYABLE:
On November 24, 1998, the Partnership completed a private placement of
approximately $39.6 million of its Loan-Backed Adjustable Rate Class-A
Notes, (the "Class-A Notes") and $2.2 million of its Loan-Backed
Adjustable Rate Class-B Notes (the "Class-B Notes", and together with
the Class-A Notes, the "Notes"). The Class-A Notes and the Class-B
Notes, issued at par, which have a stated maturity in 2021 and bear
interest at the prime rate less 1.0% and 0.9%, respectively, are
collateralized by the loans contributed by PMC Capital to the
Partnership. In connection with this private placement, the Class-A
Notes and the Class-B Notes were given a rating of "Aaa" and "A1",
respectively, by Moody's Investors Service. The Class-B Notes were
purchased by PMC Capital, Inc., the limited partner of the
Partnership. 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
Partnership Loans. All principal collected on the Partnership 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 $39.8
million prior to the payment of issuance costs of approximately
$500,000 and the funding of a $2.6 million reserve fund held by the
trustee as collateral) were distributed to PMC Capital.
NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimates of fair value as required by Statement of Financial
Accounting Standards ("SFAS") No. 107 do not differ from the value of
the financial assets and liabilities determined by the General Partner
primarily as a result of the recent completion of the asset purchase
at fair value and the portfolio assets having variable rates of
interest. 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>
1998
--------------------------
Estimated
Carrying Fair
Amount Value
-------- ---------
(in thousands)
<S> <C> <C>
Assets:
Loans receivable, net $ 41,255 $ 41,255
Restricted investments 5,898 5,898
Liabilities:
Notes payable 40,983 40,983
</TABLE>
Loans receivable, net: The estimated fair value for all 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-49
<PAGE> 77
PMC CAPITAL L. P. 1998-1
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, 1998, the balance in due to affiliates of $450,000 was
a result of interest transferred to the Partnership relating to loans
receivable. These balances will be repaid subsequent to year end.
F-50
<PAGE> 78
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
3.1 Articles of Incorporation, as amended (incorporated by
reference to Exhibit 4(b)(1) to Amendment No. 9 to the
Registration Statement on Form N-2 (Registration No. 33-2535)
(the "N-2 Registration Statement"), dated November 29, 1991.
3.2 By-Laws, as amended (incorporated by reference to Exhibit 2
to Amendment No.7 to the N-2 Registration Statement dated
April 27, 1989).
4.1 Certificate of Common Stock (incorporated by reference to
Exhibit 4 to Amendment No. 1 to the N-2 Registration
Statement dated November 10, 1993).
****4.2 Debenture dated September 24, 1996 for $2,490,000 loan with
SBA.
4.5 Debenture dated June 27, 1990 for $2,000,000 loan with SBA -
(incorporated by reference from Exhibit 4(b)(5)(n)
Registrant's Form N-2, Amendment No. 9, dated April 29,
1991).
4.6 Debenture dated September 26, 1990 for $2,810,000 loan with
SBA - (incorporated by reference from Exhibit 4(b)(5)(o) to
the Registrant's Form N-2, Amendment 9, dated April 29,
1991).
4.7 Debenture dated September 26, 1990 for $1,500,000 loan with
SBA - (incorporated by reference from Exhibit 4(b)(5)(p) to
the Registrant's Form N-2, Amendment 9, dated April 29,
1991).
4.8 Debenture dated March 29, 1990 for $1,000,000 loan with SBA -
(incorporated by reference from Exhibit 5(q) from
Registrant's Form N-2, Amendment No. 3, dated August 18,
1992).
4.9 Debenture dated September 27, 1989 for $1,000,000 loan with
SBA - (incorporated by reference from Exhibit 5(r) from
Registrant's Form N-2, Amendment No. 3, dated August 18,
1992).
4.10 Debenture dated September 27, 1989 for $1,500,000 loan with
SBA - (incorporated by reference from Exhibit 5(s) from
Registrant's Form N-2, Amendment No. 3, dated August 18,
1992).
</TABLE>
E-1
<PAGE> 79
4.11 Debenture dated January 2, 1990 for $3,000,000 loan with SBA
- (incorporated by reference from Exhibit (5)(t) from
Registrant's Form N-2, Amendment No. 3, dated August 18,
1992).
4.12 Debenture dated August 18, 1989 for $1,000,000 loan with SBA
- (incorporated by reference from Exhibit (5)(u) from
Registrant's Form N-2, Amendment No. 3, dated August 18,
1992).
**4.13 Debenture dated September 28, 1994 for $3,000,000 loan with
SBA.
**4.14 Debenture dated September 28, 1994 for $3,000,000 loan with
SBA.
**4.15 Senior Note dated July 19, 1993 for $6,000,000 with Columbine
Life Insurance Company.
**4.16 Senior Note dated July 19, 1993 for $9,000,000 with Life
Insurance Company of Georgia.
**4.17 Senior Note dated July 19, 1993 for $5,000,000 with SouthLand
Life Insurance Company.
**4.18 Senior Note dated December 15, 1993 for $2,000,000 with
Peerless Insurance Company.
**4.19 Senior Note dated December 15, 1993 for $3,000,000 with
Security Life of Denver Insurance Company.
***4.20 Debenture dated March 29, 1995 for $3,000,000 loan with SBA.
***4.21 Debenture dated June 28, 1995 for $5,000,000 loan with SBA.
***4.22 Debenture dated September 27, 1995 for $7,000,000 loan with
SBA.
***4.24 Debenture dated December 20, 1989 for $650,000 loan with SBA
assumed from J & D Capital Corporation.
***4.25 Debenture dated June 27,1990 for $300,000 loan with SBA
assumed from J & D Capital Corporation.
***4.26 Debenture dated December 6, 1992 for $510,000 loan with SBA
assumed from J & D Capital Corporation.
***4.27 Senior Note dated April 19, 1995 for $5,000,000 with Security
Life of Denver Insurance Company.
***4.28 Senior Note dated April 19, 1995 for $2,000,000 with Peerless
Insurance Company.
E-2
<PAGE> 80
***4.29 Senior Note dated April 19, 1995 for $2,000,000 with Indiana
Insurance Company.
***4.30 Senior Note dated April 19, 1995 for $1,000,000 with Security
Life of Denver Insurance Company.
****4.31 Debenture dated June 27, 1990 for $1,030,000 assumed from
ESLO Capital Corporation.
*10.1 Employment contract between the Registrant and Lance B.
Rosemore dated July 1, 1998.
*10.2 Employment contract between the Registrant and Andrew S.
Rosemore dated July 1, 1998.
****10.3 Employment contract between the Registrant and Fredric M.
Rosemore dated June 30, 1996.
*10.4 Employment contract between the Registrant and Jan F. Salit
dated July 1, 1998.
*10.5 Employment contract between the Registrant and Barry N.
Berlin dated July 1, 1998.
*10.6 Employment contract between the Registrant and Mary J.
Brownmiller dated July 1, 1998.
10.7 First Amended and Restated Revolving Credit Note dated as
of March 15, 1998 - (incorporated by reference from
Registrants' Form 10-Q for the quarterly period ended
March 31, 1998).
****10.8 Servicing Agreement by and among Sun Trust Bank, PMC Capital
Limited Partnership and PMC Capital, Inc.
*****10.9 PMC Capital, Inc. 1997 Non-Employee Stock Option Plan.
*****10.10 PMC Capital, Inc. 1997 Employee Stock Option Plan.
*10.11 Employment contract between the Registrant and Cheryl T.
Murray dated July 1, 1998.
*10.12 Servicing Agreement by and among Harris Trust, PMC Capital
L.P. 1998-1, and PMC Capital, Inc.
10.13 Second Amendment to Loan Agreement and Amendment to Loan
Documents and Renewal and Extension of loan dated as of March
15, 1998 - (incorporated by reference from Registrant's Form
10-Q for the quarterly period ended March 31, 1998).
*21 Subsidiaries of Registrant
*27 Financial Data Schedule
-------------------
* Filed herewith
** Previously filed with the Commission as an exhibit to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1994
*** Previously filed with the Commission as an exhibit to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1995
**** Previously filed with the Commission as an exhibit to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1996
***** Previously filed with the Commission as an exhibit to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1997
E-3
<PAGE> 1
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT made as of July 1, 1998 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in North Miami
Beach, Dade County, Florida, and Dallas, Dallas County, Texas, hereinafter
referred to as the "CORPORATION", and Lance B.
Rosemore, hereinafter referred to as "EXECUTIVE".
WITNESSETH THAT:
In consideration of the promises herein contained, the parties hereto
mutually agree as follows:
1. Employment: The Corporation hereby employs the Executive as its
Chief Executive Officer and President with such powers and duties as may be
specified by the Board of Directors. The Executive hereby accepts employment
upon the terms and conditions as hereinafter set forth.
2. Terms: Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin immediately and shall terminate
on the earlier of (i) the Executive's seventieth (70th) birthday or (ii) July
31, 2001 or such later date as determined by the Board of Directors. The term of
this Executive Employment Contract may be extended annually by the Board of
Directors.
3. Compensation: For all services rendered by the Executive under this
contract, the Executive shall be paid at a minimum at the annual rate effective
as of July 1, 1998. The rate may be increased by the Board at their discretion.
The preceding is payable pursuant to the normal payroll practices of the
Corporation.
The Board of Directors may consider bonus compensation for the
Executive if the
EXHIBIT 10.1 Page 1 of 7
<PAGE> 2
performance of PMC Capital, Inc. and the Executive justifies such bonus
compensation.
4. Authorized Expenses: The Executive is authorized to incur reasonable
expenses for the promotion of the business of the Corporation. The Corporation
will reimburse the Executive for all such reasonable expenses upon the
presentation by the Executive, from time to time, of an itemized account of such
expenditures.
The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize, including
but not limited to: A) health insurance coverage for the Executive, his wife and
minor children; B) a monthly automotive allowance of $550, whereby the Executive
is to provide an automobile to be utilized for his own company needs. All
maintenance, insurance etc. (excluding fuel) will be the responsibility and
expense of the Executive; C) an agreed upon country club membership and monthly
maintenance fees so that Executive may entertain clients and other business
associates of the Corporation. All other charges of the Executive related to
non-business activities will be the responsibility of the Executive.
5. Extent of Services: The Executive shall devote a substantial portion
of business time, attention and energies to the business of the Corporation, and
shall not, during the term of this Agreement engage in any other business
activities, whether or not such activities are pursued for gain, profit or other
pecuniary advantage. This provision is not meant to prevent him from A) devoting
reasonable time to civic or philanthropic activities or B) investing his assets
in such form or manner providing that it does not require any substantial
services on the part of the Executive that will interfere with the Executive's
employment pursuant to this Agreement. Executive's employment is considered as
full-time.
6. Working Facilities: The Executive shall be furnished with such
facilities and services suitable to his position and adequate for the
performance of his duties.
EXHIBIT 10.1 Page 2 of 7
<PAGE> 3
7. Duties: The Executive is employed in an executive and supervisory
capacity and shall perform such duties consistent herewith as the Board of
Directors of the Corporation shall from time to time specify. The precise
services of the Executive may be extended or curtailed, from time to time, at
the discretion of the Board of Directors of the Corporation.
8. Disclosure of Information: The Executive recognizes and acknowledges
that the Corporation's operating procedures or service techniques are valuable,
special and unique assets of the Corporation's business. The Executive will not,
during or after the term of his employment, disclose the list of the
Corporation's operating procedures, or service techniques to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever.
In the event of breach or threatened breach by the Executive of the provisions
of this paragraph, the Corporation shall be entitled to an injunction retraining
any such breach. Nothing herein shall be construed as prohibiting the
Corporation from pursuing any other remedies available to the Corporation for
such breach or threatened breach, including the recovery of damages from the
Executive. The Executive and the Company will execute a supplemental Code of
Ethics in the form attached hereto as Exhibit "A".
9. Vacations: The Executive shall be entitled each year to a vacation
in accordance with the vacation policy of the Company.
10. Disability: If the Executive is unable to perform his services by
reason of illness or total incapacity, he shall receive his full salary for one
(1) year of said total incapacity through coordination of benefits with any
existing disability insurance program provided by the Corporation (a reduction
in salary by that amount paid by any company provided insurance). Should said
Executive be totally incapacitated beyond a one-year period, so that he is not
able to devote full time to his employment with said Corporation, then this
Agreement shall terminate.
EXHIBIT 10.1 Page 3 of 7
<PAGE> 4
11. Death During Employment: If the Executive dies during the term of
employment and has not attained the age of seventy years old, the Corporation
and/or any third party insurance provided by the Corporation, through a
coordination of benefits, shall pay the estate of the Executive a death benefit
equal to two times the Executive's annual salary. In the even the Executive
receives death benefits payable under any group life insurance policy issued to
the Corporation, the Corporation's liability under this clause will be reduced
by the amount of the death benefit paid under such policy. The Corporation shall
pay any remaining death benefits to the estate of the Executive over the course
of twenty four (24) months in the same manner and under the same terms as the
Executive would have been paid if he had still been working for the Corporation.
The estate of the Executive will also be paid any accumulated vacation pay. Such
payments pursuant to this paragraph shall constitute full compensation of said
Executive and he and his estate shall have no further claim for compensation by
reason of his employment by the Corporation.
12. Assignment: The acts and obligations of the Corporation under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Corporation.
13. Invalidity: If any paragraph or part of this Agreement is invalid,
it shall not affect the remainder of this Agreement but the remainder shall be
binding and effective against all parties.
14. Termination: The Corporation cannot terminate this agreement except
for: 1) the intentional, unapproved misuse of Corporate funds 2) professional
incompetency, or 3) willful neglect of duties or responsibilities.
15. Additional Compensation: If the Corporation's stock is purchased by
an outside party and/or the present Board of Directors is removed, this
agreement will survive such changed in full
EXHIBIT 10.1 Page 4 of 7
<PAGE> 5
force and stead. If the new Board of Directors asks the Executive to resign or
substantially modify the duties or working conditions of the Executive so that
such duties or working conditions would not be accordance with the spirit of
this agreement, then Executive could resign and be entitled to 2.99 times the
average of the last five (5) years compensation paid to Executive. Executive
will be paid such sum in the form as he deems appropriate at that time. However,
all payments made pursuant to this paragraph must be in accordance with of the
Internal Revenue Code and the Executive will not collect if it is in violation
of the law.
16. Remedies for Breach: Because damages would be difficult to
estimate, Corporation agrees to pay to the Employee, in case Employer shall
violate this contract of service by dismissing Employee without just cause
before the end of the term hereof, as liquidated damages and not as a penalty
for such breach, a sum of money equal to the amount of compensation which
Employee might have earned from the date of such breach to the end of the term
hereof, as if Employee had been permitted fully to perform the terms of this
Agreement.
17. Indemnification: The Corporation hereby agrees to indemnify and
hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of his contractual
duties. Said indemnification shall include but not be limited to reasonable cost
incurred in defending the Executive in his faithful performance of contractual
duties.
18. Entire Agreement: This contract embodies the whole Agreement
between the parties hereto and there are no inducements, promises, terms,
conditions or obligations made or entered into by the Corporation or the
Executive other than contained herein. This contract may not be changed except
in writing.
EXHIBIT 10.1 Page 5 of 7
<PAGE> 6
IN WITNESS WHEREOF, the parties here hereunto signed and sealed this
Agreement the date first above written.
Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.
- -------------------------------- ---------------------------------
By: Andrew S. Rosemore
Executive Vice President
- --------------------------------
"EXECUTIVE"
- -------------------------------- ---------------------------------
By: Lance B. Rosemore,
President
- --------------------------------
(CORPORATE SEAL)
EXHIBIT 10.1 Page 6 of 7
<PAGE> 7
Lance B. Rosemore
Contract Addendum
Executive shall be entitled to the following vacation benefits:
<TABLE>
<CAPTION>
Years of Company Service Number of Weeks
<S> <C>
0-5 3
Excess of 5 but less than 10 4
Excess of 10 5
</TABLE>
If, at the end of an employment years, the executive has vacation time
remaining, he/she will be paid for such time. Payment shall be limited to no
greater than the salary that would have been paid for half the number of days
available for that year.
Vacation time cannot be carried over from one year to another.
Scheduling of vacation days requires prior approval from the President
This Contact Addendum is effective January 1, 1997.
Executive
-------------------------
Approval
-------------------------
EXHIBIT 10.1 Page 7 of 7
<PAGE> 1
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT made as of July 1, 1998 by and between PMC Capital,
Inc., a Florida Corporation with its principal place of business in Dallas,
Dallas County, Texas, hereinafter referred to as the "CORPORATION", and Andrew
S. Rosemore, hereinafter referred to as "EXECUTIVE".
WITNESSETH THAT:
In consideration of the promises herein contained, the parties hereto
mutually agree as follows:
1. Employment: The Corporation hereby employs the Executive as its
Executive Vice President and Chief Operating Officer with such powers and duties
as may be specified by the Board of Directors. The Executive hereby accepts
employment upon the terms and conditions as hereinafter set forth.
2. Terms: Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin immediately and shall terminate
on the earlier of (i) the Executive's seventieth (70th) birthday or (ii) July 1,
2001 or such later date as determined by the Board of Directors. The term of
this Executive Employment Contract may be extended annually by the Board of
Directors.
3. Compensation: For all services rendered by the Executive under this
contract, the Executive shall be paid at a minimum at the annual rate effective
as of July 1, 1998. The rate may be increased by the Board at their discretion.
The preceding is payable pursuant to the normal payroll practices of the
Corporation.
EXHIBIT 10.2 Page 1 of 7
<PAGE> 2
The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and the Executive justifies
such bonus compensation.
4. Authorized Expenses: The Executive is authorized to incur reasonable
expenses for the promotion of the business of the Corporation. The Corporation
will reimburse the Executive for all such reasonable expenses upon the
presentation by the Executive, from time to time, of an itemized account of such
expenditures.
The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize, including
but not limited to: A) health insurance coverage for the Executive, his wife and
minor children; B) a monthly automotive allowance of $550, whereby the Executive
is to provide an automobile to be utilized for his own company needs. All
maintenance, insurance etc. (excluding fuel) will be the responsibility and
expense of the Executive; C) an agreed upon country club membership and monthly
maintenance fees so that Executive may entertain clients and other business
associates of the Corporation. All other charges of the Executive related to
non-business activities will be the responsibility of the Executive.
5. Extent of Services: The Executive shall devote a substantial portion
of business time, attention and energies to the business of the Corporation, and
shall not, during the term of this Agreement engage in any other business
activities, whether or not such activities are pursued for gain, profit or other
pecuniary advantage. This provision is not meant to prevent him from A) devoting
reasonable time to civic or philanthropic activities or B) investing his assets
in such form or manner providing that it does not require any substantial
services on the part of the Executive that will interfere with the Executive's
employment pursuant to this Agreement. Executive's employment is considered as
full-time.
EXHIBIT 10.2 Page 2 of 7
<PAGE> 3
6. Working Facilities: The Executive shall be furnished with such
facilities and services suitable to his position and adequate for the
performance of his duties.
7. Duties: The Executive is employed in an executive and supervisory
capacity and shall perform such duties consistent herewith as the Board of
Directors of the Corporation shall from time to time specify. The precise
services of the Executive may be extended or curtailed, from time to time, at
the discretion of the Board of Directors of the Corporation.
8. Disclosure of Information: The Executive recognizes and acknowledges
that the Corporation's operating procedures or service techniques are valuable,
special and unique assets of the Corporation's business. The Executive will not,
during or after the term of his employment, disclose the list of the
Corporation's operating procedures, or service techniques to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever.
In the event of breach or threatened breach by the Executive of the provisions
of this paragraph, the Corporation shall be entitled to an injunction retraining
any such breach. Nothing herein shall be construed as prohibiting the
Corporation from pursuing any other remedies available to the Corporation for
such breach or threatened breach, including the recovery of damages from the
Executive. The Executive and the Company will execute a supplemental Code of
Ethics in the form attached hereto as Exhibit "A".
9. Vacations: The Executive shall be entitled each year to a vacation
in accordance with the vacation policy of the Company.
10. Disability: If the Executive is unable to perform his services by
reason of illness or total incapacity, he shall receive his full salary for one
(1) year of said total incapacity through coordination of benefits with any
existing disability insurance program provided by the Corporation (a reduction
in salary by that amount paid by any company provided insurance). Should said
Executive be totally incapacitated beyond one-year period, so that he is not
able to devote full time to his employment with said Corporation, then this
Agreement shall terminate.
EXHIBIT 10.2 Page 3 of 7
<PAGE> 4
11. Death During Employment: If the Executive dies during the term of
employment and has not attained the age of seventy years old, the Corporation
and/or any third party insurance provided by the Corporation, through a
coordination of benefits, shall pay the estate of the Executive a death benefit
equal to two times the Executive's annual salary. In the event the Executive
receives death benefits payable under any group life insurance policy issued to
the Corporation, the Corporation's liability under this clause will be reduced
by the amount of the death benefit paid under such policy. The Corporation shall
pay any remaining death benefits to the estate of the Executive over the course
of twenty four (24) months in the same manner and under the same terms as the
Executive would have been paid if he had still been working for the Corporation.
The estate of the Executive will also be paid any accumulated vacation pay. Such
payments pursuant to this paragraph shall constitute the full compensation of
said Executive and he and his estate shall have no further claim for
compensation by reason of his employment by the Corporation.
12. Assignment: The acts and obligations of the Corporation under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Corporation.
13. Invalidity: If any paragraph or part of this Agreement is invalid,
it shall not affect the remainder of this Agreement but the remainder shall be
binding and effective against all parties.
14. Termination: The Corporation cannot terminate this agreement except
for: 1) the intentional, unapproved misuse of Corporate funds 2) professional
incompetency, or 3) willful neglect of duties or responsibilities.
15. Additional Compensation: If the Corporation's stock is purchased by
an outside party and/or the present Board of Directors is removed, this
agreement will survive such changed in full
EXHIBIT 10.2 Page 4 of 7
<PAGE> 5
force and stead. If the new Board of Directors asks the Executive to resign or
substantially modify the duties or working conditions of the Executive so that
such duties or working conditions would not be accordance with the spirit of
this agreement, then Executive could resign and be entitled to 2.99 times the
average of the last five (5) years compensation paid to Executive. Executive
will be paid such sum in the form as he deems appropriate at that time. However,
all payments made pursuant to this paragraph must be in accordance with the
applicable provisions of the Internal Revenue Code and the Executive will not
collect if it is in violation of the law.
16. Remedies for Breach: Because damages would be difficult to
estimate, Corporation agrees to pay to the Employee, in case Employer shall
violate this contract of service by dismissing Employee without just cause
before the end of the term hereof, as liquidated damages and not as a penalty
for such breach, a sum of money equal to the amount of compensation which
Employee might have earned from the date of such breach to the end of the term
hereof, as if Employee had been permitted fully to perform the terms of this
Agreement.
17. Indemnification: The Corporation hereby agrees to indemnify and
hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of his contractual
duties. Said indemnification shall include but not be limited to reasonable cost
incurred in defending the Executive in his faithful performance of contractual
duties.
18. Entire Agreement: This contract embodies the whole Agreement
between the parties hereto and there are no inducements, promises, terms,
conditions or obligations made or entered into by the Corporation or the
Executive other than contained herein. This contract may not be changed except
in writing.
EXHIBIT 10.2 Page 5 of 7
<PAGE> 6
IN WITNESS WHEREOF, the parties here hereunto signed and sealed this
Agreement the date first above written.
Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.
- --------------------------------- -------------------------------------
By: Lance B. Rosemore
President
- ---------------------------------
"EXECUTIVE"
- --------------------------------- -------------------------------------
By: Andrew S. Rosemore,
Executive Vice President and Chief
Operating Officer
- ---------------------------------
(CORPORATE SEAL)
EXHIBIT 10.2 Page 6 of 7
<PAGE> 7
Andrew S. Rosemore
Contract Addendum
Executive shall be entitled to the following vacation benefits:
<TABLE>
<CAPTION>
Years of Company Service Number of Weeks
<S> <C>
0-5 3
Excess of 5 but less than 10 4
Excess of 10 5
</TABLE>
If, at the end of an employment years, the executive has vacation time
remaining, he/she will be paid for such time. Payment shall be limited to no
greater than the salary that would have been paid for half the number of days
available for that year.
Vacation time cannot be carried over from one year to another.
Scheduling of vacation days requires prior approval from the President
This Contact Addendum is effective January 1, 1997.
Executive
--------------------------
Approval
--------------------------
EXHIBIT 10.2 Page 7 of 7
<PAGE> 1
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT made as of July 1, 1998 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in Dallas,
Dallas County, Texas, hereinafter referred to as the "CORPORATION", and Jan F.
Salit, hereinafter referred to as "EXECUTIVE".
WITNESSETH THAT:
In consideration of the promises herein contained, the parties hereto
mutually agree as follows:
1. Employment: The Corporation hereby employs the Executive as its
Executive Vice President and Chief Investment Officer with such powers and
duties as may be specified by the Board of Directors. The Executive hereby
accepts employment upon the terms and conditions as hereinafter set forth.
2. Terms: Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin immediately and shall terminate
on the earlier of (i) the Executive's seventieth (70th) birthday or (ii) July
31, 2001 or such later date as determined by the Board of Directors. The term of
this Executive Employment Contract may be extended annually by the Board of
Directors.
3. Compensation: For all services rendered by the Executive under this
contract, the Executive shall be paid at a minimum at the annual rate effective
as of July 1, 1998. The rate may be increased by the Board at their discretion.
The preceding is payable pursuant to the normal payroll practices of the
Corporation.
The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and the Executive justifies
such bonus compensation.
EXHIBIT 10.4 Page 1 of 7
<PAGE> 2
4. Authorized Expenses: The Executive is authorized to incur reasonable
expenses for the promotion of the business of the Corporation. The Corporation
will reimburse the Executive for all such reasonable expenses upon the
presentation by the Executive, from time to time, of an itemized account of such
expenditures.
The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize, including
but not limited to: A) health insurance coverage for the Executive, his wife and
minor children; B) a monthly automotive allowance of $450, whereby the Executive
is to provide an automobile to be utilized for his own company needs. All
maintenance, insurance etc. (excluding fuel) will be the responsibility and
expense of the Executive.
5. Extent of Services: The Executive shall devote a substantial portion
of business time, attention and energies to the business of the Corporation, and
shall not, during the term of this Agreement engage in any other business
activities, whether or not such activities are pursued for gain, profit or other
pecuniary advantage. This provision is not meant to prevent him from A) devoting
reasonable time to civic or philanthropic activities or B) investing his assets
in such form or manner providing that it does not require any substantial
services on the part of the Executive that will interfere with the Executive's
employment pursuant to this Agreement. Executive's employment is considered as
full-time.
6. Working Facilities: The Executive shall be furnished with such
facilities and services suitable to his position and adequate for the
performance of his duties.
EXHIBIT 10.4 Page 2 of 7
<PAGE> 3
7. Duties: The Executive is employed in an executive and supervisory
capacity and shall perform such duties consistent herewith as the Board of
Directors of the Corporation shall from time to time specify. The precise
services of the Executive may be extended or curtailed, from time to time, at
the discretion of the Board of Directors of the Corporation.
8. Disclosure of Information: The Executive recognizes and acknowledges
that the Corporation's operating procedures or service techniques are valuable,
special and unique assets of the Corporation's business. The Executive will not,
during or after the term of his employment, disclose the list of the
Corporation's operating procedures, or service techniques to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever.
In the event of breach or threatened breach by the Executive of the provisions
of this paragraph, the Corporation shall be entitled to an injunction retraining
any such breach. Nothing herein shall be construed as prohibiting the
Corporation from pursuing any other remedies available to the Corporation for
such breach or threatened breach, including the recovery of damages from the
Executive.
9. Vacations: The Executive shall be entitled each year to a vacation
in accordance with the vacation policy of the Company.
10. Disability: If the Executive is unable to perform his services by
reason of illness or total incapacity, he shall receive his full salary for one
(1) year of said total incapacity through coordination of benefits with any
existing disability insurance program provided by the Corporation ( a reduction
in salary by that amount paid by any company provided insurance). Should said
Executive be totally incapacitated beyond a one-year period, so that he is not
able to devote full time to his employment with said Corporation, then this
Agreement shall terminate.
11. Death During Employment: If the Executive dies during the term of
employment and has not attained the age of seventy years old, the Corporation
and/or any third party insurance
EXHIBIT 10.4 Page 3 of 7
<PAGE> 4
provided by the Corporation, through a coordination of benefits, shall pay the
estate of the Executive a death benefit equal to two times the Executive's
annual salary. In the event the Executive receives death benefits payable under
any group life insurance policy issued to the Corporation, the Corporation's
liability under this clause will be reduced by the amount of the death benefit
paid under such policy. The Corporation shall pay any remaining death benefits
to the estate of the Executive over the course of twenty four (24) months in the
same manner and under the same terms as the Executive would have been paid if he
had still been working for the Corporation. The estate of the Executive will
also be paid any accumulated vacation pay. Such payments pursuant to this
paragraph shall constitute the full compensation of said Executive and he and
his estate shall have no further claim for compensation by reason of his
employment by the Corporation.
12. Assignment: The acts and obligations of the Corporation under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Corporation.
13. Invalidity: If any paragraph or part of this Agreement is invalid,
it shall not affect the remainder of this Agreement but the remainder shall be
binding and effective against all parties.
14. Additional Compensation: If the Corporation's stock is purchased by
an outside party and/or the present Board of Directors is removed, this
agreement will survive such changes in full force and stead. If the new Board of
Directors asks the Executive to resign or substantially modify the duties or
working conditions of the Executive so that such duties or working conditions
would not be in accordance with the spirit of this agreement, then Executive
could resign and be entitled to 2.99 times the average of (i) the last five (5)
years compensation paid to Executive or (ii) such Executive has not been
employed five (5) years, the average annual salary since commencement of this
contract. Executive will be paid such sum in the form as he deems appropriate at
that time.
EXHIBIT 10.4 Page 4 of 7
<PAGE> 5
However, all payments made pursuant to this paragraph must be in accordance with
the applicable provisions of the Internal Revenue Code and the Executive will
not collect if it is in violation of the law.
15. Termination: The Corporation cannot terminate this agreement except
for: 1) the intentional, unapproved misuse of Corporate funds 2) professional
incompetency, or 3) willful neglect of duties or responsibilities.
16. Remedies for Breach: Because damages would be difficult to
estimate, Corporation agrees to pay to the Employee, in case Employer shall
violate this contract of service by dismissing Employee without just cause
before the end of the term hereof, as liquidated damages and not as a penalty
for such breach, a sum of money equal to the amount of compensation which
Employee might have earned from the date of such breach to the end of the term
hereof, as if Employee had been permitted fully to perform the terms of this
Agreement.
17. Indemnification: The Corporation hereby agrees to indemnify and
hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of his contractual
duties. Said indemnification shall include but not be limited to reasonable cost
incurred in defending the Executive in his faithful performance of contractual
duties.
18. Entire Agreement: This contract embodies the whole Agreement
between the parties hereto and there are no inducements, promises, terms,
conditions or obligations made or entered into by the Corporation or the
Executive other than contained herein. This contract may not be changed except
in writing.
EXHIBIT 10.4 Page 5 of 7
<PAGE> 6
IN WITNESS WHEREOF, the parties here hereunto signed and sealed this
Agreement the date first above written.
Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.
- ---------------------------------- -------------------------------------
By: Lance B. Rosemore
President
- ----------------------------------
"EXECUTIVE"
- ---------------------------------- -------------------------------------
By: Jan F. Salit,
Executive Vice President
and Chief Investment Officer
- ----------------------------------
(CORPORATE SEAL)
EXHIBIT 10.4 Page 6 of 7
<PAGE> 7
Jan F. Salit
Contract Addendum
Executive shall be entitled to the following vacation benefits:
<TABLE>
<CAPTION>
Years of Company Service Number of Weeks
<S> <C>
0-5 3
Excess of 5 but less than 10 4
Excess of 10 5
</TABLE>
If, at the end of an employment years, the executive has vacation time
remaining, he/she will be paid for such time. Payment shall be limited to no
greater than the salary that would have been paid for half the number of days
available for that year.
Vacation time cannot be carried over from one year to another.
Scheduling of vacation days requires prior approval from the President
This Contact Addendum is effective January 1, 1997.
Executive
---------------------------
Approval
---------------------------
EXHIBIT 10.4 Page 7 of 7
<PAGE> 1
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT made as of July 1, 1998 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in Dallas,
Dallas County, Texas, hereinafter referred to as the "CORPORATION", and Barry N.
Berlin, hereinafter referred to as "EXECUTIVE".
WITNESSETH THAT:
In consideration of the promises herein contained, the parties hereto
mutually agree as follows:
1. Employment: The Corporation hereby employs the Executive as its
Chief Financial Officer with such powers and duties as may be specified by the
Board of Directors. The Executive hereby accepts employment upon the terms and
conditions as hereinafter set forth.
2. Terms: Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin immediately and shall terminate
on the earlier of (i) the Executive's seventieth (70th) birthday or (ii) July
31, 2001 or such later date as determined by the Board of Directors. The term of
this Executive Employment Contract may be extended annually by the Board of
Directors.
3. Compensation: For all services rendered by the Executive under this
contract, the Executive shall be paid at a minimum at the annual rate effective
as of July 1, 1998. The rate may be increased by the Board at their discretion.
The preceding is payable pursuant to the normal payroll practices of the
Corporation.
The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and the Executive justifies
such bonus compensation.
EXHIBIT 10.5 Page 1 of 7
<PAGE> 2
4. Authorized Expenses: The Executive is authorized to incur reasonable
expenses for the promotion of the business of the Corporation. The Corporation
will reimburse the Executive for all such reasonable expenses upon the
presentation by the Executive, from time to time, of an itemized account of such
expenditures.
The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize, including
but not limited to: A) health insurance coverage for the Executive, his wife and
minor children; B) a monthly automotive allowance of $450, whereby the Executive
is to provide an automobile to be utilized for his own company needs. All
maintenance, insurance etc. (excluding fuel) will be the responsibility and
expense of the Executive; C) the cost of all continuing professional education
related courses required to maintain CPA certification.
5. Extent of Services: The Executive shall devote a substantial portion
of business time, attention and energies to the business of the Corporation, and
shall not, during the term of this Agreement engage in any other business
activities, whether or not such activities are pursued for gain, profit or other
pecuniary advantage. This provision is not meant to prevent him from A) devoting
reasonable time to civic or philanthropic activities or B) investing his assets
in such form or manner providing that it does not require any substantial
services on the part of the Executive that will interfere with the Executive's
employment pursuant to this Agreement. Executive's employment is considered as
full-time.
6. Working Facilities: The Executive shall be furnished with such
facilities and services suitable to his position and adequate for the
performance of his duties.
EXHIBIT 10.5 Page 2 of 7
<PAGE> 3
7. Duties: The Executive is employed in an executive and supervisory
capacity and shall perform such duties consistent herewith as the President of
the Corporation shall from time to time specify. The precise services of the
Executive may be extended or curtailed, from time to time, at the discretion of
the Board of Directors of the Corporation.
8. Disclosure of Information: The Executive recognizes and acknowledges
that the Corporation's operating procedures or service techniques are valuable,
special and unique assets of the Corporation's business. The Executive will not,
during or after the term of his employment, disclose the list of the
Corporation's operating procedures, or service techniques to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever.
In the event of breach or threatened breach by the Executive of the provisions
of this paragraph, the Corporation shall be entitled to an injunction retraining
any such breach. Nothing herein shall be construed as prohibiting the
Corporation from pursuing any other remedies available to the Corporation for
such breach or threatened breach, including the recovery of damages from the
Executive.
9. Vacations: The Executive shall be entitled each year to a vacation
in accordance with the vacation policy of the Company.
10. Disability: If the Executive is unable to perform his services by
reason of illness or total incapacity, he shall receive his full salary for one
(1) year of said total incapacity through coordination of benefits with any
existing disability insurance program provided by the Corporation (a reduction
in salary by that amount paid by any company provided insurance). Should said
Executive be totally incapacitated beyond a one-year period, so that he is not
able to devote full time to his employment with said Corporation, then this
Agreement shall terminate.
11. Death During Employment: If the Executive dies during the term of
employment and has not attained the age of seventy years old, the Corporation
and/or any third party insurance
EXHIBIT 10.5 Page 3 of 7
<PAGE> 4
provided by the Corporation, through a coordination of benefits, shall pay the
estate of the Executive a death benefit equal to two times the Executive's
annual salary. In the event the Executive receives death benefits payable under
any group life insurance policy issued to the Corporation, the Corporation's
liability under this clause will be reduced by the amount of the death benefit
paid under such policy. The Corporation shall pay any remaining death benedicts
to the estate of the Executive over the course of twenty four (24) months in the
same manner and under the same terms as the Executive would have been paid if
the had still been working for the Corporation. The estate of the Executive will
also be paid any accumulated vacation pay. Such payments pursuant to this
paragraph shall constitute the full compensation of said Executive and he and
his estate shall have no further claim for compensation by reason of his
employment by the Corporation.
12. Assignment: The acts and obligations of the Corporation under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Corporation.
13. Invalidity: If any paragraph or part of this Agreement is invalid,
it shall not affect the remainder of this Agreement but the remainder shall be
binding and effective against all parties.
14. Additional Compensation: If the Corporation's stock is purchased by
an outside party and/or the present Board of Directors is removed, this
agreement will survive such changes in full force and stead. If the new Board of
Directors asks the Executive to resign or substantially modify the duties or
working conditions of the Executive so that such duties or working conditions
would not be in accordance with the spirit of this agreement, then Executive
could resign and be entitled to 2.99 times the average of (I) the last five (5)
years compensation paid to Executive or (ii) such Executive has not been
employed five (5) years, the average annual salary since commencement of this
contract. Executive will be paid such sum in the form as he deems appropriate at
that time.
EXHIBIT 10.5 Page 4 of 7
<PAGE> 5
However, all payments made pursuant to this paragraph must be in accordance with
the applicable provisions of the Internal Revenue Code and the Executive will
not collect if it is in violation of the law.
15. Termination: The Corporation cannot terminate this agreement except
for: 1) the intentional, unapproved misuse of Corporate funds 2) professional
incompetency, or 3) willful neglect of duties or responsibilities.
16. Remedies for Breach: Because damages would be difficult to
estimate, Corporation agrees to pay to the Employee, in case Employer shall
violate this contract of service by dismissing Employee without just cause
before the end of the term hereof, as liquidated damages and not as a penalty
for such breach, a sum of money equal to the amount of compensation which
Employee might have earned from the date of such breach to the end of the term
hereof, as if Employee had been permitted fully to perform the terms of this
Agreement.
17. Indemnification: The Corporation hereby agrees to indemnify and
hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of his contractual
duties. Said indemnification shall include but not be limited to reasonable cost
incurred in defending the Executive in his faithful performance of contractual
duties.
18. Entire Agreement: This contract embodies the whole Agreement
between the parties hereto and there are no inducements, promises, terms,
conditions or obligations made or entered into by the Corporation or the
Executive other than contained herein. This contract may not be changed except
in writing.
EXHIBIT 10.5 Page 5 of 7
<PAGE> 6
IN WITNESS WHEREOF, the parties here hereunto signed and sealed this
Agreement the date first above written.
Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.
- --------------------------------- -------------------------------------
By: Lance B. Rosemore
President
- ---------------------------------
"EXECUTIVE"
- --------------------------------- -------------------------------------
By: Barry N. Berlin,
Chief Financial Officer
- ---------------------------------
(CORPORATE SEAL)
EXHIBIT 10.5 Page 6 of 7
<PAGE> 7
Barry N. Berlin
Contract Addendum
Executive shall be entitled to the following vacation benefits:
<TABLE>
<CAPTION>
Years of Company Service Number of Weeks
<S> <C>
0-5 3
Excess of 5 but less than 10 4
Excess of 10 5
</TABLE>
If, at the end of an employment years, the executive has vacation time
remaining, he/she will be paid for such time. Payment shall be limited to no
greater than the salary that would have been paid for half the number of days
available for that year.
Vacation time cannot be carried over from one year to another.
Scheduling of vacation days requires prior approval from the President
This Contact Addendum is effective January 1, 1997.
Executive
------------------------
Approval
------------------------
EXHIBIT 10.5 Page 7 of 7
<PAGE> 1
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT made as of July 1, 1998 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in Dallas,
Dallas County, Texas, hereinafter referred to as the "CORPORATION", and Mary J.
Brownmiller; hereinafter referred to as "EXECUTIVE".
WITNESSETH THAT:
In consideration of the promises herein contained, the parties hereto
mutually agree as follows:
1. Employment: The Corporation hereby employs the Executive as its
Senior Vice President with such powers and duties as may be specified by the
Board of Directors. The Executive hereby accepts employment upon the terms and
conditions as hereinafter set forth.
2. Terms: Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin immediately and shall terminate
on the earlier of (i) the Executive's seventieth (70th) birthday or (ii) July
31, 2001 or such later date as determined by the Board if Directors. The term of
this Executive Employment Contract may be extended annually by the Board of
Directors.
3. Compensation: For all services rendered by the Executive under this
contract, the Executive shall be paid at a minimum at the annual rate effective
as of July 1, 1998. The rate may be increased by the Board at their discretion.
The preceding is payable pursuant to the normal payroll practices of the
Corporation.
The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and the Executive justifies
such bonus compensation.
EXHIBIT 10.6 Page 1 of 7
<PAGE> 2
4. Authorized Expenses: The Executive is authorized to incur reasonable
expenses for the promotion of the business of the Corporation. The Corporation
will reimburse the Executive for all such reasonable expenses upon the
presentation by the Executive, from time to time, of an itemized account of such
expenditures.
The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize.
5. Extent of Services: The Executive shall devote a substantial portion
of business time, attention and energies to the business of the Corporation, and
shall not, during the term of this Agreement engage in any other business
activities, whether or not such activities are pursued for gain, profit or other
pecuniary advantage. This provision is not meant to prevent her from A) devoting
reasonable time to civic or philanthropic activities or B) investing her assets
in such form or manner providing that it does not require any substantial
services on the part of the Executive that will interfere with the Executive's
employment pursuant to this Agreement. Executive's employment is considered as
full-time.
6. Working Facilities: The Executive shall be furnished with such
facilities and services suitable to her position and adequate for the
performance of her duties.
7. Duties: The Executive is employed in an executive and supervisory
capacity and shall perform such duties consistent herewith as the Board of
Directors of the Corporation shall from time to time specify. The precise
services of the Executive may be extended or curtailed, from time to time, at
the discretion of the Board of Directors of the Corporation.
8. Disclosure of Information: The Executive recognizes and acknowledges
that the Corporation's operating procedures or service techniques are valuable,
special and unique assets of
EXHIBIT 10.6 Page 2 of 7
<PAGE> 3
the Corporation's business. The Executive will not, during or after the term of
her employment, disclose the list of the Corporation's operating procedures, or
service techniques to any person, firm, corporation, association or other entity
for any reason or purpose whatsoever. In the event of breach or threatened
breach by the Executive of the provisions of this paragraph, the Corporation
shall be entitled to an injunction restraining any such breach. Nothing herein
shall be construed as prohibiting the Corporation from pursuing any other
remedies available to the Corporation for such breach or threatened breach,
including the recovery of damages from the Executive.
9. Vacations: The Executive shall be entitled each year to a vacation
in accordance with the vacation policy of the Company.
10. Disability: If the Executive is unable to perform her services by
reason of illness or total incapacity, she shall receive her full salary for one
(1) year of said total incapacity through coordination of benefits with any
existing disability insurance program provided by the Corporation (a reduction
in salary by that amount paid by any company provided insurance). Should said
Executive be totally incapacitated beyond a one-year period, so that she is not
able to devote full time to her employment with said Corporation, then this
Agreement shall terminate.; and
11. Death During Employment: If the Executive dies during the term of
employment and has not attained the age of seventy years old, the Corporation
and/or any third party insurance provided by the Corporation, through a
coordination of benefits, shall pay the estate of the Executive a death benefit
equal to two times the Executive's annual salary. In the event the Executive
receives death benefits payable under any group life insurance policy issued to
the Corporation, the Corporation's liability under this clause will be reduced
by the amount of the death benefit paid under such policy. The Corporation shall
pay any remaining death benefits to the estate of the
EXHIBIT 10.6 Page 3 of 7
<PAGE> 4
Executive over the course of twenty four (24) months in the same manner and
under the same terms as the Executive would have been paid if he had still been
working for the Corporation. The estate of the Executive will also be paid any
accumulated vacation pay. Such payments pursuant to this paragraph shall
constitute the full compensation of said Executive and she and her estate shall
have no further claim for compensation by reason of his employment by the
Corporation.
12. Assignment: The acts and obligations of the Corporation under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Corporation.
13. Invalidity: If any paragraph or part of this Agreement is invalid,
it shall not affect the remainder of this Agreement but the remainder shall be
binding and effective against all parties.
14. Additional Compensation: If the Corporation's stock is purchased by
an outside party and/or the present Board of Directors is removed, this
agreement will survive such changes in full force and stead. If the new Board of
Directors asks the Executive to resign or substantially modify the duties or
working conditions of the Executive so that such duties or working conditions
would not be in accordance with the spirit of this Agreement, the Executive
could resign and be entitled to 2.99 times the average of (i) the last five (5)
years compensation paid to Executive or (ii) if such Executive has not been
employed five (5) years, the average annual salary since commencement of this
contract. Executive will be paid such sum in the form as she deems appropriate
at that time. However, all payments made pursuant to this paragraph must be in
accordance with of the Internal Revenue Code and the Executive will not collect
if it is in violation of the law.
15. Termination: The Corporation cannot terminate this agreement except
for: 1) the intentional, unapproved misuse of Corporate funds 2) professional
incompetency, or 3) willful neglect of duties or responsibilities.
EXHIBIT 10.6 Page 4 of 7
<PAGE> 5
16. Remedies for Breach: Because damages would be difficult to
estimate, Corporation agrees to pay to the Employee, in case Employer shall
violate this contract of service by dismissing Employee without just cause
before the end of the term hereof, as liquidated damages and not as a penalty
for such breach, a sum of money equal to the amount of compensation which
Employee might have earned from the date of such breach to the end of the term
hereof, as if Employee had been permitted fully to perform the terms of this
Agreement.
17. Indemnification: The Corporation hereby agrees to indemnify and
hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of her contractual
duties. Said indemnification shall include but not be limited to reasonable cost
incurred in defending the Executive in her faithful performance of contractual
duties.
18. Entire Agreement: This contract embodies the whole Agreement
between the parties hereto and there are no inducements, promises, terms,
conditions or obligations made or entered into by the Corporation or the
Executive other than contained herein. This contract may not be changed except
in writing.
EXHIBIT 10.6 Page 5 of 7
<PAGE> 6
IN WITNESS WHEREOF, the parties here hereunto signed and sealed this Agreement
the date first above written.
Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.
- --------------------------------- -------------------------------------
By: Lance B. Rosemore
President
- ---------------------------------
"EXECUTIVE"
- --------------------------------- -------------------------------------
By: Mary J. Brownmiller
Senior Vice President
- ---------------------------------
(CORPORATE SEAL)
EXHIBIT 10.6 Page 6 of 7
<PAGE> 7
Executive Employment Contract
Addendum
This Addendum made as of August 4, 1997 amends the Executive Employment Contract
between PMC Capital, Inc. and Cheryl T. Murray dated as of August 1, 1997,
Paragraph #2 "Terms" shall be amended to terminate on July 31, 2000. All other
terms and conditions shall remain the same.
"Executive" "Corporation"
- ------------------------------- --------------------------------
Cheryl T. Murray Lance B. Rosemore
General Counsel President
EXHIBIT 10.6 Page 7 of 7
<PAGE> 1
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT made as of July 1, 1998 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in Dallas,
Dallas County, Texas, hereinafter referred to as the "CORPORATION", and Cheryl
T. Murray; hereinafter referred to as "EXECUTIVE".
WITNESSETH THAT:
In consideration of the promises herein contained, the parties hereto
mutually agree as follows:
1. Employment: The Corporation hereby employs the Executive as its
General Counsel with such powers and duties as may be specified by the Board of
Directors. The Executive hereby accepts employment upon the terms and conditions
as hereinafter set forth.
2. Terms: Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin immediately and shall terminate
on the earlier of (i) the Executive's seventieth (70th) birthday or (ii) July
31, 2001 or such later date as determined by the Board if Directors. The term of
this Executive Employment Contract may be extended annually by the Board of
Directors.
3. Compensation: For all services rendered by the Executive under this
contract, the Executive shall be paid at a minimum at the annual rate effective
as of July 1, 1998. The rate may be increased by the Board at their discretion.
The preceding is payable pursuant to the normal payroll practices of the
Corporation.
The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and the Executive justifies
such bonus compensation.
EXHIBIT 10.11 Page 1 of 6
<PAGE> 2
4. Authorized Expenses: The Executive is authorized to incur reasonable
expenses for the promotion of the business of the Corporation. The Corporation
will reimburse the Executive for all such reasonable expenses upon the
presentation by the Executive, from time to time, of an itemized account of such
expenditures.
The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize.
5. Extent of Services: The Executive shall devote a substantial portion
of business time, attention and energies to the business of the Corporation, and
shall not, during the term of this Agreement engage in any other business
activities, whether or not such activities are pursued for gain, profit or other
pecuniary advantage. This provision is not meant to prevent her from A) devoting
reasonable time to civic or philanthropic activities or B) investing her assets
in such form or manner providing that it does not require any substantial
services on the part of the Executive that will interfere with the Executive's
employment pursuant to this Agreement. Executive's employment is considered as
full-time.
6. Working Facilities: The Executive shall be furnished with such
facilities and services suitable to her position and adequate for the
performance of her duties.
7. Duties: The Executive is employed in an executive and supervisory
capacity and shall perform such duties consistent herewith as the Board of
Directors of the Corporation shall from time to time specify. The precise
services of the Executive may be extended or curtailed, from time to time, at
the discretion of the Board of Directors of the Corporation.
8. Disclosure of Information: The Executive recognizes and acknowledges
that the Corporation's operating procedures or service techniques are valuable,
special and unique assets of
EXHIBIT 10.11 Page 2 of 6
<PAGE> 3
the Corporation's business. The Executive will not, during or after the term of
her employment, disclose the list of the Corporation's operating procedures, or
service techniques to any person, firm, corporation, association or other entity
for any reason or purpose whatsoever. In the event of breach or threatened
breach by the Executive of the provisions of this paragraph, the Corporation
shall be entitled to an injunction restraining any such breach. Nothing herein
shall be construed as prohibiting the Corporation from pursuing any other
remedies available to the Corporation for such breach or threatened breach,
including the recovery of damages from the Executive.
9. Vacations: The Executive shall be entitled each year to a vacation
in accordance with the vacation policy of the Company.
10. Disability: If the Executive is unable to perform her services by
reason of illness or total incapacity, she shall receive his full salary for one
(1) year of said total incapacity through coordination of benefits with any
existing disability insurance program provided by the Corporation (a reduction
in salary by that amount paid by any company provided insurance). Should said
Executive be totally incapacitated beyond a one-year period, so that she is not
able to devote full time to her employment with said Corporation, then this
Agreement shall terminate.; and
11. Death During Employment: If the Executive dies during the term of
employment and has not attained the age of seventy years old, the Corporation
and/or any third party insurance provided by the Corporation, through a
coordination of benefits, shall pay the estate of the Executive a death benefit
equal to two times the Executive's annual salary. In the event the Executive
receives death benefits payable under any group life insurance policy issued to
the Corporation, the Corporation's liability under this clause will be reduced
by the amount of the death benefit paid under such policy. The Corporation shall
pay any remaining death benefits to the estate of the
EXHIBIT 10.11 Page 3 of 6
<PAGE> 4
Executive over the course of twenty four (24) months in the same manner and
under the same terms as the Executive would have been paid if he had still been
working for the Corporation. The estate of the Executive will also be paid any
accumulated vacation pay. Such payments pursuant to this paragraph shall
constitute the full compensation of said Executive and she and her estate shall
have no further claim for compensation by reason of his employment by the
Corporation.
12. Assignment: The acts and obligations of the Corporation under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Corporation.
13. Invalidity: If any paragraph or part of this Agreement is invalid,
it shall not affect the remainder of this Agreement but the remainder shall be
binding and effective against all parties.
14. Additional Compensation: If the Corporation's stock is purchased by
an outside party and/or the present Board of Directors is removed, this
agreement will survive such changes in full force and stead. If the new Board of
Directors asks the Executive to resign or substantially modify the duties or
working conditions of the Executive so that such duties or working conditions
would not be in accordance with the spirit of this Agreement, the Executive
could resign and be entitled to 2.99 times the average of (i) the last five (5)
years compensation paid to Executive or (ii) if such Executive has not been
employed five (5) years, the average annual salary since commencement of this
contract. Executive will be paid such sum in the form as she deems appropriate
at that time. However, all payments made pursuant to this paragraph must be in
accordance with the applicable provisions of the Internal Revenue Code and the
Executive will not collect if it is in violation of the law.
15. Termination: The Corporation cannot terminate this agreement except
for: 1) the intentional, unapproved misuse of Corporate funds 2) professional
incompetency, or 3) willful neglect of duties or responsibilities.
EXHIBIT 10.11 Page 4 of 6
<PAGE> 5
16. Remedies for Breach: Because damages would be difficult to
estimate, Corporation agrees to pay to the Employee, in case Employer shall
violate this contract of service by dismissing Employee without just cause
before the end of the term hereof, as liquidated damages and not as a penalty
for such breach, a sum of money equal to the amount of compensation which
Employee might have earned from the date of such breach to the end of the term
hereof, as if Employee had been permitted fully to perform the terms of this
Agreement.
17. Indemnification: The Corporation hereby agrees to indemnify and
hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of her contractual
duties. Said indemnification shall include but not be limited to reasonable cost
incurred in defending the Executive in her faithful performance of contractual
duties.
18. Entire Agreement: This contract embodies the whole Agreement
between the parties hereto and there are no inducements, promises, terms,
conditions or obligations made or entered into by the Corporation or the
Executive other than contained herein. This contract may not be changed except
in writing.
EXHIBIT 10.11 Page 5 of 6
<PAGE> 6
IN WITNESS WHEREOF, the parties here hereunto signed and sealed this Agreement
the date first above written.
Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.
- --------------------------------- -------------------------------------
By: Lance B. Rosemore
President
- ---------------------------------
"EXECUTIVE"
- --------------------------------- -------------------------------------
By: Cheryl T. Murray
General Counsel
- ---------------------------------
(CORPORATE SEAL)
EXHIBIT 10.11 Page 6 of 6
<PAGE> 1
SERVICING AGREEMENT
This Servicing Agreement (this "Agreement"), dated as of November 10,
1998, is made and entered into by and among HARRIS TRUST AND SAVINGS BANK, as
trustee (the "Trustee"), and as Supervisory Servicer (the "Supervisory
Servicer"), PMC Capital, L.P. 1998-1, a Delaware limited partnership, as issuer
(the "Issuer"), and PMC Capital, Inc., a Florida corporation, as servicer (the
"Servicer").
PRELIMINARY STATEMENT
The Issuer is the owner of the Loans and the other property being
pledged, assigned and conveyed by it to the Trustee for inclusion in the Trust
Estate pledged to secure the Notes issued pursuant to the Indenture. The
Servicer is in the business, among other things, of servicing mortgage loans.
The Issuer hereby appoints the Servicer to service the Loans which are included
in the Trust Estate, and the Servicer hereby accepts that appointment.
All covenants and agreements made by the Issuer, the Servicer, the
Supervisory Servicer and the Trustee herein are for the benefit of the Holders
from time to time of the Notes, the Trustee and the Supervisory Servicer. The
Issuer, the Trustee, the Supervisory Servicer and the Servicer are entering
into this Agreement for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged.
In consideration of the mutual agreements herein contained, the
Issuer, the Servicer, the Supervisory Servicer and the Trustee hereby agree as
follows:
ARTICLE I
DEFINITIONS
All capitalized terms used herein and not otherwise defined herein
shall have the meanings set forth in Schedule 1 attached hereto. Unless
otherwise provided, all calculations of interest pursuant to this Agreement are
based on a 360-day year of twelve 30-day months.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 2.1 REPRESENTATIONS AND WARRANTIES OF SERVICER. The Servicer
hereby represents and warrants to the Trustee, the Noteholders, the Supervisory
Servicer and the Issuer as of the
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 1 OF 33
<PAGE> 2
Closing Date, and at all times during the term of this Agreement shall be
deemed to represent and warrant, that:
(a) The Servicer has been duly formed and is validly existing
under the laws of the jurisdiction of its formation and is duly
qualified to do business and is in good standing under the laws of
each jurisdiction in which the failure to be so qualified would have a
material adverse effect on the enforceability of, or its ability to
service, a Loan and no demand for such qualification has been made
upon the Servicer by any state, and, in any event the Servicer is or
will be in compliance with the laws of any such state to the extent
necessary to insure the enforceability of each Loan and the servicing
of the Loans in accordance with the terms of this Agreement;
(b) The Servicer holds all material licenses, certificates
and permits from all governmental authorities necessary for the
conduct of its business (except where the failure to obtain same would
not materially and adversely affect the Servicer's ability to perform
its obligations hereunder in accordance with the terms of this
Agreement) and has received no notice of proceedings relating to the
revocation of any such license, certificate or permit which singly or
in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially and adversely affect the conduct of the
business, results of operations, net worth or condition (financial or
otherwise) of the Servicer;
(c) The Servicer has the full power and authority to execute,
deliver and perform, and to enter into and consummate all transactions
contemplated by this Agreement, has duly authorized the execution,
delivery and performance of this Agreement, has duly executed and
delivered this Agreement and this Agreement constitutes a legal, valid
and binding obligation of the Servicer, enforceable against it in
accordance with its terms, except as such enforcement may be limited
by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights in general
and (ii) by general equity principles (regardless of whether such
enforcement is considered in a proceeding in equity or at law);
(d) Neither the execution and delivery by the Servicer of
this Agreement, the consummation by the Servicer of the transactions
contemplated hereby, nor the fulfillment of or compliance by the
Servicer with the terms and conditions of this Agreement will conflict
with or result in a breach of any of the terms, conditions or
provisions of the Servicer's organizational documents or bylaws or any
legal restriction or any material agreement or instrument to which the
Servicer is now a party or by which it is bound, or constitute a
default or result in an acceleration under any of the foregoing, or
result in the violation of any law, rule, regulation, order, judgment
or decree to which the Servicer or its property is subject;
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 2 OF 33
<PAGE> 3
(e) At the date hereof, the Servicer does not believe, nor
does it have any reason or cause to believe, that it cannot perform
each of its covenants contained in this Agreement;
(f) There is no litigation pending or, to the Servicer's
knowledge, threatened, which, if determined adversely to the Servicer,
would materially and adversely affect the execution, delivery or
enforceability of this Agreement, or the ability of the Servicer to
service the Loans hereunder in accordance with the terms hereof or
which would have a material adverse effect on the financial condition
of the Servicer;
(g) No consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery
and performance by the Servicer of or compliance by the Servicer with
this Agreement or the consummation by the Servicer of the transactions
contemplated by this Agreement or if any such consent, approval,
authorization or order is required, the Servicer has obtained or will
obtain it prior to the time necessary for the Servicer to perform its
obligations hereunder;
(h) Neither this Agreement nor any statement, report or other
document furnished or to be furnished pursuant to this Agreement or in
connection with the transactions contemplated hereby contains any
untrue statement of material fact or omits to state a material fact
necessary to make the statements relating to the Servicer contained
therein not misleading;
(i) The Servicer is not in default with respect to any order
or decree of any court or any order, regulation or demand of any
federal, state, municipal or governmental agency, which default might
have consequences that would materially and adversely affect the
condition (financial or other) or operations of the Servicer or its
properties or might have consequences that would materially and
adversely affect its performance hereunder; and
(j) The Servicer has taken all reasonable actions necessary
to mitigate the risk that computer applications used by it may be
unable to recognize and properly perform date-sensitive functions
involving certain dates prior to, during and after the year 2000.
Upon discovery by either the Issuer, the Servicer, the Supervisory
Servicer or the Trustee of a material breach of any of the foregoing
representations and warranties, the party discovering such breach shall give
prompt written notice to the other parties, with a copy to the Noteholders and
the Rating Agency. Within 30 days of its discovery or its receipt of notice of
any such breach of a representation or warranty, the Servicer shall cure such
breach in all material respects; provided that, if such failure shall be of a
nature that it cannot be cured within 30 days, the Servicer shall give written
notice to the Supervisory Servicer and the Trustee, with a copy to the
Noteholders and the Rating Agency, within such 30 day period of the corrective
action it proposes to take and shall thereafter pursue such corrective action
diligently until such default is cured but in no event longer than 90 days from
the date of such notice.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 3 OF 33
<PAGE> 4
SECTION 2.2 COVENANTS OF SERVICER. The Servicer hereby agrees
that during the term of this Agreement:
(a) Compliance With Agreements and Applicable Laws. The
Servicer shall perform each of its obligations under this Agreement
and comply with all material requirements of any law, rule or
regulation applicable to it and the terms of the Loans and any related
agreements.
(b) Existence. The Servicer shall maintain its existence and
shall at all times continue to be duly organized under the laws of the
state of its organization and duly qualified and duly authorized (as
described in Sections 2.1(a), (b) and (c) hereof) and shall conduct
its business in accordance with the terms of its organizational
documents and bylaws.
(c) Financial Statements; Accountants' Reports; Other
Information. The Servicer shall keep or cause to be kept in reasonable
detail books and records of account of the Servicer's assets and
business, including, but not limited to, books and records relating to
the sale of the Loans to the Issuer and the Servicing of such Loans by
the Servicer, which books and records shall be furnished to the
Trustee upon reasonable request.
(d) Access to Records; Discussions With Officers and
Accountants. The Servicer shall, upon the reasonable request of the
Supervisory Servicer, the Trustee or any Noteholder, permit the
Supervisory Servicer, the Trustee or any such Noteholder or any of
their authorized designees:
(i) to inspect the books and records of the Servicer as
they may relate to the Loans and the obligations of the
Servicer under this Agreement; and
(ii) to discuss the affairs, finances and accounts of the
Servicer relating to the Loans and the obligations of the
Servicer under this Agreement with any Authorized Officer of
the Servicer.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the
Servicer. Such inspections shall be at the expense of the party
performing or requesting such inspection unless a Servicer Default
shall have occurred and be continuing, in which case any such
inspection shall be at the expense of the Servicer. The books and
records of the Servicer will be maintained at the address of the
Servicer designated herein for receipt of notices, unless the Servicer
shall otherwise advise the Supervisory Servicer, the Trustee and the
Noteholders in writing not less than 15 Business Days prior to any
such change of address..
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 4 OF 33
<PAGE> 5
(e) Notice of Material Events. The Servicer shall promptly
and in any event, within five Business Days of the occurrence thereof,
inform the Supervisory Servicer, the Trustee, the Noteholders and the
Rating Agency in writing of the occurrence of any of the following:
(i) the submission of any claim or the initiation of any
legal process, litigation or administrative or judicial
investigation against the Servicer involving potential
damages or penalties in an uninsured amount in excess of
$1,000,000 in any one instance or $5,000,000 in the
aggregate;
(ii) any change in the location of the Servicer's
principal office or any change in the location of the
Servicer's books and records;
(iii) the occurrence of any Servicer Default;
(iv) the commencement of any proceedings instituted by or
against the Servicer in any federal, state or local court or
before any governmental body or agency, or before any
arbitration board, or the promulgation of any proceeding or
any proposed or final rule which, if adversely determined,
would result in a material adverse change in the financial
condition or operations of the Servicer;
(v) the commencement of any proceedings by or against the
Servicer under any applicable bankruptcy, reorganization,
liquidation, rehabilitation, insolvency or other similar law
now or hereafter in effect or of any proceeding in which a
receiver, liquidator, conservator, trustee or similar
official shall have been, or may be, appointed or requested
for the Servicer or any of its assets;
(vi) the receipt of notice that (A) any license, permit,
charter, registration or approval necessary for the
performance by the Servicer of its obligations under this
Agreement is to be, or may be, suspended or revoked, or (B)
the Servicer is to cease and desist any practice, procedure
or policy employed by the Servicer in the conduct of its
business, and such cessation may result in a material adverse
change in the financial condition or operations of the
Servicer;
(vii) any merger, consolidation or sale of substantially
all of the assets of the Servicer; or
(viii) the final payment in full of the Notes.
(f) Maintenance of Licenses. The Servicer shall maintain all
licenses, permits, charters and registrations which are material to
the performance by the Servicer of its obligations under this
Agreement.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 5 OF 33
<PAGE> 6
(g) Notices. The Servicer shall promptly notify the Trustee,
the Noteholders, the Rating Agency and the Supervisory Servicer in
writing of any event, circumstance or occurrence which may materially
and adversely affect the ability of the Servicer to service any Loan
or to otherwise perform and carry out its duties, responsibilities and
obligations under and in accordance with this Agreement.
SECTION 2.3 CLOSING CERTIFICATE AND OPINION. On the Closing Date, the
Servicer will deliver to the Issuer, the Initial Purchasers, the Supervisory
Servicer, the Noteholders and the Trustee an Opinion of Counsel, dated the
Closing Date, in form and substance satisfactory to the Noteholders, as to the
due authorization, execution and delivery of this Agreement by the Servicer and
the enforceability thereof and such other matters as reasonably requested by
the Noteholders. On the Closing Date, the Servicer shall also deliver an
Officers' Certificate, dated the Closing Date, signed by two Authorized
Officers, to the effect that:
(a) the representations and warranties contained in Section
2.1 hereof are true and correct in all material respects as of the
Closing Date;
(b) no Servicer Default exists hereunder; and
(c) the Servicer maintains such errors and omissions
insurance and fidelity bond coverage as is required by this Agreement.
SECTION 2.4 FIDELITY BOND AND INSURANCE. The Servicer shall maintain
with a responsible company, at its own expense, a blanket fidelity bond in a
minimum amount of $1,000,000 and an errors and omissions insurance policy with
coverage in an amount deemed reasonable by the Servicer, with coverage on all
officers, employees or other persons acting in any capacity requiring such
persons to handle funds, money, documents or papers relating to the Loans
("Servicer Employees"). Any such fidelity bond and errors and omissions
insurance shall protect and insure the Trust Estate and the Trustee, as Trustee
for the Noteholders, its officers, employees and agents against losses,
including losses resulting from forgery, theft, embezzlement, fraud, errors and
omissions and negligent acts of such Servicer Employees. No provision of this
Section 2.4 requiring such fidelity bond and errors and omissions insurance
shall diminish or relieve the Servicer from its duties and obligations as set
forth in this Agreement. Upon the request of the Trustee, the Servicer shall
cause to be delivered to the Trustee a certified true copy of such fidelity
bond and insurance policy. Coverage of the Servicer under a policy or bond
obtained by an Affiliate of the Servicer and providing the coverage required by
this Section shall satisfy the requirements of this Section.
SECTION 2.5 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING
THE LOANS. The Servicer shall provide to the Trustee, the Issuer, the
Supervisory Servicer, the Noteholders and their representatives or designees
access to the documentation regarding the Loans, such access being afforded
without charge but only upon reasonable request and during normal
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 6 OF 33
<PAGE> 7
business hours at the offices of the Servicer provided that such access shall
not be requested more frequently than is reasonable or justifiable.
The Servicer shall at all times maintain accurate records and books of
account and an adequate system of audit and internal controls. All accounting
and loan servicing records pertaining to each Loan shall be maintained in such
manner as will permit the Trustee, the Noteholders and the Supervisory Servicer
or their duly authorized representatives and designees to examine and audit and
make legible reproductions of records during reasonable business hours. All
such records shall be maintained until no Notes remain Outstanding or such
longer period as is required by Law, including but not limited to, all
transaction registers and loan ledger histories.
SECTION 2.6 MERGER OR CONSOLIDATION. The Servicer will keep in full
effect its existence, rights and franchises, and will obtain and preserve its
qualification to do business in each jurisdiction in which such qualification
is or shall be necessary to protect the validity and enforceability of this
Agreement or any of the Loans and to perform its duties under this Agreement.
Any Person into which the Servicer may be merged or consolidated, or
any Person resulting from any merger, conversion or consolidation to which the
Servicer shall be a party, or any Person succeeding to the business of the
Servicer, shall be an established mortgage loan servicing institution that has
a net worth of at least $50,000,000 (unless otherwise consented to in writing
by the Trustee and the Noteholders) and shall be the successor of the Servicer
hereunder, without the execution or filing of any paper or any further act on
the part of any of the parties hereto except for notice thereof to the Rating
Agency, anything herein to the contrary notwithstanding, provided such
successor accepts the terms and conditions of this Agreement. The Servicer
shall, upon making a determination that it will enter into any such merger or
consolidation, send written notice thereof to the Trustee, the Noteholders, the
Supervisory Servicer and the Rating Agency which shall in no event be less than
30 days prior written notice.
SECTION 2.7 INDEMNIFICATION. The Servicer agrees to indemnify and hold
the Issuer, the Trust Estate, the Initial Purchasers, the Supervisory Servicer,
the Trustee and the Noteholders (and each of their respective officers,
directors, employees and agents) each harmless against any and all claims,
losses, damages, penalties, fines, forfeitures, reasonable legal fees and
related costs, judgments, and other costs and expenses ("Losses") resulting
from any claim, demand, defense or assertion based on or grounded upon, or
resulting from, a material breach of any of the Servicer's representations and
warranties contained in this Agreement or the negligence, bad faith or willful
misconduct of the Servicer relating to the performance of its duties hereunder
and servicing the Loans in compliance with the terms of this Agreement. The
Servicer agrees to indemnify and hold each of the Trustee and the Supervisory
Servicer and each of their respective officers, directors, employees and agents
harmless against any and all Losses incurred by it except for such actions to
the extent caused by any negligence, bad faith or willful misconduct on its
part, arising out of the administration of this Agreement, the Indenture or the
Supervisory Servicing Agreement or the exercise or performance of any of its
rights, powers or duties hereunder or thereunder. The Issuer,
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 7 OF 33
<PAGE> 8
the Initial Purchasers, the Supervisory Servicer or the Trustee, as the case
may be, shall immediately notify the Servicer if a claim is made by a third
party with respect to this Agreement or the Loans; provided, however, that
failure to so notify shall not relieve the Servicer of its obligations
hereunder. Notwithstanding anything to the contrary contained herein, no Person
acting as Servicer hereunder shall have any liability under this Section 2.7
for the indemnification of any claim based upon or arising from the action or
omission of any predecessor Servicer.
ARTICLE III
GENERAL ADMINISTRATION AND SERVICING OF LOANS
SECTION 3.1 GENERAL DUTIES OF SERVICER. (a) For and on behalf of the
Issuer, the Trustee and the Holders, the Servicer shall service and administer
the Loans in accordance with the provisions of this Agreement and the
instructions of the Trustee hereunder. Unless otherwise specified herein with
respect to specific obligations of the Servicer, the Servicer shall service and
administer the Loans in the best interests of, and for the benefit of, the
Holders, in accordance with the Servicing Standard.
(b) Consistent with the terms of this Agreement, the Servicer may
waive, modify or vary any term of any Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Obligor if, in the Servicer's reasonable determination, such waiver,
modification, postponement or indulgence is not materially adverse to the
interests of the Trustee on behalf of the Noteholders and the Servicer would
make the same determination if it serviced the Loan for its own account;
provided, however, that the Servicer may not permit any modification with
respect to any Loan that would change the Loan Rate, forgive the payment of any
principal or interest (unless in connection with the liquidation of the related
Loan) or defer or extend the final maturity date of such Loan beyond the term
of the Notes without the written consent of all of the Noteholders. Without
limiting the generality of the foregoing, and subject to the consent of the
Trustee and in accordance with the Servicing Standard, the Servicer shall
continue, and is hereby authorized and empowered, to execute and deliver on
behalf of the Trustee, all instruments of satisfaction or cancellation, or of
partial or full release, discharge and all other comparable instruments, with
respect to the Loans and with respect to the Mortgaged Properties. If
reasonably required by the Servicer, the Trustee shall furnish the Servicer
with any powers of attorney and other documents necessary or appropriate to
enable the Servicer to carry out its servicing and administrative duties under
this Agreement.
SECTION 3.2 NO ASSIGNMENT OR DELEGATION OF DUTIES BY SERVICER. The
Servicer, as an independent contractor, shall service and administer the Loans
and shall have full power and authority, acting alone, to do any and all things
in connection with such servicing and administration which the Servicer may
deem necessary or desirable and consistent with the terms of this Agreement.
The Servicer may not enter into subservicing agreements for any servicing and
administration of
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 8 OF 33
<PAGE> 9
Loans without the prior written consent of the Required Noteholders and the
Trustee (acting at the written direction of the Required Noteholders) (which
consent shall not be unreasonably withheld) and without notice thereof to the
Rating Agency. Except as expressly provided herein, the Servicer shall not
assign or transfer any of its rights, benefits or privileges hereunder to any
other Person, or delegate to or subcontract with, or authorize or appoint any
other Person to perform any of the duties, covenants or obligations to be
performed by the Servicer hereunder, without notice to the Rating Agency and
without the prior written consent of the Required Noteholders and the Trustee
(acting at the written direction of the Required Noteholders) (which consent
shall not be unreasonably withheld), and absent such written consent any
agreement, instrument or act purporting to effect any such assignment,
transfer, delegation or appointment shall be void. The Servicer shall be liable
for all acts and omissions of any delegate, subcontractor or other agent
appointed pursuant to this Agreement. Nothing contained in this Section 3.2
shall prohibit or be deemed to prohibit the Servicer from contracting with
third parties to perform duties that are not duties of the Servicer hereunder
that the Servicer deems reasonably necessary in connection with the servicing
of the Loans including, without limitation, title work, surveying,
environmental consulting, property management and maintenance, construction,
engineering and architectural consulting.
SECTION 3.3 ESTABLISHMENT OF LOCKBOX ACCOUNT; NOTICES TO OBLIGORS;
DEPOSITS IN LOCKBOX ACCOUNT. (a) On or prior to the Closing Date, the Trustee
shall cause to be established and maintained, at the Servicer's expense if the
Servicer is PMC, if not, then at the expense of the Trust Estate, the Lockbox
Account with Bank One, Texas, N.A. or another Financial Institution having a
long-term unsecured debt rating of at least A-2 or its equivalent by the Rating
Agency, at all times that it holds the Lockbox Account (the "Required Rating").
The creation of the Lockbox Account shall be evidenced by a letter agreement
substantially in the form of Exhibit B hereto. A copy of such executed letter
agreement shall be furnished to the Servicer, the Placement Agent, the
Supervisory Servicer, the Noteholders and the Rating Agency.
(b) Within five days after the Closing Date, the Servicer will prepare
and deliver to each of the Obligors, with a copy of such correspondence to the
Trustee and to the Noteholders, notices in the form attached hereto as Exhibit
C, directing each such Obligor to send all future Monthly Payments or Principal
Prepayments directly to the Lockbox Account.
(c) Notwithstanding the foregoing notices, if the Servicer receives
any Collections, including, without limitation, any Monthly Payments, late
payment charges or other payments relating to a Loan, the Servicer will receive
such funds in trust for the Trustee and, if the Servicer is not a financial
institution having a rating of at least "P-1" or its equivalent by the Rating
Agency, will forward such funds to the Lockbox Account no later than the
Business Day immediately following the date the Servicer obtains knowledge of
such receipt. In addition, any Liquidation Proceeds received by the Servicer
will be deposited into the Lockbox Account no later than the Business Day
immediately following the day the Servicer obtains knowledge of such receipt.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 9 OF 33
<PAGE> 10
(d) Upon receipt of notice that the institution holding the Lockbox
Account no longer has the Required Rating or that Bank One, Texas, N.A. no
longer wishes to hold the Lockbox Account, the Servicer will, within five
Business Days, establish and maintain, at its expense if the Servicer is PMC,
or if not, at the expense of the Trust Estate, a new Lockbox Account at a
Financial Institution having the Required Rating. Such Lockbox Account shall be
evidenced by a letter agreement substantially in the form of Exhibit B hereto.
A copy of the executed letter agreement shall be furnished to the Servicer, the
Noteholders, the Supervisory Servicer and the Rating Agency within five
Business Days after the new Lockbox Account is established. Within five
Business Days of establishing the new Lockbox Account, the Servicer will
prepare and deliver to each of the Obligors, with copies of such correspondence
to the Trustee, and to the Noteholders, notices, in the form of Exhibit C
attached hereto, directing each such Obligor to send all future Monthly
Payments directly to the Lockbox Account.
SECTION 3.4 PERMITTED WITHDRAWALS FROM THE LOCKBOX ACCOUNT. The
Trustee shall have the sole right to withdraw funds from the Lockbox Account
and shall, on a daily basis, withdraw all deposits to the Lockbox Account and
transfer such funds to the Collection Account established under the Indenture.
The Trustee shall cause the entity holding the Lockbox Account to forward funds
held therein as provided herein.
SECTION 3.5 PAYMENT OF TAXES AND OTHER CHARGES. If the Servicer
receives notice that any taxes, assessments or other charges which are or may
become a lien upon the Mortgaged Property are overdue, the Servicer will give a
written demand to the Obligor to pay such amounts and will verify whether such
payment has been made within 60 days after mailing such notice (but in any
event prior to the time that any taxing authority commences to exercise its
available remedies), subject to any right, pursuant to the Mortgage, of an
Obligor who is contesting the validity of such charges and has paid to the
Servicer a deposit or security in the amount of the contested charge plus
possible costs, interest and penalties or who has otherwise established
adequate reserves against such liability in accordance with generally accepted
accounting principles; provided, further, however, that this provision shall
not have the effect of permitting the Servicer to take, or fail to take, any
action in respect of the payments described herein that would adversely affect
the interest of the Trustee in any Mortgaged Property. If such amounts have not
been paid by the Obligor or the Obligor has not deposited or reserved funds
therefor as described in the immediately preceding sentence, the Servicer will
promptly make such payment as a Servicing Expense and request reimbursement
from the Obligor, and from the Trustee in accordance with Section 3.8 hereof.
SECTION 3.6 COLLECTION OF CERTAIN LOAN PAYMENTS. The Servicer shall
make reasonable efforts to collect all payments called for under the terms and
provisions of the Loans. Consistent with the foregoing, the Servicer shall not,
unless the charging or collection of any such late payment charge, prepayment
charge, assumption fee or any penalty or interest would result in the violation
or contravention of applicable Law, waive or permit to be waived any late
payment charge, prepayment charge, assumption fee or any penalty or interest in
connection with the prepayment of a Loan. Notwithstanding any other provisions
hereof, the Servicer shall not charge or impose on any
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 10 OF 33
<PAGE> 11
Obligor, nor seek to charge or impose on any Obligor, nor assert a right to
receive, any fee, charge, premium or penalty that if charged or collected would
violate or contravene any Law, including usury laws or the terms of the related
Loan.
SECTION 3.7 LIMITATION OF LIABILITY OF SERVICER'S OFFICERS AND OTHERS.
No director, officer, employee or agent of the Servicer shall be under any
liability to the Trustee, the Issuer, the Supervisory Servicer, the Holders or
any other persons for any action taken by them or for their refraining to take
any action in good faith pursuant to this Agreement or for errors in judgment;
except that such provision shall not protect any of them from liability which
would be imposed by reason of willful misfeasance, willful misconduct, bad
faith or negligence.
SECTION 3.8 SERVICING COMPENSATION; ADVANCES AND EXPENSES. (a) As
compensation for its services hereunder, the Servicer shall be paid the
Servicing Fee. The Servicer shall be required to pay all expenses incurred by
it in connection with its servicing activities hereunder and shall be entitled
to reimbursement thereof as described below. The Servicing Fee shall be paid to
the Servicer and Servicing Expenses reimbursed to the Servicer pursuant to
Section 6.4 of the Indenture.
(b) All reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance by the Servicer of its servicing obligations
hereunder ("Servicing Expenses") shall constitute routine servicing
responsibilities of the Servicer, which shall include, but are not limited to,
expenditures for the following, subject to the provisions of this Agreement,
(i) attorneys' fees, trustee fees under any deed of trust, recording, filing
and publication fees, title report and title search costs, costs associated
with environmental audits, court costs, witness fees and all other costs
incurred in respect of any enforcement of a Loan, any judicial foreclosure, or
any foreclosure sale, trustee's sale or acquisition in lieu of foreclosure, or
in respect of the insurance, sale or other disposition of any Mortgaged
Property or REO Property; (ii) repair, restoration, maintenance or other
protection of any Mortgaged Property (whether incurred before or after such
property became an REO Property) in accordance with and subject to the
provisions of this Agreement, as applicable; and (iii) compliance with the
Servicer's obligations under Section 3.5 hereof. Servicing Expenses shall not
include any portion of the Servicer's overhead or normal salary and operating
expenses.
(c) Not later than the close of business on each Determination Date,
with respect to each Loan for which a Principal Prepayment was received during
the related Collection Period, the Issuer shall remit to the Trustee for
deposit into the Collection Account, an amount ("Compensating Interest") equal
to any excess of (a) 30 days' interest at the then applicable Class A or Class
B Remittance Rate, as the case may be, on the related principal balance over
(b) that portion of the amount of interest actually received with respect to
such principal balance during such Collection Period and available to be paid
to the Noteholders. Such Compensating Interest shall be net of amounts payable
to the Noteholders and the Servicing Fee.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 11 OF 33
<PAGE> 12
SECTION 3.9 THE TRUSTEE'S, THE NOTEHOLDERS' AND SUPERVISORY SERVICER'S
RIGHT TO EXAMINE SERVICER RECORDS AND AUDIT OPERATIONS. The Trustee, the
Noteholders and the Supervisory Servicer and their designees shall have the
right upon reasonable prior notice, during normal business hours and as often
as reasonably required, to examine and audit (at no cost to the Servicer unless
a Servicer Default has occurred and is then continuing) any and all of the
books, records or other information of the Servicer directly relating to the
Loans, whether held by the Servicer or by another on behalf of the Servicer,
which may be relevant to the performance or observance by the Servicer of the
terms, covenants or conditions of this Agreement. The Trustee, the Noteholders
and the Supervisory Servicer shall have the right upon reasonable prior notice,
during normal business hours and as often as reasonably required to perform
ongoing diligence of the Servicer's operations through loan reviews,
re-appraisals (at no cost to the Servicer) or other reasonable review of
Servicer operations. No amounts payable in respect of the foregoing (other than
costs associated with re-appraisals) shall be paid from the Trust Estate unless
a Servicer Default exists and is then continuing.
SECTION 3.10 MAINTENANCE AND RELEASE OF LOAN DOCUMENTATION;
SATISFACTION OF MORTGAGES. (a) The Servicer shall retain, with respect to each
Loan, the originals (or copies if originals are not available) of all of the
instruments and documents relating to the Loan that would be maintained by a
prudent lender servicing such Loan for its own account (the "Servicer Loan
File"), except for those original instruments and documents constituting a part
of the Trustee Loan File that are required to be held by the Trustee.
Each Servicer Loan File shall remain the property of the Issuer
pledged to the Trustee for the benefit of the Holders and shall be held by the
Servicer in trust for the benefit of the Trustee on behalf of the Holders. Upon
written request of the Trustee, the Servicer shall immediately deliver all or
any of such instruments, records and documents in its possession or custody to
the Trustee, together with a list identifying each Loan to which such records
pertain. The Servicer, at its option, may microfilm, microfiche or otherwise
condense any records or documents constituting a part of, or relating to, any
Loan or any Servicer Loan File, provided that the Servicer, upon written
request by the Trustee, promptly reproduces in their entirety any or all such
records or documents at no cost to the Trustee.
(b) The Servicer shall maintain each Servicer Loan File for a period
of four years after the related Loan has been paid in full, is foreclosed upon
or is otherwise liquidated, or such longer period as may be required by Law.
The Servicer shall maintain an appropriate account record for each Loan which
shall include the permanent loan number for each Loan serviced by the Servicer
as shown on the Loan Schedule. Any system utilized for the Loan account records
shall be capable of producing, for any Loan, an account transcript itemizing in
chronological order the date, amount and application of each Monthly Payment by
due date and other information affecting the amounts paid by the Obligor,
including the latest outstanding Loan Principal Balance.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 12 OF 33
<PAGE> 13
(c) The Servicer shall not grant a satisfaction or release of a
Mortgage without having obtained payment in full of the indebtedness secured by
the Mortgage or otherwise prejudice any right the Trustee may have under the
mortgage instruments, subject to Section 4.1 hereof. Upon the prepayment in
full or other liquidation of a Loan, the Servicer shall immediately deposit the
prepayment or Liquidation Proceeds in the Lockbox Account and prepare and
deliver to the Trustee and Supervisory Servicer a request for the appropriate
instrument releasing the Mortgaged Property from the lien of the Mortgage,
together with an Officer's Certificate (i) certifying that (A) all amounts that
the Obligor is obligated to pay under the Underlying Note, the Mortgage and any
other document pertaining to the Loan, including, but not limited to, all
required payments of principal and interest, have been paid in full and
deposited in the Lockbox Account; or (B) all Liquidation Proceeds which the
Servicer reasonably believes will be collected with respect to a Liquidated
Loan have been collected and deposited in the Lockbox Account; and (ii)
requesting that (X) the Trustee Loan File for such Loan be released by the
Trustee to the Servicer and (Y) the Trustee execute and deliver to the Servicer
the appropriate instrument prepared by the Servicer necessary to release the
lien of the Mortgage, together with the Underlying Note bearing written
evidence of cancellation or assignment thereof, as appropriate.
The Trustee shall, upon receipt of a written request from a Servicing
Officer and approval of the Supervisory Servicer, execute any document provided
to the Trustee by the Servicer or take any other action requested in such
request, that is, in the opinion of the Servicer as evidenced by such request,
required by any state or other jurisdiction to discharge the lien of a Mortgage
upon the satisfaction thereof and the Trustee will sign and post, but will not
guarantee receipt of, any such documents to the Servicer, or such other party
as the Servicer may direct in writing, within five Business Days of the
Trustee's receipt of such certificate or documents. Such certificate or
documents shall establish to the Trustee's satisfaction that the related Loan
has been paid in full by or on behalf of the Obligor and that such payment has
been deposited in the Lockbox Account.
Upon receipt of the Trustee Loan File, the Servicer shall record the
mortgage release or satisfaction in the proper recording office, deliver the
Underlying Note and/or the recorded original of such instrument of release or
satisfaction to the Obligor, deposit any remaining documents into the Servicer
Loan File, and retain the Servicer Loan File as provided in section (a) and (b)
above. Any costs and expenses associated with the release of any Loan shall be
the expense of the Trust Estate to the extent not paid by the applicable
Obligor.
Any applications for partial release of any part of a Mortgaged
Property must be approved in the manner set forth in Section 3.12 hereof.
(d) From time to time as is appropriate, the Servicer may request the
Trustee to deliver or cause to be delivered to the Servicer all or part of the
documents constituting a part of the Trustee Loan File to facilitate the
servicing or foreclosure of any Loan, the acquisition of any Mortgaged Property
in lieu of foreclosure, the partial release of any Mortgaged Property from the
lien of the Mortgage or the making of any corrections to the Underlying Note or
the Mortgage or other
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 13 OF 33
<PAGE> 14
documents constituting the Trustee Loan File. To make such request, the
Servicer shall deliver to the Trustee an Officer's Certificate requesting that
possession of all, or any document constituting part of, the Trustee Loan File
be released to the Servicer; such certificate shall certify the reason for such
release. The Servicer also shall deliver to the Trustee together with such
certificate a Trust Receipt signed by a Servicing Officer, in substantially the
form attached as Exhibit A hereto.
If the Servicer at any time seeks to initiate a foreclosure proceeding
with respect to any Mortgaged Property, then the Servicer shall deliver to the
Trustee, for signature by the Trustee, as appropriate, any court pleadings,
requests for Trustee's sale or other documents necessary to the foreclosure or
to any legal action brought to obtain judgment against the Obligor on the
Underlying Note or the Mortgage, or to obtain a deficiency judgment, or to
enforce any other remedies or rights provided by the Underlying Note or the
Mortgage or otherwise available at law or in equity. The Servicer shall also
deliver to the Trustee an Officer's Certificate requesting that such pleadings
or documents be executed by the Trustee and certifying as to the reason such
documents or pleadings are required and that the execution and delivery thereof
by the Trustee will not invalidate the Mortgage except for the termination of
such lien upon completion of the proposed foreclosure. Notwithstanding the
foregoing, the Servicer shall cause possession of any Trustee Loan File or
documents therein that have been released by the Trustee to be returned to the
Trustee when the need for such file or documents no longer exists, but in any
event within 30 calendar days after release by the Trustee unless (i) the Loan
has been liquidated and the Liquidation Proceeds relating to the Loan have been
deposited in the Lockbox Account or (ii) the Trustee Loan File or documents so
released have been delivered to an attorney, a public trustee or other public
official, as required by Law, to initiate or pursue legal action or other
proceedings to foreclose the applicable Mortgage, and the Servicer has
delivered to the Trustee an Officer's Certificate certifying as to the name and
address of the Person to which the Trustee Loan File, or documents therefrom,
have been delivered and the purpose or purposes of such delivery.
(e) The Servicer shall, at its expense if the Servicer is PMC, if not,
at the expense of the Trust Estate, prepare and deliver to the Trustee any
instruments required in connection with substitution of a Loan pursuant to
Section 3.3 of the Indenture and will pay any recording or filing costs
associated therewith.
SECTION 3.11 NOTICE OF LIENS AND OTHER ACTIONS. The Servicer shall, at
all times, exercise reasonable efforts to prevent any lien or judicial levy
upon or writ of attachment against a Mortgaged Property of which the Servicer
is notified or otherwise has knowledge, which is, or may be, superior to the
lien of the Mortgage.
SECTION 3.12 WAIVERS, RELEASES, CONDEMNATIONS, EASEMENTS AND
ALTERATIONS. Any applications for partial releases of real property and
releases of personal property which are part of a Mortgaged Property, the
creation or release of easements, waivers of rights under any Mortgage, consent
to alteration, removal or demolition of improvements and other matters
affecting the Mortgage or the Mortgaged Property, other than those which are
contractually provided for in the
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 14 OF 33
<PAGE> 15
Underlying Note or related loan documents, shall be subject to the prior
written approval of the Trustee which consent shall not be unreasonably
withheld and which shall be provided only upon written certification by the
Servicer that such action is consistent with the Servicing Standard and the
Mortgage and the ability to collect under the Underlying Note will not be
adversely affected by such release.
SECTION 3.13 LIMITATION ON LIABILITY OF SERVICER AND OTHERS. The
Servicer and any director, officer, employee or agent of the Servicer may rely
on any document of any kind which it in good faith reasonably believes to be
genuine and to have been adopted or signed by the proper authorities respecting
any matters arising hereunder. Subject to the terms of Section 2.7 herein, the
Servicer shall have no obligation to appear with respect to, prosecute or
defend any legal action which is not incidental to the Servicer's duty to
service the Loans in accordance with this Agreement. The Issuer agrees to
indemnify and hold the Servicer harmless from any loss, claim, demand,
liability or expense (including, without limitation, past acts of predecessor
Servicers and fees and expenses of legal counsel) arising from or relating to
the performance of its duties under this Agreement which do not result from the
Servicer's negligence, bad faith or willful misconduct.
SECTION 3.14 PROPERTY ADDRESS CHANGE. The Servicer shall note in its
records and notify the Trustee of all changes of address of an Obligor or of a
Mortgaged Property of which the Servicer is notified or of which the Servicer
has knowledge.
ARTICLE IV
SPECIFIC SERVICING PROCEDURES
SECTION 4.1 ASSUMPTION AGREEMENTS. When a Mortgaged Property has been or
is about to be conveyed by the Obligor, the Servicer shall, to the extent it
has knowledge of such conveyance or prospective conveyance, exercise its rights
to accelerate the maturity of the related Loan under any "due-on-sale" clause
contained in the related Mortgage or Underlying Note; provided, however, that
the Servicer shall not exercise any such right if the "due-on-sale" clause, in
the reasonable belief of the Servicer, is not enforceable under applicable law
or if such enforcement would materially increase the risk of default or
delinquency on, or materially decrease the security for, such Loan. In such
event, the Servicer shall enter into an assumption and modification agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Underlying Note and,
unless prohibited by applicable law or the Mortgage, the Obligor remains liable
thereon, provided that the Servicer may enter into an assumption agreement with
the transferee and release the transferor-Obligor from liability only if (a)
the transferee qualifies for credit under the customary credit policies of the
Servicer, (b) any applicable Law requires that the transferor-Obligor be
released from liability on the Loan, (c) an officer of the Servicer has
examined and approved all instruments as are necessary to carry out the
assumption transaction and approved such instruments as to form and substance,
(d) the execution and delivery of such
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 15 OF 33
<PAGE> 16
instruments by all necessary parties will not cause the unpaid principal
balance and any accrued interest thereon for the Loan to be uncollectible in
whole or in part, and (e) upon closing the assumption transaction (i) the
Mortgage will continue to be a first lien upon the Mortgaged Property, and (ii)
the Loan Rate and Monthly Payment for the Loan will not be changed nor will the
term of the Note be extended. For each proposed assumption transaction, the
Servicer shall deliver an Officer's Certificate to the Trustee certifying that
each of the applicable requirements specified in the immediately preceding
sentence have been satisfied together with the assumption instruments requiring
execution by the Trustee. Such certificate shall also indicate whether the
seller/transferor of the Mortgaged Property will be released from liability on
the Loan and that the Servicer has made a good faith determination that any
such release will not adversely affect the collectibility of the Loan.
The Servicer is also authorized with the prior approval of the Trustee
to enter into a substitution of liability agreement with such transferee,
pursuant to which the original Obligor is released from liability and such
person is substituted as Obligor and becomes liable under the Underlying Note.
The Servicer shall notify the Trustee that any such substitution or assumption
agreement has been completed by forwarding to the Trustee the original of such
substitution or assumption agreement, which original shall be added by the
Trustee to the related Trustee's Loan File and shall, for all purposes, be
considered a part of such Trustee's Loan File to the same extent as all other
documents and instruments constituting a part thereof. Any fee collected by the
Servicer for consenting to any such conveyance or entering into an assumption
or substitution agreement shall be retained by or paid to the Servicer as
additional servicing compensation.
Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Servicer shall not be deemed to be in default, breach or any
other violation of its obligations hereunder by reason of any assumption of a
Loan by operation of law or any assumption which the Servicer may be restricted
by law from preventing, for any reason whatsoever.
SECTION 4.2 SERVICING DELINQUENT ACCOUNTS; LIQUIDATION OF LOANS. The
Servicer shall exercise diligence in obtaining payment of Monthly Payments when
due under the terms of each Loan and shall use reasonable efforts to contact
any delinquent Obligor.
If any delinquent Obligor shall be or become a bankrupt or otherwise
become the subject of any insolvency or similar proceeding, the Servicer shall
notify the Trustee of such event and, thereafter, shall carry out all
reasonable actions necessary for the benefit and protection of the interests of
the Trustee and the Holders, including, but not limited to, retention of
counsel to represent the Trustee in any bankruptcy or other court proceedings
relating to such Obligor or the Mortgaged Property.
If any Loan previously reported on a Determination Date Report as more
than 90 days delinquent is subsequently reported as being brought current, the
Servicer will verify with the
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 16 OF 33
<PAGE> 17
relevant Obligor that the Obligor paid the delinquent payments, by sending the
Obligor the letter in the form attached hereto as Exhibit H.
(b) In the event that any payment due under any Loan and not postponed
pursuant to Section 3.1 is not paid when the same becomes due and payable, or
in the event the Obligor fails to perform any other covenant or obligation
under such Loan and such failure continues beyond any applicable grace period,
the Servicer shall take such other action as it shall deem to be in the best
interests of the Trustee and the Holders. The Servicer shall foreclose upon or
otherwise effect the ownership in the name of the Trustee of Mortgaged
Properties relating to defaulted Loans as to which no satisfactory arrangements
can be made for collection of delinquent payments in accordance with the
customary collection policies of the Servicer and the provisions of Section
3.1. In connection with such foreclosure or other conversion, the Servicer
shall exercise collection and foreclosure procedures with the same degree of
care and skill in its exercise or use as it would exercise or use under the
circumstances in the conduct of its own affairs and shall in any event, comply
with the Servicing Standard. The Servicer shall use its reasonable efforts to
realize upon such defaulted Loans in accordance with the Servicing Standard.
The Servicer shall be responsible for all other costs and expenses incurred by
it in any foreclosure proceedings; provided, however, that it shall be entitled
to reimbursement thereof as contemplated in Sections 3.8 and 4.3 hereof.
No modification, recast or extension of a Loan other than as provided
above and in Section 3.1 is permitted without the prior written consent of the
Trustee and which shall be provided only upon written certification by the
Servicer that such action is consistent with the Servicing Standard and the
Mortgage and the ability to collect under the Underlying Note will not be
adversely affected by such release.
Notwithstanding the foregoing provisions of this Section 4.2, the
Servicer shall not, on behalf of the Trustee, obtain title to a Mortgaged
Property by deed in lieu of foreclosure or otherwise, or take any other action
with respect to any Mortgaged Property, if, as a result of any such action, the
Trustee, on behalf of the Noteholders, could, in the reasonable judgment of the
Servicer, made in accordance with the Servicing Standard, be considered to hold
title to, to be a "mortgagee-in possession" of, or to be an "owner" or
"operator" of such Mortgaged Property within the meaning of CERCLA or any
comparable law, unless the Servicer has previously determined in accordance
with the Servicing Standard, based on a Phase I Environmental Assessment (and
any additional environmental testing that the Servicer deems necessary and
prudent) of such Mortgaged Property conducted by an Independent Person who
regularly conducts Phase I Environmental Assessments and performed during the
twelve-month period preceding any such acquisition of title or other action;
that the Mortgaged Property is in material compliance with applicable
environmental laws and regulations or, if not, that it would maximize the
recovery to the Noteholders on a present value basis to acquire title to or
possession of the Mortgaged Property and to effect such compliance.
(c) If the environmental testing contemplated by Section 4.2(b) above
establishes that any of the conditions set forth therein have not been
satisfied with respect to any Mortgaged Property
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 17 OF 33
<PAGE> 18
securing a defaulted Loan, the Servicer shall, in accordance with the Servicing
Standard, prepare a written report to the Trustee and the Noteholders
summarizing the environmental condition of the Mortgaged Property and proposing
a course of action to pursue with respect to such Mortgaged Property. In the
event that the Servicer has not received through the Trustee the written
objection to such proposed course of action of the Holders of more than 50% of
the Outstanding Note Amount within 30 days of the Trustee's distributing such
notice, the Servicer shall be deemed to have been directed by the Noteholders
to take such proposed action.
(d) The Servicer shall report to the Trustee monthly in writing as to
any actions taken by the Servicer with respect to any Mortgaged Property as to
which the environmental testing contemplated in Section 4.2(b) above has
revealed that any of the conditions set forth have not been satisfied, in each
case until the earliest to occur of satisfaction of all such conditions and the
release of the Lien of the related Mortgage on such Mortgaged Property.
(e) If foreclosure has been approved as provided above, the Servicer
shall initiate or cause to be initiated the foreclosure action according to
such procedures as are authorized by Law and the practices in the locality
where the Mortgaged Property is located. In the event that title to the
Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale shall be taken in the name of the
Trustee for the benefit of the Holders.
(f) The Servicer shall have the right to determine, in accordance with
the Servicing Standard, the advisability of seeking to obtain a deficiency
judgment if the state in which the Mortgaged Property is located and the terms
of the Loan permit such an action and shall, in accordance with the Servicing
Standard, seek such deficiency judgment if it deems advisable.
(g) After a Loan has become a Liquidated Loan, the Servicer shall
promptly prepare and forward to the Trustee a liquidation report detailing the
Liquidation Proceeds received from the Liquidated Loan, expenses incurred with
respect thereto and any Realized Loss incurred in connection therewith.
(h) If the requirements of Sections 4.2(b) and (c) hereof have been
satisfied, the Servicer may accept a deed in lieu of foreclosure, provided that
(i) marketable title as evidenced by a policy of title insurance can be
conveyed to and acquired by the Trustee or its designee; (ii) no cash
consideration is to be paid to the Obligor by the Trustee; and (iii) the
Servicer has obtained from the Obligor a written acknowledgment that the deed
is being accepted as an accommodation to the Obligor and on the condition that
the Mortgaged Property will be transferred to the Trustee or its designee free
and clear of all claims, liens, encumbrances, attachments, reservations or
restrictions except for those to which the Mortgaged Property was subject at
the time the Mortgaged Property became subject to the Mortgage. Title shall be
conveyed directly from the Obligor to the Trustee for the benefit of the
Holders.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 18 OF 33
<PAGE> 19
(i) The Servicer will indemnify and hold harmless the Trustee, the
Supervisory Servicer and their respective directors, officers, agents and
employees from and against any and all claims, demands, losses, penalties,
liabilities, costs, damages, injuries and expenses, including, without
limitation, reasonable attorneys' fees and expenses, suffered or sustained by
such parties, either directly or indirectly, relating to or arising out of the
violation of an Environmental Law with respect to a Mortgaged Property
resulting from the Servicer's obligations failure to perform its hereunder,
including without limitation any expenses and other costs incurred in
connection with the defense of any such action, proceeding or claim. This
obligation shall survive the termination of this Agreement, the Indenture and
the Supervisory Servicing Agreement or the earlier resignation or removal of
the Trustee or the Supervisory Servicer, as the case may be.
SECTION 4.3 FORECLOSURE EXPENSES. The Servicer shall prepare a written
estimate of the amount of attorneys' fees, trustee's fees and other costs in
respect of any foreclosure or acquisition in lieu of foreclosure. The Servicer
shall arrange payment of attorneys' fees, trustees' fees and other foreclosure
costs at the commencement of foreclosure proceedings.
The Servicer may reimburse itself for any Servicing Expenses paid by
the Servicer, made in connection with such Loan or such foreclosure or other
action, out of amounts received by the Servicer in connection with liquidation
of the Loan, prior to remittance of any such amounts to the Lockbox Account.
Section 4.4 TITLE, MANAGEMENT AND DISPOSITION OF REO PROPERTY. (a)
Upon the acquisition of REO Property by the Servicer by foreclosure or
conveyance in lieu of foreclosure, the Servicer shall notify the Trustee
promptly that the REO Property has been acquired and shall thereafter: (i)
deliver the deed or certificate of sale to the Trustee, or its nominee; (ii)
manage, conserve and protect the REO Property in the same manner and to such
extent as is customary in the locality where such REO Property is located
including the rental of the same, or any part thereof, as the Servicer deems to
be in the best interest of the Trustee for the benefit of the Holders; (iii)
pay all costs such as taxes and assessments relating to the REO Property; (iv)
process any claims for redemption and otherwise comply with any redemption
procedures required by Law; (v) sell or otherwise dispose of the REO Property
and remit the proceeds to the Trustee; and (vi) timely file any and all
federal, state and local tax or information returns or reports as are required
as a result of the acquisition or disposition of REO Property and perform any
withholding required in connection therewith. The Servicer shall not acquire
any REO Property relating to a Charged-Off Loan that is required to be released
from the lien of the Indenture and disposed of by the Issuer on the next
Payment Date. If any REO Property is expected to be acquired, the Servicer
shall inform the Issuer, the Noteholders and the Trustee and the Issuer shall
comply with Section 5.14 of the Indenture.
The Servicer shall manage, conserve, protect and operate each REO
Property for the Trustee solely for the purpose of its prudent and prompt
disposition and sale. The Servicer shall, either itself or through an agent
selected by the Servicer, manage, conserve, protect and operate the REO
Property in the same manner that it manages, conserves, protects and operates
other foreclosed
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 19 OF 33
<PAGE> 20
property for its own account and in the same manner that similar property in
the same locality as the REO Property is managed. The Servicer shall attempt to
sell the same (and may temporarily rent the same) on such terms and conditions
as the Servicer deems to be in the best interest of the Holders.
(b) Until the REO Property is disposed of, the Servicer shall (i) take
appropriate action to secure the REO Property and maintain proper surveillance
over it; (ii) advance all costs such as taxes and assessments; (iii) maintain
the REO Property so as to preserve its value and prevent any additional
deferred maintenance; and (iv) submit monthly statements for services to the
Trustee, together with additional documentation including statements of income
and expenses (accompanied by copies of paid invoices for every expense item).
(c) Until the REO Property is disposed of, the Servicer shall maintain
for such REO Property, a standard hazard insurance policy providing fire and
extended coverage in an amount equal to the full replacement cost of all
improvements on the Mortgaged Property, which requirement may be satisfied by a
master force placed or blanket insurance policy insuring against hazard losses.
If the Mortgaged Property is in an area identified in the Federal Register by
the Federal Emergency Management Agency as having special flood hazards (and
such flood insurance has been made available) Servicer shall maintain a flood
hazard insurance policy meeting the requirements of the current guidelines of
the Federal Insurance Administration with an insurance carrier generally
acceptable to commercial mortgage lending institutions for properties, similar
to the REO Property in an amount representing coverage not less than the lesser
of (i) the full insurable value of such REO Property, or (ii) the maximum
amount of insurance which is available under the Flood Disaster Protection Act
of 1973, as amended from time to time. The Servicer will also maintain
comprehensive general liability insurance and business interruption insurance
(to the extent applicable) in such amounts as are then customary for similarly
situated properties and businesses.
(d) The Servicer shall advance all funds necessary for the proper
operation, management, insurance and maintenance of the REO Property. On each
Determination Date Report, the Servicer shall schedule its reasonable expenses
with respect to any REO Property for the related Collection Period.
(e) The Servicer shall deposit all funds collected and received in
connection with the operation or disposition of any REO Property in the Lockbox
Account no later than the Business Day immediately following notice of receipt
of such funds, net of funds necessary for the proper operation, management,
insurance and maintenance of the REO Property.
(f) If as of the date of disposition of any REO Property there remain
unpaid Servicing Fees with respect to the related Loan, the Servicer, shall be
entitled to payment for the unpaid Servicing Fees and reimbursement for the
unreimbursed related Servicing Expenses from proceeds received in connection
with the disposition prior to remittance of any proceeds to the Trustee.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 20 OF 33
<PAGE> 21
Disposition of REO Property shall be carried out by the Servicer at
such price and upon such terms and conditions as the Servicer, in its judgment,
believes to be in the best interests of the Holders, subject to and in
accordance with Section 4.2. Upon the sale of any Mortgaged Property, the
Servicer shall remit the net cash proceeds remaining after payment of expenses
of the sale to the Lockbox Account.
(g) If any Charged-Off Loan is expected to be released from the lien
of the Indenture on the next Payment Date, the Servicer shall not commence a
foreclosure proceeding or accept a deed in lieu of foreclosure. Any
determination by the Servicer that a Loan is a Charged-Off Loan shall be made
in good faith.
ARTICLE V
REPORTS TO BE PROVIDED BY SERVICER
SECTION 5.1 DETERMINATION DATE REPORTS.
(a) Monthly Reports. Each month, not later than 12:00 noon Dallas time
on the fifth Business Day preceding each Payment Date, the Servicer shall
deliver to the Trustee, by telecopy, the receipt and legibility of which shall
be confirmed telephonically, with hard copy thereof to be delivered on the next
Business Day, with copies to the Supervisory Servicer (if other than the
Trustee), the Noteholders, the U.S. Small Business Administration and the
Rating Agency, a Determination Date Report in the form attached hereto as
Exhibit D signed by a Servicing Officer stating the date (day, month and year),
referring to this Agreement by name and date and stating, as of the close of
business on the immediately preceding Determination Date:
(i) the aggregate amount of all funds received in respect of
scheduled principal payments on the Loans during the related
Collection Period;
(ii) the aggregate amount of interest received on the Loans
during the related Collection Period;
(iii) the number and Loan Principal Balances of all Loans
which were the subject of Principal Prepayments during the related
Collection Period and the aggregate amount of Principal Prepayments
received with respect to the Loans during such Collection Period;
(iv) the aggregate Loan Principal Balance of the Loans as of
the related Determination Date, stating any REO Properties separately;
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 21 OF 33
<PAGE> 22
(v) the loan number and Loan Principal Balance of each
Delinquent Loan for the related Collection Period;
(vi) the loan number and the aggregate number and aggregate
Loan Principal Balance of Loans delinquent 31 days, 91 days and 181 or
more days as of the Determination Date;
(vii) the loan number and the aggregate number and aggregate
Loan Principal Balance of Loans which were Charged-Off Loans as of the
Determination Date and the related recovery thereon;
(viii) the number and aggregate Loan Principal Balance of
Loans (i) which will be released from the lien of the Indenture during
the related Collection Period or on the related Payment Date, (ii)
which have been repurchased including the Takeout Price therefor and
(iii) which have been substituted for a Substitute Loan including any
Asset Substitution Shortfall therefor;
(ix) the number and aggregate Loan Principal Balance of Loans
which were in foreclosure as of the related Determination Date;
(x) with respect to any Loan that became an REO Property
during the related Collection Period, (a) the Loan Principal Balance
of such Loan as of the date title to such REO Property was acquired,
(b) the book value and length of time held of each REO Property as of
the related Determination Date, and (c) the income and expenses
incurred by the Servicer in connection with any REO Property during
the related Collection Period;
(xi) the amount of any Realized Losses incurred during the
related Collection Period;
(xii) the cumulative Realized Losses since the Closing Date;
(xiii) the Required Principal Payment for the related Payment
Date and information as to the calculation of such amount;
(xiv) the amount of the interest accrued on the Notes and
information as to the calculation of such amount;
(xv) the Outstanding Note Amount;
(xvi) the Servicing Fee, Supervisory Servicer's Fee, if any,
Trustee's Fee and Rating Agency fee due on the related Payment Date;
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 22 OF 33
<PAGE> 23
(xvii) the amount of all Servicing Expenses paid by Servicer
during such Collection Period and any and all other amounts deducted
by the Servicer in accordance with the terms hereof from Collections
received by the Servicer prior to remittance thereof to the Lockbox
Account and a detailed report describing the type and amount of all
such Servicing Expenses and other deductions;
(xviii) information as to any Funds Retention Event;
(xix) the Required Reserve Amount, including the beginning
balance thereof, additions thereto and transfers therefrom during the
related Collection Period; and
(xx) such other information as the Trustee, the Noteholders
or the Rating Agency may reasonably require.
To the extent that there are inconsistencies between the telecopy of
the Servicer's Certificate and the hard copy thereof, the Trustee shall be
entitled to rely upon the telecopy.
(b) Annual Statement. Within 90 days after the end of each calendar
year, the Servicer shall furnish to the Trustee and the Noteholders such
information in the form attached hereto as Exhibit E as is reasonably necessary
to provide to the Holders a statement containing the aggregate amount of
principal of and interest on the Notes paid during the prior calendar year,
aggregated for such calendar year or applicable portion thereof during which
such Person was a Holder. Such obligation of the Servicer shall be deemed to
have been satisfied to the extent that substantially comparable information
shall be provided by the Servicer pursuant to any requirements of the Code as
from time to time are in force.
(c) Computer Data. Prior to the Closing Date the Servicer shall
provide the Supervisory Servicer with all data on the Servicer's computerized
servicing system relating to the Loans in an electronically readable form
specified by the Supervisory Servicer and shall update such data at least
monthly.
(d) Other Reports. The Servicer shall furnish to the Trustee, the
Noteholders, the Rating Agency and the Supervisory Servicer, during the term of
this Agreement, such periodic, special or other reports, Officer's
Certificates, data relating to the Loans or information, whether or not
provided for herein, as shall be reasonably requested, all such reports or
information to be provided by and in accordance with such applicable
instructions and directions as the Trustee, the Noteholders or the Supervisory
Servicer may reasonably require; provided, however, the Servicer shall be
reimbursed for the reasonable cost of providing such additional reports.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 23 OF 33
<PAGE> 24
SECTION 5.2 REPORTS OF FORECLOSURE AND ABANDONMENT OF MORTGAGED
PROPERTY. Each year the Servicer shall make any reports of foreclosures and
abandonments of any Mortgaged Property required by the Code.
SECTION 5.3 QUARTERLY STATEMENT AS TO COMPLIANCE. The Servicer will
deliver to the Trustee, the Noteholders, the Rating Agency and the Supervisory
Servicer, quarterly, no later than each April 15, July 15, October 15 and
January 15, for each quarterly period ending on each March 31, June 30,
September 30 and December 31, commencing on January 15, 1999, an Officer's
Certificate in the form attached hereto as Exhibit F stating that (a) the
Servicer has fully complied with the provisions of this Agreement, (b) a review
of the activities of the Servicer during the preceding quarter and of the
Servicer's performance under this Agreement has been made under such officer's
supervision and (c) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations, duties and
responsibilities under this Agreement throughout such quarterly period (or,
with respect to the first such report, since the Closing Date) and no Servicer
Default exists, or, if there has been a default or failure in the fulfillment
of any such obligation, specifying each such default or failure known to such
officer and the nature and status thereof and the action being taken by the
Servicer to cure such default.
SECTION 5.4 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT.
The Servicer at its expense shall cause a nationally recognized firm of
independent certified public accountants to furnish a statement to the Trustee,
the Supervisory Servicer, the Noteholders, and each Rating Agency on or before
May 1 of each year, commencing on May 1, 1999, to the effect that, with respect
to the most recently ended fiscal year, such firm has examined certain records
and documents relating to the Servicer's performance of its servicing
obligations and that, on the basis of such examination, conducted substantially
in compliance with the Uniform Single Attestation Program for Mortgage Bankers,
such firm is of the opinion that such servicing has been conducted
substantially in compliance in all material respects with the requirements of
the standard servicing procedures outlined in the Uniform Single Attestation
Program for Mortgage Bankers, except for such exceptions noted therein. In the
event such firm requires the Trustee or the Supervisory Servicer to agree to
the procedures performed by such firm, the Servicer shall direct the Trustee
and the Supervisory Servicer in writing to so agree; it being understood and
agreed that the Trustee and the Supervisory Servicer will deliver such letter
of agreement in conclusive reliance upon the direction of the Servicer, and
each of the Trustee and the Supervisory Servicer makes no independent inquiry
or investigation as to, and shall have no obligation or liability in respect
of, the sufficiency, validity or correctness of such procedures.
SECTION 5.5 SERVICER'S FINANCIAL STATEMENTS; ANNUAL CERTIFICATION.
Within 120 days after the end of each fiscal year beginning with the fiscal
year ending December 31, 1998, the Servicer shall submit to the Trustee, the
Noteholders and the Rating Agency a copy of its annual audited financial
statements or in the event the Servicer is not PMC, a copy of the annual
audited consolidated financial statement of its parent. Within 45 days after
the end of each of the first three
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 24 OF 33
<PAGE> 25
fiscal quarters of each fiscal year beginning with the quarter ending December
31, 1998, the Servicer shall submit to the Trustee, the Noteholders and the
Rating Agency a copy of its quarterly financial statements. Such financial
statements shall, to the extent required by the Securities Exchange Act of
1934, as amended, whether or not the Servicer is subject to such Act, include a
balance sheet, income statement, statement of retained earnings, beneficiaries'
(or shareholders') equity, statement of cash flows and all related notes and
schedules and shall be in comparative form.
Contemporaneously with the submission of the financial statements
required by the preceding paragraph, the Servicer shall deliver to the Trustee,
the Noteholders and the Rating Agency an Officer's Certificate in the form
attached hereto as Exhibit G to the effect that:
(a) such officer has confirmed that the Fidelity Bond, the
Errors and Omissions Insurance Policy and any other bonds or insurance
required by Section 2.4 hereof are in full force and effect; and
(b) the representations and warranties of the Servicer set
forth in Section 2.1 are true and correct in all material respects as
if made on the date of such certification.
The Servicer shall also furnish and certify such other information as
to its organization, activities and personnel as the Trustee, the Noteholders
the Rating Agency or the Supervisory Servicer may reasonably request from time
to time.
ARTICLE VI
DEFAULTS
SECTION 6.1 SERVICER DEFAULTS. The happening of any one or more of the
following events shall constitute a Servicer Default hereunder:
(a) Any failure by the Servicer to make any payment, deposit,
advance or transfer of funds required to be paid, deposited, advanced
or transferred under the terms of this Agreement, and such failure
continues unremedied for five Business Days after discovery by
Servicer of such failure or receipt by Servicer of notice of such
failure;
(b) Failure on the part of the Servicer duly to observe or
perform in any material respect any of the covenants or agreements
contained in this Agreement or the Supervisory Servicing Agreement
which continues unremedied for 30 days after the giving of written
notice of such failure or breach as the case may be, to the Servicer;
provided, however, if such failure shall be of a nature that it cannot
be cured within 30 days, such failure shall not constitute a Servicer
Default hereunder if within such 30-day period the Servicer gives
notice to the Trustee and the Supervisory Servicer of the corrective
action it proposes to take, which
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 25 OF 33
<PAGE> 26
corrective action is agreed in writing by the Trustee to be satisfactory and
the Servicer shall thereafter pursue such corrective action diligently until
such default is cured;
(c) A decree or order of a court or agency or supervisory
authority having jurisdiction in the premises for the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshaling of assets and liabilities or similar proceedings,
or for the winding-up or liquidation of its affairs, shall have been
entered against the Servicer, and such decree or order shall have
remained in force undischarged or unstayed for a period of 90 days;
(d) The Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshaling of assets and liabilities or similar proceedings
of or relating to the Servicer or of or relating to all or
substantially all of its property;
(e) The Servicer shall admit in writing its inability to pay
its debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization statute, make
an assignment for the benefit of its creditors or voluntarily suspend
payments of its obligations;
(f) The Servicer shall cease to be an Eligible Servicer;
(g) A material adverse change occurs in the financial
condition of the Servicer, which change materially impairs the ability
of the Servicer to perform its obligations under this Agreement; or
(h) Any representation or warranty made by the Servicer in
any Transaction Document proves to have been incorrect in any material
respect when made, which has a material adverse effect on the
Noteholders and which continues to have a material adverse effect or
be incorrect in any material respect for a period of 30 days after
written notice of such inaccuracy, requiring it to be remedied, has
been given to the Servicer by the Trustee, the Supervisory Servicer or
any Noteholder; provided, however, if such inaccuracy is of a nature
that it cannot be remedied within such 30-day period the Servicer
gives notices to the Trustee and the Supervisory Servicer of the
corrective action it proposes to take, which corrective action is
agreed in writing by the Trustee to be satisfactory and the Servicer
shall thereafter pursue such corrective action diligently until such
default is cured but in no event longer than 90 days from the date of
such notice.
SECTION 6.2 NOTICE OF SERVICER DEFAULT. In the case of a Servicer
Default referred to in Section 6.1 hereof or upon any termination of the
Servicer pursuant to Article VII hereof, the Trustee shall immediately notify
the Supervisory Servicer by telephone or telecopy (telephonic notice to be
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 26 OF 33
<PAGE> 27
followed by written notice within one Business Day) and shall promptly notify
the Rating Agency and the Holders in writing.
SECTION 6.3 REMEDIES. So long as any such Servicer Default shall not
have been remedied within any applicable cure period, the Trustee may, and at
the written direction of the Noteholders holding not less than 66 2/3% of the
Outstanding Note Amount shall, by notice in writing specifying the termination
date to the Servicer and the Supervisory Servicer (and to the Trustee if given
by the Holders), terminate all of the rights and obligations of the Servicer
under this Agreement and in and to the Loans and the proceeds thereof. On or
after the receipt by the Servicer of such written notice, all authority and
power shall pass to and be vested in the Supervisory Servicer pursuant to and
under this Section; and, without limitation, the Supervisory Servicer is hereby
authorized and empowered to execute and deliver, on behalf of the Servicer, as
attorney-in-fact or otherwise, any and all documents and other instruments, and
to do or accomplish all other acts or things necessary or appropriate to effect
the purposes of such notice of termination, whether to complete the purposes of
such notice of termination, whether to complete the transfer and assignment of
the Loans and related documents or otherwise. All reasonable costs and expenses
(including, without limitation, attorneys' fees) of the Trustee, the
Supervisory Servicer or the Servicer incurred in connection with such
termination and transfer will be at the expense of the Servicer. The Servicer
agrees to cooperate with the Supervisory Servicer and the Trustee in effecting
the termination of the Servicer's responsibilities and rights hereunder,
including, without limitation, the transfer to the Supervisory Servicer for
administration by it of any cash amounts held by the Servicer or thereafter
received relating to the Loans and all Servicer Files. In addition to any other
amounts which are then, or, notwithstanding the termination of its activities
as Servicer, may become payable to the Servicer under this Agreement, the
Servicer shall be entitled to receive out of any delinquent payment on account
of interest on a Loan due during a Collection Period prior to the notice of
termination received pursuant to this Section 6.3 and received after such
notice, that portion of such payment which it would have received pursuant to
Section 3.8 hereof if such notice had not been given.
SECTION 6.4 ADDITIONAL REMEDIES OF TRUSTEE UPON SERVICER DEFAULTS.
Upon any Servicer Default, the Trustee, in addition to the rights specified in
Section 6.3 hereof, shall have the right, in its own name and as Trustee, to
take all actions now or hereafter existing at law, in equity or by statute to
enforce its rights and remedies and to protect the interests, and enforce the
rights and remedies, of the Noteholders (including the institution and
prosecution of all judicial, administrative and other proceedings and the
filings of proofs of claim and debt in connection therewith). No remedy
provided for by this Agreement shall be exclusive of any other remedy, and each
and every remedy shall be cumulative and in addition to any other remedy and no
delay or omission to exercise any right or remedy shall impair any such right
or remedy or shall be deemed to be a waiver of any Servicer Default.
SECTION 6.5 SUPERVISORY SERVICER TO ACT; APPOINTMENT OF SUCCESSOR. On
the effective date of any resignation of the Servicer pursuant to Section 7.1
hereof or on the date the Servicer is removed as servicer pursuant to this
Article VI, the Supervisory Servicer (or any successor appointed
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 27 OF 33
<PAGE> 28
by the Supervisory Servicer pursuant to the Supervisory Servicing Agreement)
hereof shall be the successor in all respects to the Servicer in its capacity
as servicer under this Agreement and the transactions set forth or provided for
herein and shall be subject to all the responsibilities, duties and liabilities
relating thereto placed on the Servicer by the terms and provisions hereof in
accordance with and subject to the terms and conditions of the Supervisory
Servicing Agreement; provided, however, that the Supervisory Servicer or
successor Servicer shall not be liable for any acts or omissions of the
Servicer occurring prior to such succession or for any breach by the Servicer
of any of its representations or warranties contained herein or in any related
document or agreement. The Supervisory Servicer (or other successor) shall
assume all of the rights and obligations of the Servicer in accordance with the
terms and conditions of the Supervisory Servicing Agreement which shall control
over any provisions herein covering the same subject matter. The Servicer
shall, upon request of the Trustee or the Supervisory Servicer but at the
expense of the Servicer, deliver to the Supervisory Servicer (or other
successor), all Servicer Loan Files, documents and records (including computer
tapes and diskettes) relating to the Loans and an accounting of any amounts
collected and held by the Servicer and otherwise use its reasonable efforts to
effect the orderly and efficient transfer of servicing rights and obligations
to the assuming party.
The Servicer agrees to cooperate with the Trustee and the Supervisory
Servicer or any other successor servicer in effecting the termination of the
Servicer's servicing responsibilities and rights hereunder and shall promptly
provide the Supervisory Servicer or such successor servicer, as applicable, all
documents and records reasonably requested by it to enable it to assume the
Servicer's functions hereunder and shall promptly also transfer to the
Supervisory Servicer or such successor servicer, as applicable, all amounts
which then have been or should have been deposited in the Lockbox Account by
the Servicer or which are thereafter received with respect to the Loans.
Neither the Trustee, the Supervisory Servicer nor any other successor servicer
shall be held liable by reason of any failure to make, or any delay in making,
any distribution hereunder or any portion thereof caused by (i) the failure of
the Servicer to deliver, or any delay in delivering, cash, documents or records
to it, or (ii) restrictions imposed by any regulatory authority having
jurisdiction over the Servicer hereunder. The Supervisory Servicer shall
provide written notice of each appointment of a successor to the Servicer
hereunder, other than the Supervisory Servicer, to each Holder and the Rating
Agency, and the Trustee.
SECTION 6.6 WAIVER OF DEFAULTS. The Trustee (with the written consent
of Required Noteholders and with notice to the Rating Agency) may, on behalf of
all Noteholders, waive any events permitting removal of the Servicer as
servicer pursuant to this Article VI. Upon any waiver of a past default, such
default shall cease to exist, and any Servicer Default arising therefrom shall
be deemed to have been remedied for every purpose of this Agreement. No such
waiver shall extend to any subsequent or other default or impair any right
consequent thereto except to the extent expressly so waived.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 28 OF 33
<PAGE> 29
ARTICLE VII
TERMINATION
SECTION 7.1 SERVICER NOT TO RESIGN. The Servicer shall not assign this
Agreement or resign from the obligations and duties hereby imposed on it except
by mutual consent of the Servicer and the Trustee (with the Required
Noteholders' consent), or upon the determination that the Servicer's duties
hereunder are no longer permissible under applicable law and such incapacity
cannot be cured by the Servicer. Any such determination permitting the
resignation of the Servicer shall be evidenced by a Certificate of an
Authorized Officer of the Servicer to such effect delivered to the Trustee, the
Noteholders, the Supervisory Servicer and the Rating Agency. No such
resignation shall become effective until a successor has assumed the Servicer's
responsibilities and obligations hereunder in accordance with Section 6.5.
SECTION 7.2 TERM OF AGREEMENT. This Agreement shall continue in
existence and effect until the earlier of (a) the later of the final payment or
other liquidation of the last Loan or the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any Loan and the remittance
of all funds due thereunder, (b) the payment in full of the Notes in accordance
with the Indenture, in addition to all other amounts payable thereunder, and
the discharge of the Indenture in accordance with the terms thereof, or (c)
mutual consent of the Servicer, the Trustee, the Supervisory Servicer and all
Holders in writing.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1 AMENDMENT. This Agreement may be amended from time to time
by the Servicer, the Issuer and the Trustee (acting at the written direction of
the Required Noteholders) by written agreement, with 30 days prior written
notice to the Rating Agency and with prior written notice to and consent of the
Supervisory Servicer. Notwithstanding the foregoing, this Agreement may be
amended without the written direction of the Required Noteholders to modify any
provisions of this Agreement required by the Rating Agency to maintain the
rating of the Notes or to cure any ambiguity, defect, omission, conflict or
inconsistency in this Agreement or between the terms of this Agreement and any
other document executed or delivered in connection herewith. This Agreement may
also be amended without the written direction of the Required Noteholders, so
long as such amendment does not materially adversely affect the rights of the
Noteholders.
SECTION 8.2 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND THE OBLIGATIONS, RIGHTS AND
REMEDIES OF THE PARTIES HEREUNDER SHALL BE
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 29 OF 33
<PAGE> 30
DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF
CONFLICTS OF LAW.
SECTION 8.3 NOTICES. All demands, notices and communications hereunder
shall be in writing and shall be duly given if addressed to the appropriate
Notice Address and delivered by hand or sent by nationally recognized express
courier, or mailed by registered mail, postage prepaid, or transmitted by
telecopy, and shall be effective upon receipt, except when telecopied, in which
case, any such communication shall be effective upon telecopy against receipt
of answer back or written confirmation thereof.
SECTION 8.4 SEVERABILITY OF PROVISIONS. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity
or enforceability of the other covenants, agreements, provisions or terms of
this Agreement. The parties hereto further agree that the holding by any court
of competent jurisdiction that any remedy pursued by the Trustee hereunder is
unavailable or unenforceable shall not affect in any way the ability of the
Trustee to pursue any other remedy available to it.
SECTION 8.5 NO PARTNERSHIP. Nothing herein contained shall be deemed
or construed to create a partnership or joint venture between the parties
hereto, and the services of the Servicer shall be rendered as an independent
contractor and not as agent for the Trustee.
SECTION 8.6 COUNTERPARTS. This Agreement may be executed in one or
more counterparts and by the different parties hereto on separate counterparts,
each of which, when so executed, shall be deemed to be an original; such
counterparts, together, shall constitute one and the same agreement.
SECTION 8.7 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the Servicer, the Issuer, the Supervisory
Servicer and the Trustee and their respective successors and assigns.
SECTION 8.8 NOTIFICATION TO RATING AGENCY AND NOTEHOLDERS. The Trustee
shall give prompt notice to the Rating Agency and the Noteholders of the
occurrence of any of the following events of which it has received notice: (a)
any modification or amendment to this Agreement, the Indenture or any other
Transaction Documents, (b) any proposed removal, replacement, resignation or
change of the Trustee or the Servicer, (c) any Event of Default under the
Indenture or any Servicer Default and (d) the final payment in full of the
Notes. Whenever the terms of this Agreement require that notice or reports be
given to the Rating Agency or the Noteholders, the Person to provide such
notice or reports shall first give them to the Trustee who shall provide them
to the Rating Agency or the Noteholders, as applicable. Additionally, the
Trustee, upon receipt, shall provide copies to
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 30 OF 33
<PAGE> 31
the Rating Agency and the Noteholders of all compliance reports, Determination
Date Reports, financial statements, operating reports, environmental reports
and any and all other reports received by the Trustee from the Servicer, the
Issuer or the Supervisory Servicer from time to time to the extent such reports
have not been otherwise forwarded to the Rating Agency and the Noteholders
pursuant to the provisions of this Agreement or the other Transaction
Documents.
SECTION 8.9 INDULGENCES; NO WAIVERS. Neither the failure nor any delay
on the part of a party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted
such waiver.
SECTION 8.10 TITLES NOT TO AFFECT INTERPRETATION. The titles of
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used in
the construction or interpretation hereof.
SECTION 8.11 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding among the parties hereto with respect to the
subject matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or
written, of any nature whatsoever with respect to the subject matter hereof.
The express terms hereof control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms hereof.
SECTION 8.12 RECORDATION OF AGREEMENT. To the extent permitted by
applicable law, this Agreement is subject to recordation in all appropriate
public offices for real property records in all the counties or the comparable
jurisdictions in which any Mortgaged Property is situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected by the Servicer and at its expense upon the written request of the
Trustee.
SECTION 8.13 FURTHER ASSURANCES. Notwithstanding any other provision
of this Agreement, neither Trustee nor the Supervisory Servicer shall have any
obligation to consent to any amendment or modification of this Agreement unless
it has been provided reasonable security or indemnity against its out-of-pocket
expenses (including reasonable attorneys' fees) to be incurred in connection
therewith by the person requesting the amendment. To the extent permitted by
law, the Servicer agrees that it will, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such further
instruments as the Trustee may reasonably request to effectuate the intention
of or facilitate the performance of this Agreement.
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 31 OF 33
<PAGE> 32
[Remainder of page intentionally left blank]
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 32 OF 33
<PAGE> 33
IN WITNESS WHEREOF, the Issuer, the Servicer, the Supervisory Servicer
and the Trustee have caused their names to be signed hereto by their respective
officers thereunto duly authorized as of the day and year first above written.
PMC CAPITAL, INC., as Servicer
By:
-----------------------------------------
Jan F. Salit
Executive Vice President
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By:
-----------------------------------------
Robert D. Foltz
Vice President
HARRIS TRUST AND SAVINGS BANK,
as Supervisory Servicer
By:
-----------------------------------------
Robert D. Foltz
Vice President
PMC CAPITAL, L.P. 1998-1
as Issuer
By: PMC Capital Corp. 1998-1
Its General Partner
By:
-------------------------------------
Jan F. Salit
Executive Vice President
EXHIBIT 10.12 SERVICING AGREEMENT - PAGE 33 OF 33
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State
of
Company Incorporation
------- -------------
<S> <C>
PMC Investment Corporation Florida
Western Financial Capital Corporation Florida
First Western SBLC, Inc. Florida
PMC Funding Corp. Florida
PMC Advisers, Ltd. Texas
PMC Capital Corp. 1996-A Texas
PMC Asset Management, Inc. Texas
PMC Trust 1996-A Delaware
PMC Capital Limited Partnership Delaware
Asset Investments Series A, L.L.C. Delaware
First Western Series 1994-1 L.L.C. Delaware
FW 97 L.L.C. Delaware
PMC Capital, L.P. 1998-1 Delaware
PMC Capital Corp. 1998-1 Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE DECEMBER
31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 235
<SECURITIES> 20,657
<RECEIVABLES> 118,042<F1>
<ALLOWANCES> (594)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 549
<DEPRECIATION> (321)
<TOTAL-ASSETS> 163,349<F2>
<CURRENT-LIABILITIES> 7,610<F3>
<BONDS> 74,790
4,000<F4>
3,000<F4>
<COMMON> 72,925
<OTHER-SE> (774)
<TOTAL-LIABILITY-AND-EQUITY> 163,349<F5>
<SALES> 0
<TOTAL-REVENUES> 24,314<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,624
<LOSS-PROVISION> (726)<F7>
<INTEREST-EXPENSE> 5,467
<INCOME-PRETAX> 13,949
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,949
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
<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 listed above.
(i) Interest - only strip receivable, less $180,000 reserve $ 4,168
(ii) Restricted investments 2,525
(iii) Real property owned 109
(iv) Due from unconsolidated subsidiaries 2,579
(v) Deferred charges, deposits and
other assets, net 1,140
(vi) Investment in unconsolidated subsidiaries 12,930
(vii) Servicing asset 1,330
--------
$ 24,781
========
<F3>Include the following:
(i) Accrued interest payable $ 1,264
(ii) Borrower advances 1,598
(iii) Dividends payable 3,020
(iv) Accounts payable 1,728
---------
$ 7,610
=========
<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, 1998.
<F5>Includes the following items not included above:
(i) Deferred fee revenue $ 666
(ii) Other liabilities 1,131
(iii) Due to unconsolidated subsidiaries 1
--------
$ 1,798
========
<F6>Revenues consist primarily of interest, other yield on investments, premium
income and equity in income of unconsolidated subsidiaries.
<F7>Includes gain on sale of loans of $925,000
</FN>
</TABLE>
