<PAGE> 1
As filed with the Securities and Exchange Commission on September 27, 1999
Registration No. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. ____ [ ]
(Check appropriate box or boxes)
--------------
PMC CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
18111 PRESTON ROAD
SUITE 600
DALLAS, TEXAS 75252
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 349-3200
--------------
LANCE B. ROSEMORE
18111 PRESTON ROAD
SUITE 600
DALLAS, TEXAS 75252
(NAME AND ADDRESS OF AGENT FOR SERVICE)
With a Copy to:
KENNETH L. BETTS, ESQ.
LOCKE LIDDELL & SAPP LLP
2200 ROSS AVENUE, SUITE 2200
DALLAS, TEXAS 75201
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
--------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
<PAGE> 2
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933.
<TABLE>
<CAPTION>
=================================================================================================================
PROPOSED PROPOSED
TITLE OF AMOUNT MAXIMUM MAXIMUM AGGREGATE AMOUNT OF
SECURITIES BEING BEING OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED (1) PER UNIT (1) PRICE (1) FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
($.01 par value)..... 500,000 shares $8.4375 $4,218,750 $1,173
=================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(f) of the Securities Act based on the average
of the reported high and low sales prices per share of Common Stock on the
American Stock Exchange on September 23, 1999.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 3
PMC CAPITAL, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBERS, FORM N-2 CAPTION IN PROSPECTUS
- ---------------------- ---------------------
<S> <C>
1.,14. Outside Front Cover Page Cover Page
2. Inside Front and Outside Back Cover Page Cover Page
3. Fee Table and Synopsis Fund Expenses; Synopsis
4. Financial Highlights Not Applicable
5. Plan of Distribution Description of the Plan
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8.,16. General Description of the Registrant; Cover Page; Synopsis; Certain
General Information and History Considerations; Market Price of Common
Stock; Business; Investment Objectives
and Policies
9.,18. Management Management
10. Capital Stock, Long-Term Debt, and Other Description of Capital Stock and
Securities Long-Term Debt; Senior Securities;
Financial Statements
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13.,15. Table of Contents Table of Contents
17. Investment Objectives and Policies Investment Objectives and Policies
19. Control Persons and Principal Holders of Holdings of Principal Shareholders; Management
Securities
20. Investment Advisory and Other Services Not Applicable
21. Brokerage Allocation and Other Practices Brokerage Allocation and Other Practices
22. Tax Status Tax Status
23. Financial Statements Financial Statements
</TABLE>
i
<PAGE> 4
PART I SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1999
PROSPECTUS
PMC CAPITAL, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
500,000 SHARES OF COMMON STOCK
Our plan provides participants with a simple and convenient method of
acquiring additional shares of common stock. Purchases under the plan will be
made without payment of any brokerage commissions.
Investment options offered under the plan are:
FULL DIVIDEND REINVESTMENT - You may reinvest dividends on all shares
of your common stock.
PARTIAL DIVIDEND REINVESTMENT - You may reinvest dividends on a portion
of your common stock.
OPTIONAL PAYMENT ONLY - In addition to reinvesting dividends, if you
are an existing shareholder you may invest by making optional payments at any
time of not less than $50 per payment or more than $5,000 in the aggregate per
calendar month to purchase shares of common stock.
The price of shares purchased by participants either with reinvested
dividends or optional payments will be (1) the average of the mean of the high
and low prices of the common stock, as published in The Wall Street Journal -
American Stock Exchange listings, for the five days in which trading of such
shares takes place immediately prior to the applicable investment date, if the
shares are purchased from us or (2) the calculated weighted average price of the
shares, if the shares are acquired in the open market.
This prospectus relates to 500,000 shares of our common stock
registered for purchase by the plan administrator under the plan. The plan
administrator will buy the common stock either directly from us or in the open
market, including both market transactions and negotiated transactions, as we
direct. No commissions or underwriters fees or discounts are to be paid in
connection with this offering. This prospectus sets forth the information an
investor should know about us before investing. Please read this prospectus
carefully and retain it for future reference.
--------------------
THE COMMON STOCK BEING OFFERED HEREBY IS SUBJECT TO CERTAIN RISKS WHICH SHOULD
BE CAREFULLY CONSIDERED BY POTENTIAL INVESTORS. (SEE "CERTAIN CONSIDERATIONS.")
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SHARES OF COMMON STOCK OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY
PERSON TO TELL YOU OTHERWISE.
--------------------
The date of this Prospectus is September ___, 1999.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WHERE YOU CAN FIND ADDITIONAL INFORMATION........................................................................2
SYNOPSIS.........................................................................................................3
FUND EXPENSES....................................................................................................4
SENIOR SECURITIES................................................................................................6
DESCRIPTION OF THE PLAN.........................................................................................24
PURPOSE.........................................................................................................24
ADVANTAGES......................................................................................................24
ADMINISTRATION..................................................................................................24
PARTICIPATION...................................................................................................25
PARTICIPATION BY SHAREHOLDERS...................................................................................26
PURCHASES.......................................................................................................27
REPORTS TO PARTICIPANTS.........................................................................................28
DIVIDENDS.......................................................................................................28
CERTIFICATES....................................................................................................28
CHANGING INVESTMENT OPTIONS.....................................................................................29
WITHDRAWING FROM THE PLAN.......................................................................................29
OTHER INFORMATION...............................................................................................30
USE OF PROCEEDS.................................................................................................32
CERTAIN CONSIDERATIONS..........................................................................................33
MARKET PRICE OF COMMON STOCK....................................................................................38
TAX CONSIDERATIONS..............................................................................................50
MANAGEMENT......................................................................................................51
REMUNERATION OF OFFICERS AND DIRECTORS..........................................................................54
DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT.................................................................59
BROKERAGE ALLOCATION AND OTHER PRACTICES........................................................................63
LEGAL MATTERS...................................................................................................64
EXPERTS.........................................................................................................64
PMC CAPITAL, INC AND SUBSIDIARIES...............................................................................65
CONSOLIDATED FINANCIAL STATEMENTS AND...........................................................................65
PART C.........................................................................................................C-1
</TABLE>
i
<PAGE> 6
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OTHER INFORMATION..............................................................................................C-1
SIGNATURES......................................................................................................10
EXHIBIT INDEX..................................................................................................E-1
</TABLE>
ii
<PAGE> 7
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940, and in accordance
therewith file reports and other information with the SEC. Reports, proxy
statements and other information filed by us with the SEC can be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at
13th Floor, 7 World Trade Center, New York, New York 10048; and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, reports and
other information concerning the Company may be examined without charge, or
copies obtained upon payment of prescribed fees, at the American Stock Exchange,
Inc., 86 Trinity Place, New York, New York 10006. Copies of the Registration
Statement and the exhibits thereto may also be obtained at the SEC's Internet
address at http://www.sec.gov.
We have filed with the SEC a Registration Statement on Form N-2 under
the Securities Act of 1933 with respect to our common stock to be issued
pursuant to the dividend reinvestment and share purchase plan. This prospectus
is a supplement to the Registration Statement and as a result does not contain
all of the information set forth in that Registration Statement. The rules and
regulations of the SEC identify the information to be included in this
prospectus and we have included all of the required information. For further
information about us we refer you to that Registration Statement. There are
statements contained in this prospectus concerning information in documents that
are filed as exhibits to that Registration Statement or that were otherwise
previously filed with the SEC. In each of those cases, we refer you to the copy
of the filed document to obtain that information. Each of those statements is
qualified in its entirety by this reference.
The financial information included in this prospectus, except as
otherwise indicated, is as of December 31, 1998, which is the end of our most
recent fiscal year. For financial information relating to the first two quarters
of our operations during fiscal year 1999, please see the financial information
included in this prospectus under the heading "PMC Capital, Inc. and
Subsidiaries Consolidated Financial Statements."
2
<PAGE> 8
SYNOPSIS
This prospectus relates to 500,000 shares of our common stock being
offered for sale through our Dividend Reinvestment and Cash Purchase Plan. The
minimum cash payment for the purchase of shares through the plan shall be
$50.00. The common stock is traded on the American Stock Exchange. On September
23, 1999, the closing price of the common stock on the American Stock Exchange
was $8.50.
PMC Capital, along with its wholly-owned regulated investment company
act subsidiaries, is a diversified, closed-end management investment company. We
have elected to be regulated as a business development company under the
Investment Company Act of 1940. We engage in the business of originating loans
to small businesses either directly or through our three principal subsidiaries:
First Western SBLC, Inc., PMC Investment Corporation and Western Financial
Capital Corporation. First Western, PMC Investment and Western Financial are
registered under the Investment Company Act as diversified closed-end management
investment companies. In addition, PMC Capital is either directly or indirectly
the sole shareholder or partner of PMC Advisers, Ltd., PMC Funding Corp., PMC
Capital Limited Partnership (1996 partnership) and its related general partner
and trust and PMC Capital, L.P. 1998-1 and its related general partner. PMC
Advisers is an investment advisor who evaluates and services loans pursuant to
fee arrangements. We have elected to be taxed as a regulated investment company
under the Internal Revenue Code and, as a result, distribute substantially all
our taxable income as dividends to our shareholders, thereby incurring no
Federal income tax liability on that income.
We primarily originate loans to individuals and small business concerns
in the lodging industry. We also target the medical, food service, service,
retail and commercial real estate industries. We primarily lend to businesses in
the Southwest and Southeast regions of the United States. A majority of our
loans in the lodging industry are to owner-operated facilities generally
operating under national franchises. We believe that franchise operations offer
attractive lending opportunities because those 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.
3
<PAGE> 9
FUND EXPENSES(1)
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load (as a percentage of offering price).................................. None
Dividend Reinvestment and Cash Purchase Plan Fees(2)............................ None
ANNUAL EXPENSES
(as a percentage of net assets attributable to common shares)(3)
Management Fee(4)............................................................... 4.1%
Interest Payments on Borrowed Funds(5).......................................... 7.3%
All Other Expenses(6)........................................................... 3.4%
Total Annual Expenses(7)........................................................ 14.8%
</TABLE>
EXAMPLE
You would pay the following expenses over the indicated period
on a hypothetical $1,000 investment, assuming a 5% annual
return on total assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 155 $ 447 $ 700 $1,189
</TABLE>
- ---------------------
(1) The purpose of the above table, including the example, is to assist you in
understanding various costs and expenses that investors in us may bear
directly or indirectly. See "Selected Consolidated Financial Data" and
"Management." The table and the example are based on our fiscal year ended
December 31, 1998. THE HYPOTHETICAL EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN IN THE TABLE AND THE EXAMPLE.
(2) All costs of the plan are borne by us and are included in the fees paid to
the transfer agent for the monthly services provided thereby. Such expenses
are reflected in "All Other Expenses" above.
(3) Net assets attributable to common shares equals net assets (i.e., total
assets less total liabilities and redeemable preferred stock outstanding)
as of December 31, 1998.
(4) We are internally managed and do not have an investment advisor.
Accordingly, we directly incur all costs with respect to the selection,
research and supervision of all investments. For purposes of this Fund
Expenses table, we have done an internal valuation of our expenses
allocable to the research, selection and supervision of our investments.
Our good faith estimate of those costs is approximately $3.1 million,
representing 4.1% of net assets attributable to common shares.
(5) We had outstanding borrowings of $74.8 million at December 31, 1998.
(6) Included in "All Other Expenses" are the costs associated with the advisory
services provided to PMC Commercial Trust.
(7) Total Annual Expenses as a percentage of consolidated net assets
attributable to common shares are higher than most closed-end management
investment companies due to our consolidated outstanding borrowings of
$74.8 million and consolidated preferred stock of $7.0 million at December
31, 1998, which significantly reduce the consolidated net assets
attributable to common shares on which the Annual Expenses percentage is
calculated. If the total annual expenses were calculated as a percentage of
total assets, that percentage would be 6.8%.
4
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of our selected consolidated financial data
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 and the notes thereto and "Management's Discussion and Analysis of
the Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The selected consolidated financial data presented below has been
derived from our consolidated financial statements, audited by
PricewaterhouseCoopers LLP, independent public accountants.
<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>
5
<PAGE> 11
SENIOR SECURITIES
(At End of Fiscal Year, Consolidated)
<TABLE>
<CAPTION>
Total
Amount
Outstanding Involuntary
Exclusive of Asset Coverage Liquidating Average Market
Treasury Per Preference Per Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
-------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SENIOR NOTES
December 31, 1989..................... -- -- -- N/A
December 31, 1990..................... -- -- -- N/A
December 31, 1991..................... -- -- -- N/A
December 31, 1992..................... -- -- -- N/A
December 31, 1993..................... 25,000,000 2,292 -- N/A
December 31, 1994..................... 25,000,000 2,216 -- N/A
December 31, 1995..................... 35,000,000 1,841 -- N/A
December 31, 1996 .................... 35,000,000 1,878 -- N/A
December 31, 1997 .................... 35,000,000 2,012 -- N/A
December 31, 1998 .................... 35,000,000 2,058 -- N/A
BANK LOAN
(revolving line of credit)
December 31, 1989..................... 3,000,000 1,711 -- N/A
December 31, 1990..................... 2,891,500 1,759 -- N/A
December 31, 1991..................... 4,251,000 1,987 -- N/A
December 31, 1992..................... 1,000 3,596 -- N/A
December 31, 1993..................... 1,000 2,292 -- N/A
December 31, 1994..................... 1,000 2,216 -- N/A
December 31, 1995..................... 1,000 1,841 -- N/A
December 31, 1996 .................... -- -- -- N/A
December 31, 1997..................... -- -- -- N/A
December 31, 1998 .................... -- -- -- N/A
</TABLE>
6
<PAGE> 12
<TABLE>
<CAPTION>
Total
Amount
Outstanding Involuntary
Exclusive of Asset Coverage Liquidating Average Market
Treasury Per Preference Per Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
-------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SBA DEBENTURES(5)
December 31, 1989 .................... 16,640,000 1,711 -- N/A
December 31, 1990 .................... 23,140,000 1,759 -- N/A
December 31, 1991 .................... 23,140,000 1,987 -- N/A
December 31, 1992 .................... 22,280,000 3,596 -- N/A
December 31, 1993 .................... 20,280,000 2,292 -- N/A
December 31, 1994 .................... 26,280,000 2,216 -- N/A
December 31, 1995 .................... 43,540,000 1,841 -- N/A
December 31, 1996 .................... 44,570,000 1,878 -- N/A
December 31, 1997 .................... 41,290,000 2,012 -- N/A
December 31, 1998 .................... 39,790,000 2,058 -- N/A
NON-REDEEMABLE CUMULATIVE PREFERRED
STOCK(5)
December 31, 1989 .................... 3,000,000 148 100 N/A
December 31, 1990 .................... 3,000,000 158 100 N/A
December 31, 1991 .................... 3,000,000 179 100 N/A
December 31, 1992 .................... 3,000,000 317 100 N/A
December 31, 1993 .................... 3,000,000 215 100 N/A
December 31, 1994 .................... 3,000,000 202 100 N/A
December 31, 1995 .................... 3,000,000 169 100 N/A
December 31, 1996 .................... 3,000,000 173 100 N/A
December 31, 1997 .................... 3,000,000 184 100 N/A
December 31, 1998 .................... 3,000,000 188 100 N/A
</TABLE>
7
<PAGE> 13
<TABLE>
<CAPTION>
Total
Amount
Outstanding Involuntary
Exclusive of Asset Coverage Liquidating Average Market
Treasury Per Preference Per Value
Class and Year Securities (1) Unit (2) Unit (3) Per Unit (4)
-------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REDEEMABLE
CUMULATIVE PREFERRED
STOCK(5)
December 31, 1989..................... -- -- -- N/A
December 31, 1990..................... -- -- -- N/A
December 31, 1991..................... -- -- -- N/A
December 31, 1992..................... -- -- -- N/A
December 31, 1993..................... -- -- -- N/A
December 31, 1994..................... 2,000,000 202 100 N/A
December 31, 1995..................... 4,000,000 169 100 N/A
December 31, 1996 .................... 4,000,000 173 100 N/A
December 31, 1997..................... 4,000,000 184 100 N/A
December 31, 1998..................... 4,000,000 188 100 N/A
</TABLE>
- ------------------
(1) Total amount of each class of senior securities outstanding at the end
of the year presented.
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as our consolidated total assets less all
liabilities and indebtedness not represented by senior securities,
divided by senior securities representing indebtedness. This asset
coverage ratio is multiplied by $1,000 to determine the Asset Coverage
Per Unit. The asset coverage ratio for a class of senior securities
that is preferred stock is calculated as our consolidated total assets
less all liabilities and indebtedness not represented by senior
securities, divided by senior securities representing indebtedness,
plus the involuntary liquidation preference of the preferred stock (see
footnote 3). The Asset Coverage Per Unit is expressed in terms of
dollar amounts per share.
(3) The amount to which such class of senior security would be entitled
upon the voluntary liquidation of the issuer in preference to any
security junior to it.
(4) Not applicable, as senior securities are not registered for public
trading.
(5) Issued by our small business investment company subsidiaries to the
SBA. Since these categories of senior securities are not subject to the
asset coverage requirements of the Investment Company Act, the
disclosure provided in this column is for your information only.
8
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
Our operations include originating and servicing commercial loans for
our own account. In addition, we operate as an investment manager to evaluate
properties and loans and to service loans and lease contracts pursuant to a fee
arrangement for PMC Commercial Trust, an affiliate of ours. We sell the
government guaranteed portion of our loans originated under the SBA 7(a)
program. Further, we have completed several structured sales of our loan
portfolio. Historically, we have retained servicing and residual interests in
all loans sold.
Our 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 Trust.
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:
<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>
PMC Investment ............... $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 Capital .................. 29.7 49% 19.9 40% 14.2 84%
----- ----- -----
Total ........................ $66.4 -23% $86.4 23% $70.2 -9%
===== ===== =====
</TABLE>
9
<PAGE> 15
During the years ended December 31, 1998 and 1997, we 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 Investment, Western Financial and PMC Capital
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,
acts as the investment manager for PMC Commercial Trust pursuant to the terms of
investment management agreements. During the years ended December 31, 1998 and
1997, PMC Advisers and its wholly-owned subsidiary earned management fees from
PMC Commercial Trust 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 Trust. PMC Adviser's fee is primarily based on the amount and value
of assets. As a result, any increases in the dollar amount of PMC Commercial
Trust's assets will benefit PMC Advisers, and PMC Advisers will have a potential
conflict in determining whether to advise PMC Commercial Trust to acquire assets
and write down the value of any assets. In order to mitigate the risk to PMC
Commercial Trust from increasing its asset base through leveraged transactions,
the investment management agreements provide PMC Advisers with a reduced fee for
any loans originated through additional borrowings. Additionally, the potential
conflict for the management of PMC Advisers between PMC Commercial Trust and us
is mitigated through a loan origination agreement which allocates loan
origination opportunities between PMC Commercial Trust and us.
Pursuant to the investment management agreements between PMC Commercial
Trust and PMC Advisers, fees of between 0.875% and 1.67%, annually, are charged
by us based upon the average principal outstanding of PMC Commercial Trust'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 Trust'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 Trust. This property
management agreement provided for a one time fee of 0.75% of the purchase price
paid by PMC Commercial Trust to Amerihost Properties, Inc. and its subsidiaries
in connection with the purchase of hotels from Amerihost and an annual
management fee equal to the product of 0.70% multiplied by that purchase price.
In the event the property management agreement with PMC Advisers is terminated
or not renewed by PMC Commercial Trust (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 Trust), PMC Advisers would be entitled to receive the management
fee relating to the Amerihost transaction for a period of five years from the
termination date.
We also earn income through our equity ownership in our unconsolidated
subsidiaries, primarily the partnership we organized in 1996. The differential
between the interest received by the 1996 partnership on the loans transferred
to it by us and the interest paid by the 1996 partnership on the notes it
issued, less any loan losses and amortization of transaction fees, contributes
to our revenues.
10
<PAGE> 16
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, SBA 7(a) program funding
has decreased and the premiums earned on the sales of the government guaranteed
portions of these loans 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 these factors and an increase in the
number of borrowers requesting fixed-rate financing, we believe 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. We have attempted to offset First Western's decreased
revenues through emphasizing our other lending activities and offering lower
fixed interest rates.
As a result of the general downward trend in interest rates, we have
experienced an increased rate in the prepayment of our loans. During the years
ended December 31, 1998 and 1997, we 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 our 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, we received the immediate
benefit of the prepayment charge. Prepayment fees result in one-time increases
in our 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. Prepayments have an adverse effect on our future
results of operations and, depending upon the rate of future prepayments, may
have an impact on our ability to maintain shareholder 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 our borrowings on subsequent
leverage. First Western's loans, which are all variable-rate, have no prepayment
fees in accordance with SBA policy. Loans originated pursuant to our prime
lending program (described below) generally have prepayment fees equal to 95
days' interest. We believe 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 "Certain Considerations -- Interest Rate and Prepayment Risk."
Substantially all of the First Western loans and all loans originated
pursuant to our prime lending program are variable rate which reset quarterly
based on a spread above the prime rate of interest as stated in The Wall Street
Journal on the first day of the applicable period. 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 our prime lending program is approximately 1.3%.
11
<PAGE> 17
The prime rates used 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 we began marketing the prime lending
program which is a variable interest rate lending program based on the prime
rate. Our prime lending program is separate from the SBA 7(a) program of First
Western, our other variable rate lending program. Our 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 our 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.
Our working capital requirements for loan originations, as well as
holding borrowers advances and cash reserves for our completed securitizations
or structured financings, require us to maintain temporary short-term
investments. In order to minimize our short-term investment positions, we may
establish a bank warehouse facility and expect to more fully use our revolving
credit facility to fund these working capital requirements.
We receive 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, the
volume of loans which prepay, the mix of loans (construction versus
non-construction), the rate and type of loans originated (whether fixed or
variable) and 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. Our operations are centralized in our Dallas, Texas
headquarters. We also have 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. We
anticipate that general and administrative expenses will remain at present
levels during the year ending December 31, 1999.
Profit sharing plan, rent, legal and accounting, SBA fees and directors
and shareholders expense aggregated $838,000 and $822,000 during the years ended
December 31, 1998 and 1997, respectively. These other administrative costs were
3% of total income during both the years ended December 31, 1998 and 1997. We
anticipate that other administrative costs will remain at present levels during
the year ending December 31, 1999.
12
<PAGE> 18
CERTAIN ACCOUNTING CONSIDERATIONS
Effective January 1, 1997, we adopted as required, 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.
A transfer of assets that qualifies for sale treatment under SFAS No.
125 is generally accounted for by the seller by: (1) derecognizing all assets
sold, (2) recognizing all assets obtained and liabilities incurred at their
relative fair value, and (3) recognizing all assets retained at their allocated
previous carrying amount based on relative fair values. We typically receive
cash and retain 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 (1) the carrying value of the portion of loans sold and (2)
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, we establish a servicing asset to the
extent we receive 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, we have 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 us 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" which
during the initial reporting period after completion of the securitization is
the market rate used in valuing the interest-only strip receivable. We update
the anticipated future cash flows on a quarterly basis and determine a revised
internal rate of return 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 we determine that the internal rate of return 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, we measure 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
13
<PAGE> 19
strip receivable is reflected on our consolidated statements of income as an
unrealized gain (loss) on investments. During the years ended December 31, 1998
and 1997, we 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, we recorded an unrealized loss 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 our 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 "Business-- 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:
o a reduction in interest income earned related to 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;
o reduced premium income;
o increased investment management fees;
o the gain resulting from the 1998 structured sale of a portfolio of our
loans; and
o 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 investments, up-front fees collected including the
accretion of up-front fees and the interest earned on our interest-only strip
receivables. This overall increase in interest income was attributable to an
increase in our average outstanding portfolio during 1998 as compared to 1997.
This increase was offset by a decrease in interest on temporary investments and
the continued decline in interest rates on new loan originations.
14
<PAGE> 20
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%
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 by major
investment banks has grown, the rate we were able to charge 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
the factors previously described, the number and dollar volume of loans
originated by First Western under the SBA 7(a) program have decreased. Other
loan products offered by our competitors 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. We anticipate 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 our profits in future
15
<PAGE> 21
periods of operations. The 1996 partnership profits include all yield generated
from the loans transferred by us less the cost of the 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
Trust (approximately $167,000) and fees related to the acquisition by PMC
Commercial Trust 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 amount of salaries and related
benefits capitalized during the year ended December 31, 1998 as compared to the
amount capitalized in 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 directors' and
shareholders' expense. The largest operating expense is the salaries and related
benefits which consist of salaries for our officers and employees who provide
all of our 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. We anticipate that operating expenses will remain 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 (1) 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 (2) $39,790,000 of debentures due to
the SBA as a result of borrowings made by some of our 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.
16
<PAGE> 22
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 us. We
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; (1) 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 loans
sold in 1998 were sold at par and the underlying loans receivable were
previously reflected at par, and (2) 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, we 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 our 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, we earned increased interest on short-term
investments due to the funds received from the 1996 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
17
<PAGE> 23
$291,000, or 27%, from $1,067,000 during the year ended December 31, 1996 to
$1,358,000 during the year ended December 31, 1997.
Premium income: 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 the prime rate 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 us less the cost of
the notes issued by the 1996 partnership. Offsetting a portion of the 1996
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 Trust 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 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 our space occupied and an increase in the base
rent at
18
<PAGE> 24
our 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 1996 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, we 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, we recognized approximately $100,000 in
reversal of reserves on loans that paid in full or became 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.
CASH FLOW ANALYSIS
We 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 our funds is net income. The source of funds from net income is
adjusted primarily by the change in other assets and liabilities and First
Western's lending activities. Included in cash flows from operating activities
is the government guaranteed lending activity of First Western relating to the
government guaranteed portions of the SBA 7(a) program loans originated which
are sold into the secondary market. During the years ended December 31, 1998 and
1997, we 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, we
used net cash of $1,376,000 and $2,070,000, respectively, from the change in
operating assets and liabilities.
We 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, we received approximately $23.0 million
from the First Western securitization completed in December 1997. We decreased
our 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.
19
<PAGE> 25
We 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 our 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%). We
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 our dividend reinvestment plan during
March 1998 and the use of the market purchase option for plan participants.
Under the market purchase option, we do 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, we are required to pay out substantially all of
our net investment company taxable income to our common shareholders (see
"Dividends"). Consequently, we must procure funds from sources other than
earnings in order to meet our capital requirements.
The primary use of our funds is to originate loans. We also expend
funds for payment of:
o dividends to shareholders.
o principal due on borrowings;
o interest and related financing costs;
o general and administrative expenses;
o capital expenditures; and
o advances on loan liquidations.
Approximately $4.8 million of our SBA debentures were paid in full during 1997
and 1998 as these debentures matured.
Historically, our 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 our loan portfolio (see "Business -- Leverage") and
the utilization of our short-term, unsecured revolving credit facility (as
described below). During 1998, we structured a collateralized financing of our
variable-rate loans primarily originated as part of our prime lending program
(see "Business--Leverage"). Prospectively, in order to generate growth in the
size of our investment portfolio, we will continually review the need for
obtaining additional funds from:
o securitization and sale of a portion of our loan portfolio;
o borrowings under our credit facility;
o medium-term debt offerings; and/or
o equity offerings.
20
<PAGE> 26
As a result of the current volatile market conditions for asset-backed
securities such as those securities sold by us, we have identified alternative
sources of funds. We anticipate that during the year ended December 31, 1999 we
will primarily rely on our 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. We 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, we have
identified approximately $60 million of fixed-rate loans for securitization.
During the year ended December 31, 1999, we will have $6.7 million in senior
unsecured notes and $4.2 million in SBA debentures which will mature. We expect
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 PMC Investment to provide guaranties
on $11.5 million in future debentures, $4.2 million will be used for the
"roll-over" debentures. We believe that these financing sources will enable us
to generate funds sufficient to meet both our 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 our
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: We have a $15 million uncollateralized
revolving credit facility which expires in March 2000. At December 31, 1998, we
had no borrowings outstanding under this revolving credit facility, and had
availability of $15 million. Advances pursuant to the credit facility bear
interest at our option at either the lender's prime rate less 50 basis points or
LIBOR plus 175 basis points. The credit facility requires us 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 may not fall below 135%. At December 31, 1998 we were 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, we had been using other sources of funds to
expand our 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, we had been able to issue
debt through private placement of notes and generate working capital through the
securitization and sale of a portion of our portfolio at rates generally better
than available through the issuance of SBA debentures under the relative terms
in existence during the first half of 1998. As the cost of funds through the
issuance of asset-backed securities increased during the latter half of 1998, we
determined that the cost of debentures through the SBIC program was again cost
efficient. As a result, we applied for and were 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.
21
<PAGE> 27
INVESTMENT COMPANY ACT REQUIREMENTS: We are in compliance with the
requirement to maintain a minimum of 200% asset coverage of debt as defined in
sections 18 and 61 of the Investment Company Act as modified by exemptive orders
obtained by us from the Securities and Exchange Commission.
DIVIDENDS: We have historically paid out 100% of our 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 sale
of our loans to the 1998 partnership. A portion of dividends paid during 1998
pertained to earnings in 1997 including the effect of the gain from a
securitization and sale of loans originated by First Western completed in
December 1997. As a result of these timing differences and these carry-forward
amounts, the payment and amount of dividends does not necessarily coincide with
our earnings. We used a substantial portion of our carry-forward amounts during
1998 to pay dividends. We presently anticipate that the dividend will be
stabilized at $0.25 per share, per quarter during 1999. The dividends paid in
January 1999 and April 1999 were each $0.25 per share. We 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. We are, similar to most financial services providers, subject to the
potential impact of the Year 2000 issue due to the nature of financial
information. Potential impacts to us may arise from software, computer hardware,
and other equipment both within our direct control and outside of our ownership,
yet with which we electronically or operationally interface. Regulators have
intensively focused upon Year 2000 exposures, issuing guidance concerning the
responsibilities of senior management and directors. Year 2000 testing and
certification are being addressed as a key safety and soundness issue in
conjunction with these regulatory concerns.
During 1998, we formed an internal review team to address, identify and
resolve any Year 2000 issues that encompass any of our operating and
administrative areas. In addition, we monitor the status of our Year 2000
remediation plans, where necessary, as they relate to internally used software,
computer hardware and use of computer applications in our servicing processes.
In addition, we are engaged in assessing the Year 2000 issue with significant
suppliers.
The assessment process relating to our loan receivable servicing
operations has commenced. In addition, we have initiated formal communications
with our significant suppliers to determine the extent to which we are
vulnerable to third parties' failures to remediate their own Year 2000 issues.
We intend to use internal resources to test the software for Year 2000
modifications. We plan to substantially complete our 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
22
<PAGE> 28
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, we have installed new personal computer terminals at a cost
of approximately $25,000 which was not related to any specific Year 2000
concern. In addition, we have not incurred any material costs related to the
assessment of, and preliminary efforts in connection with our Year 2000 issues.
The costs of the project and the date on which we plan to complete our Year 2000
assessment and remediation are based on our estimates, which were derived using
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, we cannot
guarantee that these estimates will be achieved, and actual results could differ
significantly from those plans. Specific factors that might cause differences
from our estimates include, but are not limited to, completion by third parties
(primarily our bank) of their Year 2000 evaluations and their required
modifications. We believe we are devoting the necessary resources to identify
and resolve significant Year 2000 issues in a timely manner.
IMPACT OF INFLATION
We do not believe that inflation materially affects our 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 our investments.
23
<PAGE> 29
DESCRIPTION OF THE PLAN
The following questions and answers set forth the provisions of and
constitute our Dividend Reinvestment and Cash Purchase Plan. Holders of common
stock who do not participate in the plan will continue to receive cash dividends
in the usual manner. The text of the plan is as follows:
PURPOSE
1. What is the purpose of the Plan?
The plan offers eligible holders of common stock a convenient and
economical way to purchase common stock. Once an eligible shareholder is
enrolled in the plan and becomes a participant, cash dividends will be used to
purchase shares of common stock (both whole and fractional shares). Participants
pay no brokerage commissions for purchases made under the plan. The plan will
assist us in raising funds for general corporate purposes, to the extent that
common stock is purchased from us rather than in the open market.
ADVANTAGES
2. What are the advantages of the Plan?
You may participate in the plan by having cash dividends on all, or a
portion, of your shares of common stock automatically reinvested. Participants
are not required to pay any brokerage commissions in connection with purchases
made under the plan. A full investment of funds is possible under the plan
because fractions of shares of common stock, as well as full shares of common
stock, will be credited to participants' plan accounts including dividends on
these shares. Participants will avoid the cumbersome safekeeping of certificates
for shares of common stock credited to their plan accounts as the shares of
common stock are held in custody for participants by our transfer agent,
American Stock Transfer & Trust Company. Statements of participants' plan
accounts will be provided monthly.
ADMINISTRATION
3. Who administers the Plan?
We are the plan administrator. American Stock Transfer is our agent and
acts as custodian for the shares held in the plan and purchases shares of common
stock as the participant's agent. American Stock Transfer will keep a record of
each participant's participation and will send monthly statements of each
participant's plan account. Shares of common stock purchased under the plan will
be registered in the name of American Stock Transfer, as agent for participants
in the plan, and not in the name of the participant. If American Stock Transfer
ceases to serve as agent, we will designate its successor. At our option, the
shares of common stock purchased under the plan on behalf of a participant will
be newly issued by us, issued from treasury stock or purchased in the open
market, including both market transactions and negotiated transactions, by
American Stock Transfer as agent for the participants.
24
<PAGE> 30
4. Who interprets and regulates the Plan?
We reserve the right to interpret and regulate the plan as deemed
desirable or necessary. None of American Stock Transfer, an agent administering
the plan or us, will be liable for any act done in good faith or for any
omission to act in good faith, including, without limitation, any claim of
liability arising out of a failure to terminate a participant's account upon the
participant's death prior to receipt of written notice of the death (unless we
are deemed to be an underwriter for purposes of the federal securities laws, in
which case we cannot be so excluded from liability). Such exclusion of liability
to American Stock Transfer or any other agent of ours does not affect our
liability.
Participants should recognize that we cannot assure them of a profit or
protect them against a loss on the shares of common stock purchased under the
plan.
5. May the Plan be modified or discontinued?
We reserve the right to suspend, modify or terminate the plan at any
time. Any suspension, major modification or termination of the plan will be
announced by us to all plan participants.
PARTICIPATION
6. Who is eligible to participate in the Plan?
Subject to the limitations designated below, all shareholders of record
are eligible to join the plan. In order to be eligible to participate,
beneficial owners of common stock whose shares are registered in names other
than their own (e.g., in the name of a broker or a bank nominee) must become
shareholders of record by having their shares of common stock transferred into
their names. Beneficial owners may request the record holders of their shares of
common stock to participate on their behalf in the dividend reinvestment feature
of the plan; however, only holders of record may participate in the optional
cash payment feature of the plan. In the event a participant's account shall
have fewer than 15 shares of common stock, we shall have the option, but not the
obligation, to terminate the participant's account. In the event we terminate a
participant's account, a certificate for whole shares of common stock shall be
delivered to the participant and the participant's fractional shares of common
stock shall be sold (see Question Nos. 21, 22 and 23).
25
<PAGE> 31
PARTICIPATION BY SHAREHOLDERS
7. How does a shareholder of record participate?
Shareholders of record may join the plan at any time by completing the
authorization form and returning it to American Stock Transfer. Authorization
forms will be furnished to shareholders at any time upon request made to
American Stock Transfer (1-800-278-4353).
8. When will dividends be invested?
If the authorization form is received by American Stock Transfer on or
before the dividend record date, then the dividend will be used to purchase
additional shares of common stock for a participant on the dividend payment
date, provided that, if the reinvested dividends are used to acquire shares of
common stock in the open market, the plan agent shall have up to 45 days to
acquire the shares. The dividend declaration date is the date on which our board
of directors decides whether a dividend should be paid and in what amount. If
the authorization form is received after the record date, a participant's
purchase will not start until the next quarterly dividend payment date. The
dividend record dates are generally on the last business day of each calendar
quarter on which the American Stock Exchange is open for trading. Quarterly
dividends are paid approximately two weeks following the dividend record date.
9. How are optional cash payments made and invested?
Optional cash payments are invested on the fifth business day of each
month, provided that, if the optional cash payments are used to acquire shares
of common stock in the open market, the plan agent shall have up to 45 days to
acquire the shares. Optional cash payments should be sent so that they are
received by American Stock Transfer at least five business days before a
purchase date. Any optional cash payments received later than a purchase date
will be held by American Stock Transfer and applied to the next purchase date,
unless the shareholder requests, in writing to American Stock Transfer, the
return of such payment.
Participants are required to pay a $3.00 servicing fee for each
optional cash payment investment made by American Stock Transfer. This fee is
used to partially offset the costs incurred by American Stock Transfer and
otherwise payable by us in connection with the investment of the cash payments.
Participants do not receive any interest on the amounts held by American Stock
Transfer pending investment.
Participants may not send less than $50 per payment nor more than
$5,000 per calendar month. If a participant sends less than $50 or more than
$5,000, American Stock Transfer will refund the entire amount to him or her.
26
<PAGE> 32
10. Are shareholders enrolled in the Plan required to send in a
new Authorization Form annually?
No. Shareholders are enrolled in the plan without further action on
their part, unless the participant gives notice to the plan administrator in
writing that he or she wishes to terminate participation (see Question Nos. 21
and 22 for information concerning termination of participation in the plan). A
shareholder may also submit a new authorization form to change the portion of
cash dividends that are to be issued in the form of common stock, provided that
such an election must be submitted to the plan administrator prior to a dividend
record date in order to be effective for the corresponding dividend payment
date.
11. What does the Authorization Form provide?
The authorization form allows a participant to decide the extent to
which such participant wants to participate in the plan. By checking the
appropriate box on the authorization form, a participant may indicate whether he
or she wants to:
(a) Reinvest dividends paid on all shares of common stock
registered in a participant's name;
(b) Reinvest dividends paid on a portion of common stock
registered in a participant's name; or
(c) Invest amounts exceeding $50 by making optional payments at
any time up to an aggregate of Five Thousand and No/100 Dollars ($5,000) per
calendar month.
PURCHASES
12. How many shares of Common Stock will be purchased for
Participants?
The number of shares of common stock to be purchased depends on the
amount of the participant's dividends credited to the participant's account
under the plan or the amount of any optional payments and the purchase price of
the shares of common stock. Each participant's account will be credited with
that number of shares, including fractions computed to four decimal places,
equal to the total amount to be invested divided by the applicable purchase
price.
13. What is the price of the new shares of Common Stock?
The price of shares of common stock bought with cash dividends or
optional payments will be (a) the average of the mean of the high and low prices
of common stock, as published in The Wall Street Journal - American Stock
Exchange listings, for the five days in which trading of shares of common stock
takes place immediately prior to the applicable purchase date (the related
dividend payment date) if the shares are purchased from us or (b) the weighted
average price of the shares, if the shares are purchased in the open market.
27
<PAGE> 33
14. Are any fees or expenses incurred by Participants?
Participants will pay no brokerage commissions for purchases made under
the plan. Certain charges (see Question 22) may be incurred by participants if
they withdraw from the plan or if we terminate the plan.
REPORTS TO PARTICIPANTS
15. How will Participants be advised of their purchases of shares
of Common Stock?
As soon as practicable, participants will receive monthly statements of
their purchases and accounts. These statements are participants' continuing
records of the cost of their purchases and should be retained for tax purposes.
In addition, participants will receive copies of the same communications sent to
other shareholders, including our annual report, interim reports, notice of
annual meeting and proxy statement, and income tax information.
Participants should notify American Stock Transfer (attn: Dividend
Reinvestment) of any change in address or duplicate mailings, so that American
Stock Transfer can consolidate their accounts and simplify their tax reporting.
DIVIDENDS
16. Will Participants be credited with dividends on shares of
Common Stock held in their accounts under the Plan?
Yes. We pay dividends, as declared, to the record holders of our shares
of common stock. As the record holder for participants, American Stock Transfer,
as agent, will receive dividends for all plan shares held on the record date. It
will credit these dividends to participants on the basis of full and fractional
shares of common stock held in their accounts, and will reinvest these dividends
in additional shares of common stock.
CERTIFICATES
17. Will stock certificates be issued for shares of Common Stock
purchased?
Normally, certificates for shares of common stock purchased under the
plan will not be issued to participants. The number of shares of common stock
credited to accounts under the plan will be shown on participants' monthly
statements. This additional service protects against loss, theft or destruction
of stock certificates. The shares of common stock will be owned for record
purposes by American Stock Transfer until certificates are issued to a
participant upon the participant's written request.
Certificates for any number of whole shares of common stock up to the
full number of shares of common stock credited to participants' plan accounts
will be issued upon written request to American Stock Transfer (see Question
22). Any remaining full shares of common stock and fractional shares of common
stock will continue to be credited to participants' accounts.
28
<PAGE> 34
Shares of common stock credited to the accounts of participants under
the plan may not be pledged. Participants who wish to pledge those shares of
common stock must request that certificates for those shares of common stock be
issued in their names. Certificates for fractional shares of common stock will
not be issued under any circumstances.
18. In whose name will accounts be maintained and certificates
registered when issued?
Accounts for participants will be maintained in the participants' names
as shown on our shareholder records at the time the participants join the plan.
Certificates for whole shares of common stock will be so registered when issued,
except in instances such as death. Upon written request, certificates can also
be registered and issued in names other than the account name, subject to
compliance with any applicable laws and the payment by the participants of any
applicable taxes, provided that the request bears the signatures of the
participants and the signatures are guaranteed by a commercial bank or member
firm of the American Stock Exchange.
CHANGING INVESTMENT OPTIONS
19. How do Participants change their investment option?
Participants may change their investment option at any time by
completing a new authorization form. New authorization forms may be obtained by
submitting a written request to American Stock Transfer. A participant's request
will become effective as soon as practicable after the authorization form is
received by American Stock Transfer.
20. May PMC Capital elect not to issue shares of Common Stock
under the Plan?
We reserve the right to terminate or modify the plan at any time (see
Question 29) or direct our agent not to acquire shares of common stock under the
plan. Moreover, if at any time the value of the shares to be issued is less than
the current net asset value of common stock (which net asset value shall be
determined within forty-eight hours, excluding Sundays and holidays next
preceding the time of such determination), then that dividend will be paid in
cash.
WITHDRAWING FROM THE PLAN
21. May Participants withdraw all or a portion of their shares of
Common Stock from the Plan?
Yes. The plan is entirely voluntary and participants may withdraw at
any time, by completing the account correspondence stub attached to the monthly
statement, or by forwarding a written request to American Stock Transfer for a
full or partial withdrawal. Withdrawing participants may request either that
their shares of common stock be sold and the cash proceeds forwarded to them or
request that certificates be issued to them.
29
<PAGE> 35
22. How do Participants withdraw all or a portion of their shares
of Common Stock from the Plan?
In order to withdraw from the plan, participants must notify American
Stock Transfer in writing that they wish to withdraw. Written notice should be
addressed to American Stock Transfer. Written notice may also be provided by
completing the reverse side of the account correspondence stub of the monthly
statement and returning it to American Stock Transfer.
If a participant requests a partial withdrawal, he or she must specify
that American Stock Transfer either sell the whole shares of common stock
designated or issue a certificate for any number of whole shares of Common Stock
credited to his or her plan account.
If a participant requests a full withdrawal, he or she must specify
that American Stock Transfer sell all of his or her shares of common stock or
issue a certificate for any number of whole shares credited to his or her plan
account.
If a participant requests his or her shares of common stock to be sold,
American Stock Transfer will place a market order to sell as soon as practicable
after receipt of his or her request. The participant will receive the proceeds
of the sale less any brokerage commission and any transfer tax. This will
include cash proceeds for any fraction of a share of common stock.
If a participant's request for withdrawal or sale of shares of common
stock is received by American Stock Transfer prior to the fifth business day
after the record date, the amount of the dividend which would otherwise have
been invested on the next investment date will be paid in cash as soon as
practicable to the withdrawing participant. If such request is received by
American Stock Transfer on or after the fifth business day after the record
date, then it will be processed as soon as practicable after the dividend
payment date. Thereafter, all dividends will be paid in cash. Any eligible
shareholder may elect to re-enroll in the plan at any time.
23. What happens to fractions of shares of Common Stock when
Participants withdraw from the Plan?
When participants withdraw from the plan, cash payments representing
any fractions of shares of common stock will be mailed directly to the
participants. The cash payment price will be based on the current market price
of the common stock less any brokerage commission and transfer tax on the date
the withdrawal notice is received by American Stock Transfer. If that date is
not a trading day, the next previous trading day will be substituted (see
Questions 21 and 22).
OTHER INFORMATION
24. What happens when Participants sell or transfer all of the
shares of Common Stock registered in their names?
30
<PAGE> 36
If participants dispose of all shares of common stock registered in
their names, we will, unless otherwise instructed by the participants, continue
to reinvest the dividends on the shares of common stock credited to their plan
accounts.
25. What happens if PMC Capital issues a stock dividend, declares
a stock split, or has a rights offering?
Any shares of common stock distributed by us as a stock dividend on
shares of common stock credited to participants' plan accounts, or on any split
of their shares of common stock, will be credited to their plan accounts. In a
rights offering, participants' entitlements will be based on their total
holdings, including those credited to their plan accounts. Rights applicable to
shares of common stock credited to their plan accounts, however, will be sold by
American Stock Transfer. The proceeds will be credited to participants' plan
accounts and applied to purchase shares of common stock on the next investment
date.
26. What happens if PMC Capital makes the right to purchase
additional shares of Common Stock or other securities available to its
shareholders?
In the event that we make available to our shareholders (1) rights to
purchase additional shares of common stock or (2) any securities of any other
class, then the plan administrator will afford to participants the opportunity
to exercise those rights or warrants accruing to the whole shares of common
stock credited to the participants' plan accounts.
27. How will Participant's shares of Common Stock be voted at
meetings of shareholders?
The Participants will receive proxy cards covering the total number of
whole shares of common stock credited to the participants' plan accounts. The
plan administrator will vote any whole shares of common stock that it holds for
participants in accordance with the proxies returned by the participants to us.
If a proxy card is returned properly signed, but without indicating instructions
as to the manner shares are to be voted with respect to any item thereon, the
shares of Common Stock covered will be voted in accordance with the
recommendations of our management. If a proxy card is not returned, or it is
returned unexecuted or improperly executed, the shares of common stock covered
will not be voted unless the participant or the participant's duly appointed
representative votes in person at the meeting. Participants will continue to
receive separate proxy cards for any other whole shares of common stock
registered in the participants' names.
28. What are the responsibilities of the Plan Administrator under
the Plan?
The plan administrator shall not be liable under the plan for any act
done in good faith, or for any good faith omission to act, including, without
limitation, any claim of liability (1) arising out of any such act or omission
to act which occurs prior to the termination of participation and (2) with
respect to the prices at which shares of common stock are issued to
participants' accounts. Participants should recognize that neither the plan
administrator nor we can assure participants of profits, or protect participants
against losses, on shares issued and/or held under the plan.
31
<PAGE> 37
29. May the Plan be changed or discontinued?
We reserve the right to modify, amend, suspend or terminate the plan at
any time. Notice of any modification shall be furnished to participants at least
fifteen (15) days prior to the dividend record date for which the amendment is
effective. In that event, we, as plan administrator, will follow the procedures
for termination set forth in Question 21.
30. Where should correspondence regarding the Plan be sent?
Any notice, instruction, request or election which by any provision of
the plan is required or permitted to be given or made by the participants to the
plan administrator shall be in writing, signed by the participants and addressed
to:
American Stock Transfer & Trust Company
Dividend Reinvestment
40 Wall Street, 46th Floor
New York, N.Y. 10005
Telephone No.: (800) 278-4353
or any other address as the plan administrator shall furnish to the
participants, and any notice, instruction, request or election shall be deemed
to have been sufficiently given or made when received by the plan administrator.
Participants should note their account numbers on all such
correspondence.
31. What is sufficient notice to Participants?
Any notice or certificate which any provision of the plan requires the
plan administrator to give to the participants shall be in writing and shall be
deemed to have been sufficiently given for all purposes by being deposited
postage prepaid in a post office letter box addressed to the participants at
their address as it shall last appear on the plan administrator's records.
32. Can successor Plan Administrator(s) be named?
We may, from time to time, designate a bank or trust company as
successor plan administrator under the plan.
33. What law governs the Plan?
The terms and conditions of the Plan and its operation are governed by
the laws of the State of Florida.
USE OF PROCEEDS
The net proceeds from the sale of shares of common stock purchased from
us from time to time will be used for general corporate purposes, which may
include lending such proceeds in accordance with our underwriting criteria.
32
<PAGE> 38
CERTAIN CONSIDERATIONS
In addition to the other information contained in this prospectus, you
should carefully consider the following information before making a decision to
invest in the common stock.
CREDIT RISKS OF LOANS AND PORTFOLIO DIVERSIFICATION
Our lending business is subject to various risks, including, but not
limited to, the risk that borrowers will not satisfy their debt service
obligations and the risk that the value of the collateral securing a liquidated
loan is less than the principal amount of such loan. In addition, since our
borrowers are small businesses with more limited financial resources than
larger, more established companies, we may assume a greater risk of loss than
might otherwise be the case if we had focused on lending to larger companies. We
attempt to reduce our risk of loss by:
o evaluating each borrower's creditworthiness and the value of
the collateral securing each loan;
o limiting the maximum amount loaned to any single borrower;
o taking security interests in assets, including real property,
of the borrower and, in certain cases, parties related to the
borrower; and
o obtaining personal guarantees.
We have relatively high levels of loans to the lodging industry,
approximately 61% of our total assets as of December 31, 1998. Pursuant to a
change in the emphasis of our investment strategy, our investments in the
lodging industry have increased while the percentage of our investments in the
health care field have decreased. In consideration of our efforts to decrease
our investments in the health care field, our fundamental policies allow us to
concentrate only in the lodging industry. We will invest the proceeds of any
sales of shares pursuant to the plan in a manner the ensures that it is in
compliance with our current fundamental policies.
In the event of a downturn in the lodging industry, the ability of
those borrowers to satisfy their debt service obligations to us could be
adversely affected. In addition, approximately 35% and 8% of our total assets as
of December 31, 1998 consisted of loans to borrowers located in Texas and
California, respectively. A significant economic downturn in either of these
regions could adversely affect the value of collateral located in these regions.
RISKS OF LENDING TO SMALL BUSINESSES
Our portfolio consists primarily of loans to small, privately owned
companies. There is generally no public information available about these
companies, and we must rely on the diligence of our employees to obtain
information in connection with our investment decisions. These borrowers may not
meet net income, cash flow and other coverage tests typically imposed by bank
lenders. A borrower's ability to repay its loan may be adversely impacted by
numerous factors, including the downturn in its industry or negative economic
conditions. A deterioration in a borrower's financial condition and prospects
may be accompanied by deterioration in the collateral for the loan. In addition,
small businesses depend on the management talents and efforts of one person or a
small group of people for their success. The loss of services of one or more of
these persons could have a material adverse impact on the operations of the
small business. Small companies are also more vulnerable to customer
preferences, market conditions and economic
33
<PAGE> 39
downturns and often need substantial additional capital to expand or compete.
These companies may also experience substantial changes in operating results and
may have highly leveraged capital structures. These factors may have an impact
on the ultimate recovery of our loan to these businesses. Loans to small
businesses, therefore, involve a high degree of business and financial risk,
which can result in substantial losses and accordingly should be considered
speculative.
INTEREST RATE AND PREPAYMENT RISK
As a result of the general downward trend in interest rates, we have
experienced an increase in the number and the dollar amount of loans prepaid. On
prepayments of fixed-rate loans, we 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 may
be partially offset (based on then-current market conditions) by the reduced
cost of our borrowings.
Our net income is effected by the spread between the rate at which we
borrows funds and the rate at which we loan these funds. PMC Capital, Western
Financial and PMC Investment have originated both variable and fixed interest
rate loans and the funds borrowed by these companies are typically long-term and
at fixed interest rates. The variable-rate loans in the portfolios of PMC
Capital, PMC Investment and Western Financial have been originated under our
prime lending program. Substantially all of the variable-rate loans originated
under our prime lending program were sold in the 1998 structured sale. As a
result, the portfolios of PMC Capital, PMC Investment and Western Financial
consist primarily of fixed-rate loans as of December 31, 1998. First Western
originates variable-rate loans and has used both advances from PMC Capital and
the structured sale of its portfolio (transactions completed in 1994 and 1997)
to obtain funds necessary to originate loans. If the yield on loans originated
by us with funds obtained from borrowings or the issuance of preferred stock
fails to cover the cost of such funds, our cash flows will be reduced. During
periods of changing interest rates, interest rate mismatches on loans not
securitized could negatively impact our net income, dividend yield and the
market price of the common stock. Generally, the fixed-rate loans that we
originate have prepayment penalties. If interest rates decline, we may
experience significant prepayments. These prepayments, as well as scheduled
repayments, are likely to be reloaned or invested at lower rates, which may have
an adverse effect on our 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.
DEPENDENCE ON KEY PERSONNEL
We are dependent upon the efforts and abilities of Lance B. Rosemore,
our President and Chief Executive Officer, and Dr. Andrew S. Rosemore, our
Executive Vice President and Chief Operating Officer. Although we believe that
we have a capable management group, the loss or interruption of the services of
these persons could have a material adverse effect on us. We have entered into
employment agreements with Lance B. Rosemore and Dr. Andrew S. Rosemore, which
agreements expire in June 2002.
We have not purchased policies insuring the lives of Lance B. Rosemore
or Dr. Andrew S. Rosemore. All of the executive officers are required to spend
all of their business time on our
34
<PAGE> 40
business, including the management of PMC Advisers in connection with advisory
services to be provided by PMC Advisers to affiliates of ours in the future. See
"Remuneration of Directors and Officers" and "Management." See also "Certain
Affiliated Transactions and Other Matters" for important information concerning
the management of the Company.
AVAILABILITY OF FUNDS
As a regulated investment company (RIC) we must distribute to our
stockholders at least 90% of our net investment company taxable income to
maintain our RIC status under the Internal Revenue Code. As a result, our
earnings will not be available to fund loan originations. In order to maintain
and increase the loan portfolio and assets under management, we have a
continuing need for capital. We have historically met our capital needs through
borrowings under our credit facility, structured sales/financing of our loan
portfolio, SBA debenture issuances and the issuance of common stock and
preferred stock. A reduction in the availability of these sources of funds could
have a material adverse effect on our financial condition and operating results.
We expect to continue to be able to obtain capital to fund loans through
borrowings from financial institutions, the SBA and through the structured sale
of our loans. An inability to obtain funds from these sources or from other
sources could have a material adverse effect on our financial condition and
operating results. In addition, as a business development company, we will be
generally required to maintain a ratio of at least 200% of total assets to total
borrowings, which may restrict our ability to borrow funds.
ENVIRONMENTAL LIABILITIES
We have acquired, and may in the future acquire, through foreclosure,
properties that secured defaulted loans. While we perform extensive due
diligence investigations into properties both prior to originating the loan
collateralized by those properties and prior to foreclosing thereon, there is a
risk that hazardous substances or wastes, contaminants, pollutants or sources
thereof could be discovered on properties acquired by us or with respect to
which we are deemed to be an owner or operator under applicable environmental
laws. In that event, we could be required under applicable environmental laws to
remove those substances and clean up the affected property at our sole cost and
expense or to contribute to the cost of that remediation or clean up which could
have a material adverse effect on us. In addition, we could be required to pay
fines and/or penalties imposed by governmental agencies. We require
environmental site assessments of commercial real estate securing loans we make
as a condition to making those loans; however, there can be no assurance that
such assessments would reveal any or all potential environmental liabilities.
COMPETITION
Our primary competition comes from banks, financial institutions and
other lending companies. Additionally, there are lending programs which have
been established by investment banking firms and national franchisors in the
lodging industry. Some of these competitors have greater financial and larger
managerial resources than we do. Competition has increased as the financial
strength of the banking and thrift industries improved. In our opinion, there
has been an increasing amount of competition lending activity at advance rates
and interest rates which are considerably more aggressive than ours. In order to
maintain a quality portfolio, we will continue to adhere to our historical
underwriting criteria, and as a result, we will not fund certain loan
origination opportunities. In addition, to the extent that the investment
opportunities reviewed by
35
<PAGE> 41
PMC Advisers conform to the investment criteria of PMC Commercial Trust, and PMC
Commercial Trust has funds available, those investments will be made by PMC
Commercial Trust.
LEVERAGE
We have borrowed funds and issued shares of preferred stock, and intend
to borrow additional funds through advances on our revolving credit facility and
through the issuance of notes payable or SBA debentures, if available. As a
result, we are leveraged. The SBA and private lenders have fixed dollar claims
on our assets superior to the claims of the holders of common stock. Any
increase in the interest rate earned by us 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 our net income and earnings per
share to increase more than they would without the leverage. Any decrease in the
interest rate earned by us on investments would cause net income and earnings
per share to decline by a greater amount than they would without the leverage.
Leverage is thus generally considered a speculative investment technique. In
order for us to repay indebtedness or meet our obligations in respect of any
outstanding preferred stock on a timely basis, we may be required to dispose of
assets at a time which we 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 our results of operations.
FLUCTUATIONS IN QUARTERLY RESULTS
Our quarterly operating results will fluctuate based on a number of
factors. These include, among others, the completion of a securitization
transaction in a particular calendar quarter, the interest rates on the
securities issued in connection with our securitization transactions, the volume
of loans originated, the timing of prepayment of loans, changes in and the
timing of the recognition of realized and unrealized gains or losses on
investments, the degree to which we encounter competition in our markets and
general economic conditions. As a result of these factors, results for any one
quarter should not be relied upon as being indicative of performance in future
quarters.
PORTFOLIO VALUATION
There is typically no public market for the loans of the companies to
which we make loans. In addition, our portfolio of loans is and will be subject
to restrictions on resale or otherwise have no established trading market. The
illiquidity of most of our portfolio of loans may adversely affect our ability
to dispose of our loans and securities at times when it may be advantageous to
liquidate those investments. As a result, the valuation of the loans in our
portfolio is subject to the estimate of our board of directors. Unlike
traditional lenders, we do not establish reserves for anticipated loan losses,
but adjust quarterly the valuation of our portfolio to reflect the estimate of
our board of directors as to the current realizable value of the loan portfolio.
In the absence of a readily ascertainable market value, the estimated value of
our portfolio of loans may differ significantly from the values that would be
placed on the portfolio if a ready market for the loans existed. Any changes in
estimated values are recorded in our statement of operations as "Net unrealized
gains (losses) on investments."
LOSS OF PASS-THROUGH TAX TREATMENT
We qualify as a RIC under the Internal Revenue Code. If we meet certain
diversification and distribution requirements under the Internal Revenue Code,
we qualify for pass-through tax
36
<PAGE> 42
treatment. We would cease to qualify for pass-through tax treatment if we were
unable to comply with these requirements or if we ceased to qualify as a
business development company under the 1940 Act. We are also subject to a 4%
excise tax (and, in certain cases, corporate level income tax) if we fail to
make distributions. If we fail to qualify as a RIC, we would become subject to
federal income tax as if we were an ordinary corporation, which would result in
a substantial reduction in our net assets and the amount of income available for
distribution to our shareholders.
DECLINE IN NET ASSET VALUE
If the net asset value of our assets were to decline, our ability to
pay dividends on the common stock may be adversely effected. This inability to
pay dividends could cause us to lose our status as a regulated investment
company under the Internal Revenue Code. Additionally, any reduction in net
asset value may require us to dispose of assets at a time at which it would not
otherwise do so and at prices which may be below the net book value of the
assets.
SHARES ELIGIBLE FOR FUTURE SALE
As of August 31, 1999 our executive officers and directors owned an
aggregate of 2,748,138 shares of common stock (approximately 23% of total shares
of common stock outstanding at that time). In addition, other persons have
purchased shares of common stock in reliance upon certain exemptions from
registration under the federal securities laws. Sales of the shares of common
stock owned by the management shareholders or other shareholders may not be made
in a public distribution unless registered under the federal securities laws or
sold pursuant to an exemption from registration. Sales of substantial amounts of
common stock in the public market, and the possibility that such sales may be
made, could adversely affect the prevailing market price of the common stock and
could impair our ability to raise additional capital through the sale of our
equity securities.
EFFECTS OF LEVERAGE
(1) For a schedule of the annual rate of interest or dividend payments on
senior securities, see "Description of Capital Stock and Long-Term
Debt--Long-Term Debt."
(2) The following table is included to assist the investor in understanding
the effects of leverage. The figures appearing in the able are
hypothetical and actual return may be greater or less than that
reflected in table.
Leverage Effect Table
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assumed return on -15% -10% -5% 0% 5% 10% 15%
portfolio (net of expenses)
- -------------------------------------------------------------------------------------------------------------------------
Corresponding return to (42%) (30%) (19%) (8%) 4% 15% 26%
common shareholder
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 43
MARKET PRICE OF COMMON STOCK
Our common stock is traded on the American Stock Exchange. The
following table sets forth the high and low sales prices on the American Stock
Exchange for the common stock for the periods indicated. On September 23, 1999
the closing price of the common stock on the American Stock Exchange was $8.50
per share and on June 30, 1999 the net asset value was $6.24 per share. The
common stock has historically traded at a premium to net asset value.
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Market Price:
High ........................................ $ 14.50 $ 14.88 $ 15.50 $ 15.25
Low ......................................... $ 13.38 $ 12.50 $ 13.75 $ 14.00
Net Asset Value(1) ............................... $ 5.66 $ 5.72 $ 5.78 $ 5.93
(Discount) or Premium to Net Asset Value(2) ...... 136% 119% 138% 136%
Average weekly trading volume .................... 28,900 37,200 37,900 34,800
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Market Price:
High............................................. $ 15.00 $ 14.38 $ 13.75 $ 11.00
Low.............................................. $ 13.75 $ 13.56 $ 9.00 $ 8.00
Net Asset Value (1)................................... $ 6.05 $ 6.07 $ 6.04 $ 6.06
(Discount) or Premium to Net Asset Value(2)........... 127% 123% 49% 32%
Average weekly trading volume......................... 46,100 32,400 61,801 54,000
</TABLE>
<TABLE>
<CAPTION>
1999
-----------------------------
1ST 2ND
QUARTER QUARTER
---------- ----------
<S> <C> <C>
Market Price:
High ........................................ $ 10.12 $ 8.69
Low ......................................... $ 8.31 $ 7.75
Net Asset Value (1) .............................. $ 6.09 $ 6.16
(Discount) or Premium to Net Asset Value(2) ...... 36% 26%
Average weekly trading volume .................... 34,800 55,600
</TABLE>
38
- ------------
(1) Average value during period, calculated based on average net assets
during the period divided by the weighted average number of common
shares outstanding. Securities for which market values are available
are valued at market, all other assets are valued at fair value as
determined by our board of directors. Our board of directors has
determined that the fair value of our loans is the principal amount of
the loan less any discounts, deferred fees, net of related costs and
loan loss reserves.
(2) Calculated based on the low market price on the American Stock Exchange
for the periods indicated.
<PAGE> 44
SHARE REPURCHASES
We are a closed-end investment company designed for long-term
investment and you should not consider it to be trading vehicle. In connection
with the plan and in recognition that our shares, which historically have traded
at a premium to net asset value, might trade at a discount to net asset value or
at any value that is less than the desired value as determined by our board of
directors, our board of directors contemplates that we may from time to time
repurchase our shares in the open market pursuant to Section 23(c)(1) of the
Investment Company Act.
We anticipate that the market price of our shares will remain at a
premium to net asset value but may vary. The market price of our shares will be
determined by, among other things, the relative demand for and supply of shares
in the market, our investment performance, our dividends and yield and investor
perception of our overall attractiveness. Although our board of directors
believes that share repurchases generally have a favorable effect on the market
price of our shares, it should be recognized that the acquisition of our shares
in the open market will decrease total assets and consequently have the effect
of increasing our expense ratio. Due to the nature of our investment objectives,
policies and portfolio, under current market conditions we anticipate that
repurchases generally should not have a material adverse effect on our
investment performance; however, this may not always be the case.
39
<PAGE> 45
BUSINESS
GENERAL
PMC Capital, together with its subsidiaries, is a diversified
closed-end management investment company that operates as a business development
company under the Investment Company Act of 1940. Our common stock is traded on
the American Stock Exchange under the symbol "PMC." We have elected to be taxed
as a regulated investment company and, as a result, distribute substantially all
our taxable income as dividends to our shareholders, thereby incurring no
Federal income tax liability on that income.
We primarily engage in the business of originating loans to small
businesses either directly or through three principal subsidiaries: First
Western SBLC, Inc., PMC Investment Corporation and Western Financial Capital
Corporation. We primarily originate loans to individuals and small business
concerns in the lodging industry. We also target the medical, food service,
service, retail and commercial real estate industries. We are a national lender
that primarily lends to businesses in the Southwest and Southeast regions of the
United States. A majority of our loans in the lodging industry are to
owner-operated facilities generally operating under national franchises. We
believe 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, we 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
Capital, PMC Investment 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 our lending operations, we earn revenue through PMC
Capital's investment advisor subsidiary, PMC Advisers, Ltd., which evaluates and
services loans and other investment alternatives pursuant to fee arrangements
with PMC Commercial Trust. PMC Commercial Trust is a real estate investment
trust and an affiliate of ours. PMC Commercial Trust 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 Trust generally pursues different
prospective borrowers from us. In order to further mitigate the potential for
conflicts of interest, PMC Commercial Trust, PMC Capital and PMC Advisers have
entered into a loan origination agreement. Pursuant to the loan origination
agreement, loans which meet PMC Commercial Trust's underwriting criteria are to
be first presented to PMC Commercial Trust for funding. If PMC Commercial Trust
does not have available funds, origination opportunities presented to PMC
Commercial Trust may be originated by us.
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, PMC Investment and Western Financial are registered under
the Investment Company Act as diversified closed-end management investment
companies. Our principal executive offices are located at 18111 Preston Road,
Suite 600, Dallas, Texas 75252.
40
<PAGE> 46
Earnings per share on a quarterly basis since 1989 were as follows:
<TABLE>
<CAPTION>
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.
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 pursuant to its section 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. 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 us. 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 us to place less reliance during
1997 and 1998 on the SBA 7(a) program lending activities. Since we continue to
derive a material portion of our revenues from the lending activities of First
Western, future program and market changes may have an adverse
41
<PAGE> 47
effect on future periods of operations. The impact of our SBA 7(a) program
lending activities on our earnings have been and will be affected by a number of
factors including:
o the timing and availability of portfolio for securitizations
(see "Securitization and Structured Financing Programs");
o the volume of SBA 7(a) Program lending;
o the length of SBA 7(a) Program loans;
o the structure of sales to the secondary market;
o the interest rates charged and related terms;
o the quality of the SBA 7(a) Program portfolio;
o prepayment experience (see "Prepayment Considerations"); and
o legislative and/or regulatory changes.
Any other aspect of SBA programs under which we participate could be modified by
legislation or agency policy changes. Presently, the SBA is considering amending
the program which may enhance our ability 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. We have established alternative lending strategies to address the above
noted changes and would pursue additional strategies should the SBA programs
under which any of our subsidiaries operates were to be eliminated or
significantly curtailed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PMC INVESTMENT. PMC Investment is a licensed specialized small business
investment company (SSBIC) under the Small Business Investment Act of 1958, as
amended (SBIA). PMC Investment 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 SSBIC, PMC Investment 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 PMC Investment
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, PMC Investment 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, PMC Investment 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, PMC Investment originated
$14.1 million and $24.1 million in loans, respectively. During the year ended
December 31, 1998, PMC Investment transferred $14.5 million in loans to PMC
Capital in conjunction with a structured sale of loans to the 1998 partnership.
At December 31, 1998 and 1997, PMC Investment 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 PMC Investment's loans
receivable, net). Realized and unrealized losses on PMC Investment's investments
were $350,000 and $124,000 during the years ended December 31, 1998 and 1997,
respectively.
42
<PAGE> 48
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 structured sale of loans to the 1998
partnership. 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:
o to borrowers who exceed the eligibility requirements of the
SBA 7(a) Program or SBIC programs;
o 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);
o primarily collateralized by real estate;
o contain prepayment fee provisions; and
o 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 PMC Investment and Western Financial to
PMC Capital in conjunction with the structured sale of loans. 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, PMC Capital,
PMC Investment and Western Financial, began marketing the prime lending program
which is a
43
<PAGE> 49
variable rate lending program based on the prime rate. Our prime lending program
is separate from First Western's SBA 7(a) program, which is our other variable
rate lending program. Our 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 our underwriting criteria. Loans funded within our prime lending program
have variable interest rates based on the prime rate. As of December 31, 1998,
we had funded over $50 million in our 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, we reduced our 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 our prime lending program were
sold as part of our structured sale of loans in 1998.
B & I LOAN PROGRAM. Additionally, we were 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 (B&I Loan Program). Under the
B&I Loan Program, loans are to be originated in rural areas (generally areas
with a population of less than 50,000) and are partially guaranteed by the U.S.
Government. The U.S. Government guarantees repayment generally up to 80% of the
principal amount of loans originated under the B&I Loan Program. We have not
originated any B&I Loan Program loans to date. While we have approved several
loans, none has been closed. We still intend to originate loans pursuant to the
B&I Loan Program. We do 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. As of December 31, 1998,
these were: PMC Advisers, Ltd. and its subsidiary, PMC Funding Corp. and its
subsidiary; PMC Capital Limited Partnership, formed in 1996, and its related
general partner and trust; and PMC Capital, L.P. 1998-1 and its related general
partner.
PMC ADVISERS. PMC Advisers, organized in July 1993, acts, either
directly or through its subsidiary PMC Asset Management, Inc., as the investment
manager for PMC Commercial Trust. PMC Advisers provides investment services to
PMC Commercial Trust pursuant to investment management agreements entered into
between PMC Capital, PMC Advisers and PMC Commercial Trust. As the investment
manager for PMC Commercial Trust, 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. On November 13, 1996, the 1996 partnership
completed a structured financing through a private placement of approximately
$40.7 million of its Loan-Backed Fixed Rate Notes, Series 1996-A. 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 contributed by PMC Capital to the 1996
partnership. The net book value of those loans after deferred commitment fees,
discounts and accrued interest receivable on the date of transfer was
approximately $45.5 million. 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
44
<PAGE> 50
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. We, therefore, have no obligation to pay the
1996 notes, nor do the holders of the 1996 notes have any recourse against our
assets. 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 is the servicer for all
loans held by the 1996 partnership.
On November 24, 1998, the 1998 partnership completed a structured sale
through a private placement of approximately $39.6 million of its 1998
Loan-Backed Adjustable Rate Notes - Class A. 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 contributed by
PMC Capital to the 1998 partnership. 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. We, therefore, have
no obligation to pay the 1998 class A notes, nor do the holders of the 1998
class A notes have any recourse against our assets. The net proceeds from the
issuance of the 1998 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 were purchased by PMC
Capital in the 1998 private placement. The 1998 class B notes 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. The 1998 class B notes were given a rating
of "A1" by Moody's Investors Service. PMC Capital 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 Investment Company
Act. Business development companies must register their shares under the
Securities Exchange Act of 1934, as amended, and are subject to the Exchange
Act's periodic reporting requirements rather than the Investment Company 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. Business development companies have 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 than is available
to registered investment companies.
45
<PAGE> 51
FUNDAMENTAL AND OTHER POLICIES
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 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 our outstanding voting
securities, or (ii) 67% or more of our 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 our board of directors at any time.
1. We will not purchase or sell commodities or commodity contracts.
2. We 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 we may acquire warrants, options or other rights to subscribe to or
sell securities in furtherance of our investment objectives.
3. We will not underwrite securities of other issuers, except that we
may acquire portfolio securities under circumstances where, if sold, we might be
deemed an underwriter for purposes of the Securities Act of 1933. We may
purchase "restricted securities" as to which there are substantial restrictions
on resale under the Securities Act of 1933.
4. We will not purchase any securities of a company if any of our
directors or officers owns more than 0.5% of that company and those persons
owning more than 0.5% together own 5% or more of the shares of that company.
5. We 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 Investment Company Act only
permits us to issue one class of senior debt securities and one class of senior
equity securities.
6. We will not invest more than 25% of our total assets in any one
industry except in the lodging industry which may constitute 100% of our
portfolio. We will invest at least 25% of our total assets in the lodging
industry.
7. We may invest in real estate development companies, may make real
estate acquisition loans and real estate improvement loans and further may make
other loans secured by real estate.
8. We may make loans and purchase debt securities in furtherance of our
investment objectives. We will not make loans to our officers, directors or
other affiliated persons.
9. PMC Investment will perform the functions and conduct the activities
contemplated under the SBIA, and will provide assistance solely to small
business concerns
46
<PAGE> 52
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 PMC Investment may not be changed without the prior
written consent of the SBA.
As stated above, we have 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 our total assets, respectively.
There can be no assurance that we will continue to experience the
positive results we have historically achieved from lending to the lodging
industry or that market conditions will enable us to maintain or increase our
level of loan concentration in this industry. Any economic factors that
negatively impact this industry could have a material adverse effect on our
business. Additionally, at December 31, 1998, loans to businesses located in
Texas and California comprised approximately 35% and 8% of our outstanding loan
portfolio, respectively. A decline in economic conditions in any of these states
may adversely affect us.
COMPETITION
Our 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 and national
investment banking firms. Some of these competitors have greater financial and
larger managerial resources than we do. Competition has increased as the
financial strength of the banking and thrift industries improved. In our
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 us. In order to maintain a quality portfolio, we will continue
to adhere to our historical underwriting criteria, and as a result, we will not
fund certain loan origination opportunities. We believe that we compete
effectively with those entities on the basis of the lending programs offered,
the interest rates, maturities and payment schedules, the quality of our
service, our 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 Trust, and PMC Commercial Trust has
funds available to make these investments, such investments will be made by PMC
Commercial Trust.
SECURITIZATION AND STRUCTURED FINANCING PROGRAMS
We have relied upon our ability to use portions of our loan portfolio
in the asset-backed securities market to generate cash proceeds for funding
additional loans. Further, gains on sales generated by our "securitizations"
represent a material portion of our revenues in the periods during which the
securitizations are completed. These gains may cause timing differences between
net income in accordance with generally accepted accounting principles 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 our reported earnings for
such quarter or year. Any adverse changes or delays could have a material
adverse effect on our financial position, liquidity and results of operations.
Accordingly, adverse changes in our "asset-backed securities program" or in the
asset-backed
47
<PAGE> 53
securities market for the type of product generated by us could adversely affect
our ability to originate and securitize loans on a timely basis and upon terms
favorable to us. 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 us 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 notes was
negatively impacted by market conditions. As a result, we recognized less profit
on the transfer of the loans in November 1998 to the 1998 partnership than would
have been attainable in previous quarters.
We retain a substantial portion of the default and prepayment risk
associated with the loan portfolio that we sell pursuant to our asset-backed
securities program. A large component of the gain recognized on these sales and
the corresponding asset recorded on our balance sheet is an interest-only strip
receivable, the value of which is based on the present value of estimated future
excess cash flows which will be received by us from the securitized loans.
Accordingly, the value of the interest-only strip receivable is calculated on
the basis of our assumptions concerning, among other things, defaults and
prepayments. Actual defaults and prepayments may vary from our 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 our yield due to principal
prepayments on the underlying securitized loans occurring at a rate that is
faster (or slower) than the rate anticipated by us 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, we are required to deposit substantial amounts
of the cash flows generated by its interests in our sponsored securitizations
into spread accounts which are pledged to the security holders.
We regularly measure our default, prepayment and other assumptions
against the actual performance of securitized receivables including the
guaranteed portion of loans sold. If we were to determine, as a result of our
regular review or otherwise, that we underestimated (or overestimated) defaults
and/or prepayments, or that any other material assumptions were inaccurate, we
would be required to adjust the carrying value of our interest-only strip
receivable by making a charge to income and adjusting the carrying value of the
interest-only strip receivable on our 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 our
ability to service debt and effect future securitizations and other financings.
During 1997, as a result of increased prepayment speeds, we recorded an
unrealized loss of $300,000 on our 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 we recorded a net unrealized gain and corresponding reduction
in the valuation allowance of $120,000 on the interest-only strip receivables.
The net unrealized losses related to the interest-only strip receivables on our
balance sheet were $180,000 and $300,000 at December 31, 1998 and 1997,
respectively.
48
<PAGE> 54
Although we believe that we have 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 us, which would have an adverse effect on
our cash flow.
EMPLOYEES
At December 31, 1998, we had 53 employees. We believe our relationship
with our employees is good.
OVERVIEW OF SBA REGULATIONS
The lending operations of First Western, PMC Investment and Western
Financial are regulated by the SBA, which establishes, among other things,
maximum interest rates that borrowers may be charged (which currently for PMC
Investment and Western Financial may not exceed the greater of 19% per annum or
11% above our cost of funds from the SBA) and minimum and maximum maturities for
our loans (which generally range from 4 to 25 years). Borrowers must satisfy
certain criteria established by the SBA to qualify for loans originated by us
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.
Several increased costs were put into effect for new SBA debentures in
1996. A flat 3% "draw-down" fee replaced the 2% commitment fee and interest
rates charged on newly issued SBA debentures increased by a 100 basis point fee.
Pursuant to conversations with representatives of the SBA, the interest rates
charged on SBA debentures issued to SBICs in March 1999 were approximately 110
basis points over the 10 year Treasury Note. As adjusted for fees, the rates on
the SBA debentures issued in March 1999 were approximately 210 basis points over
the 10 year Treasury Note. Additionally, the availability of 3% subsidized
debentures and the right of the SBA to purchase preferred stock of an SSBIC was
repealed. These changes have no effect on previously issued debentures or
preferred stock of SSBICs, including PMC Investment.
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:
o 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);
49
<PAGE> 55
o liquid assets or real estate equity of the borrower (and
certain affiliates) cannot exceed certain limits; and
o 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 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.
PROPERTIES
Our headquarters are located at 18111 Preston Road, Suite 600, Dallas,
Texas 75252. We lease approximately 13,000 square foot facility pursuant to a
five year lease which commenced in December 1998. In addition, at December 31,
1998, we 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.
LEGAL PROCEEDINGS
We are involved from time to time in routine litigation incidental to
our business. We do not believe that the current proceedings will have a
material adverse effect on our results of operations or financial condition.
TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS A GENERAL SUMMARY OF THE MATERIAL FEDERAL
TAX CONSIDERATIONS APPLICABLE TO US AND TO AN INVESTMENT IN THE COMMON STOCK AND
DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE TAX CONSIDERATIONS
APPLICABLE TO SUCH AN INVESTMENT. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE TAX CONSIDERATIONS WHICH PERTAIN TO THEIR
PURCHASE OF THE COMMON STOCK. THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS OF
FEDERAL INCOME TAXATION RELEVANT TO HOLDERS OF THE COMMON STOCK IN LIGHT OF
THEIR PERSONAL CIRCUMSTANCES, OR TO CERTAIN TYPES OF HOLDERS SUBJECT TO SPECIAL
TREATMENT UNDER FEDERAL INCOME TAX LAWS, INCLUDING FOREIGN TAXPAYERS. THIS
SUMMARY DOES NOT DISCUSS ANY ASPECTS OF FOREIGN, STATE OR LOCAL TAX LAWS.
GENERAL
PMC Capital and each of its subsidiaries (with the exception of PMC
Funding and PMC Advisers) have qualified as "regulated investment companies"
under the Internal Revenue Code. To be so treated, we must:
o be registered under the Investment Company Act at all times
during the taxable year;
o derive at least 90% of our gross income in each taxable year
from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or
securities or certain other passive income; and
o diversify holdings to meet certain requirements set forth in
the Internal Revenue Code.
50
<PAGE> 56
We have treated, and intend to continue to treat, all amounts received on the
sale of loans in excess of a normal servicing fee, as qualifying income for
purposes of meeting the tests.
We intend to make timely distributions of our investment company
taxable income, net capital gains and capital gain net income so that we will
not be subject to Federal income or excise taxes. For Federal income and excise
tax purposes, dividends declared in October, November or December of any
calendar year and payable to shareholders of record on a specified date in such
a month are deemed to have been received by each shareholder, and to have been
paid by us, on December 31 of such calendar year, provided that such dividend is
actually paid during January of the following year.
DISTRIBUTIONS
Distributions to shareholders of our dividend and interest income and
of any net short-term capital gain in any year will generally be taxable as
dividend income to shareholders to the extent of our earnings and profits.
Distributions which constitute dividends for Federal income tax purposes will
not generally be eligible for the dividends-received deduction for corporations.
To the extent that distributions to a United States shareholder in any year
exceed our earnings and profits, they will be treated as a nontaxable return of
capital and will reduce the United States shareholder's basis in his or her
shares. The amount of distributions, if any, in excess of the shareholder's
basis in his or her shares, will be treated as a gain from the sale of shares,
as discussed below. Distributions of our net capital gains (which will be
designated as capital gain dividends by us) will be taxable to United States
shareholders as long-term capital gain, regardless of the length of time the
shareholder has held his or her shares.
SALES
A shareholder may recognize taxable gain or loss if the holder sells
our shares. Any gain or loss arising from those sales will generally be capital
gain or loss and will be long-term capital gain or loss if such shareholder has
held the shares for more than one year at the time of the sale; otherwise it
will be short-term capital gain or loss. However, any capital loss arising from
the sale of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder.
REPORTING AND BACK-UP WITHHOLDING
We will inform you each year of the amount and nature of any income or
gain distributed to you. Certain of you may be subject to a 31% Federal back-up
withholding tax on distributions if you fail to provide us with your correct
taxpayer identification number and certification that you are not subject to
backup withholding.
MANAGEMENT
PMC Capital has no formal advisory board but is advised by our
executive officers under the direction of our board of directors. PMC Capital's
loan committee, comprised primarily of senior management, including Mr. Lance B.
Rosemore, Dr. Andrew S. Rosemore, Ms. Mary J. Brownmiller and Mr. Jan F. Salit,
is primarily responsible for the day-to-day management of our loan portfolio.
Our board of directors is divided into three classes with staggered three year
terms.
51
<PAGE> 57
No more than one class of directors is elected at any annual meeting. All
officers and directors hold office until their respective successors are elected
and qualified or until their earlier resignation or removal.
The audit committee of our board of directors is currently comprised of
Mr. Thomas Hamill and Mr. Barry A. Imber. The principal functions of the audit
committee are to oversee the financial reporting policies, accounting issues,
portfolio valuation and our entire audit function. The audit committee reports
their activities to our board of directors. There are no compensation or
nomination committees; however, our board of directors as a whole performs these
functions. We have appointed an Independent Directors Committee consisting of
Dr. Irvin Borish, Mr. Robert Diamond, Mr. Hamill and Mr. Imber, each of whom is
otherwise unaffiliated with the Company. The Independent Directors Committee,
which held two meetings during 1998, reviews all proposed affiliated
transactions to ensure that such transactions do not violate the appropriate
provisions of the Investment Company Act.
The following table set forth certain information about the executive
officers and directors.
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND ADDRESS(1) OFFICES WITH THE COMPANY
------------------- ------------------------
<S> <C>
Dr. Fredric M. Rosemore(2) Chairman of the Board and Treasurer
Mr. Lance B. Rosemore(2) President, Chief Executive Officer,
Secretary, and Director
Dr. Andrew S. Rosemore(2) Executive Vice President and
Chief Operating Officer
Mr. Jan F. Salit Executive Vice President, Chief Investment
Officer and Assistant Secretary
Mr. Barry N. Berlin Chief Financial Officer
Ms. Cheryl T. Murray General Counsel
Ms. Mary J. Brownmiller Senior Vice President
Dr. Irvin M. Borish Director
Mr. Robert Diamond Director
Dr. Martha R. Greenberg(2) Director
Mr. Thomas Hamill Director
Mr. Barry A. Imber Director
</TABLE>
- ---------------------
(1) The address for each of these persons is c/o PMC Capital, Inc., 18111
Preston Road, Suite 600, Dallas, Texas 75252.
(2) Mr. Lance B. Rosemore and Dr. Andrew S. Rosemore are the sons, and Dr.
Martha R. Greenberg is the daughter, of Dr. Fredric M. Rosemore. Dr.
Fredric M. Rosemore and Dr. Andrew S. Rosemore each own in excess of 5%
of our shares. Consequently, all these family members are "interested
persons" as defined under the Investment Company Act.
52
<PAGE> 58
Information concerning the executive officers and directors of the Company is as
follows:
DR. FREDRIC M. ROSEMORE--Dr. Rosemore, 75, has been the Chairman of the
Board and Treasurer of PMC Capital since 1983. From 1990 to 1992, Dr. Rosemore
was Vice President of PMC Capital and from 1979 to 1990, Dr. Rosemore was the
President of PMC Capital. For many years he was engaged in diverse businesses,
including the construction of apartment complexes, factory buildings, and
numerous commercial retail establishments. From 1948 to 1980, Dr. Rosemore
practiced optometry.
He has been a director of PMC Capital since 1983.
MR. LANCE B. ROSEMORE--Mr. Rosemore, 50, has been Chief Executive
Officer of PMC Capital since May 1992, President of PMC Capital since 1990 and
Secretary since 1983. From 1990 to May 1992, Mr. Rosemore was Chief Operating
Officer of PMC Capital. Previously, Mr. Rosemore owned his own consumer finance
company and was employed by C.I.T. Financial and United Carolina Bank Shares. He
has been a director of PMC Capital since 1983.
DR. ANDREW S. ROSEMORE--Dr. Rosemore, 52, has been Chief Operating
Officer of PMC Capital since May 1992 and Executive Vice President of PMC
Capital since 1990. From 1988 to May 1990, Dr. Rosemore was Vice President of
PMC Capital. From 1973 to 1988, Dr. Rosemore owned and managed commercial rental
properties, apartment complexes and factory buildings. Dr. Rosemore has been a
licensed physician in Alabama since 1972. He was a director of PMC Capital from
1988 to August 1999.
MR. JAN F. SALIT--Mr. Salit, 49, has been Executive Vice President of
PMC Capital since May 1993 and Chief Investment Officer and Assistant Secretary
of PMC Capital since March 1994. From 1979 to 1992, Mr. Salit was employed by
Glenfed Financial Corporation and its predecessor company Armco Financial
Corporation, holding various positions including Executive Vice President and
Chief Financial Officer.
MR. BARRY N. BERLIN--Mr. Berlin, 39, has been Chief Financial Officer
of PMC Capital since November of 1992. From August 1986 to November 1992, he was
an audit manager with Imber and Company Certified Public Accountants. Imber and
Company served as PMC Capital's independent accountants from March 1988 until
September 1992. Mr. Berlin is a Certified Public Accountant.
MS. MARY J. BROWNMILLER--Ms. Brownmiller, 44, has been Senior Vice
President of PMC Capital since 1992, and was Vice President of PMC Capital from
November 1989 to 1992. From 1987 to 1989, she was Vice President for
Independence Mortgage, Inc., an SBA lender. From 1976 to 1987, Ms. Brownmiller
was employed by the SBA, holding various positions including senior loan
officer. Ms. Brownmiller is a Certified Public Accountant.
MS. CHERYL T. MURRAY--Ms. Murray, 32, has been General Counsel of PMC
Capital since March 1994. From 1992 to 1994 she was associated with the law firm
of Johnson & Gibbs, P.C. and practiced in the financial services department. Ms.
Murray earned her law degree from Northwestern University School of Law.
DR. IRVIN M. BORISH--Dr. Borish, 86, served as Benedict (Distinguished)
Professor of Optometry at the University of Houston after retiring from Indiana
University, where he holds the status of Professor Emeritus. He operated a
private practice of optometry for over thirty years. He
53
<PAGE> 59
is the author of the major text in his field and holds five patents in contact
lenses. He has been a director of PMC Capital since 1989.
DR. MARTHA R. GREENBERG--Dr. Greenberg, 48, has practiced optometry for
22 years in Russellville, Alabama and currently serves on the Board of Trustees
of Southern College of Optometry. She has been a director of PMC Capital since
1984.
MR. THOMAS HAMILL--Mr. Hamill, 45, is vice president of Jardine Sayer &
Company, Inc., the U.S. reinsurance intermediary subsidiary of Jardine Lloyd
Thompson plc. From 1989 through 1996, Mr. Hamill was president of Caliban
Holdings Ltd. ("PMC Capital") and its subsidiaries, including Belvedere
Insurance Co., Ltd. From September 1986 to December 1989, Mr. Hamill was vice
president of Belvedere Corporation. Mr. Hamill is a non-executive director and
Chairman of the Board of Caliban, Belvedere Insurance and Midlands Management
Corporation. Mr. Hamill has been a director of PMC Capital since 1992.
MR. BARRY A. IMBER--Mr. Imber, 52, has been a principal of Imber and
Company, Certified Public Accountants, or its predecessor, since 1982. Imber and
Company was the independent certified public accountant for PMC Capital and its
subsidiaries for the years ended December 31, 1988 through December 31, 1991.
Mr. Imber has been a director of PMC Capital since March 1995.
MR. ROBERT DIAMOND--Mr. Diamond, 68, has been an attorney for 42 years.
He is currently of counsel to the law firm of Diamond & Diamond, P.A., Millburn,
New Jersey. He served as a director of PMC Capital from 1982 to 1992 and
rejoined our board of directors in January 1994. He served as a member of the
Board of Directors of Allstate Financial Corporation from 1991 to 1993. He has
managed personal investments since 1991.
REMUNERATION OF OFFICERS AND DIRECTORS
Our board of directors had four regular (including video conferences)
meetings and conducted no special meetings during 1998. Non-employee directors
were compensated $500 per meeting for each meeting they attended. We pay for the
travel expenses incurred by directors in connection with such meetings.
The following table sets forth the aggregate amount of compensation
paid by PMC Capital during 1998 to each of our three highest compensated
officers and to all our executive officers and directors as a group during
fiscal year 1998.
54
<PAGE> 60
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Profit Sharing Total Profit Compensation
Capacities in Which Contribution Sharing Benefits Paid
Remuneration Aggregate Accrued During Accrued by Company
Name of Person Received Compensation (1) Last Fiscal Year (2) to Date to Directors
-------------- -------- ---------------- -------------------- ------- ------------
<S> <C> <C> <C> <C> <C>
Dr. Fredric M. Rosemore Chairman of Board $ 87,500 $ 9,068 $205,413
Mr. Lance B. Rosemore President, Chief 379,410 19,670 222,853
Executive Officer
Dr. Andrew S. Rosemore Executive Vice 357,515 19,670 187,594
President, Chief
Operating Officer
Mr. Jan F. Salit Executive Vice 197,272 19,670 73,077
President, Chief
Investment Officer
Dr. Irvin M. Borish Director $ 1,500
Mr. Thomas Hamill Director 2,000
Mr. Barry A. Imber Director 2,500
Dr. Martha R. Greenberg Director 2,000
Mr. Robert Diamond Director 1,500
</TABLE>
- -------------------
(1) We have determined that the amount of perquisites and other personal
benefits paid to each of the executive officers listed in the
compensation table does not exceed the lesser of $50,000 or 10% of that
person's annual salary and bonus reported in the table and that the
aggregate amount of perquisites and other personal benefits paid to all
executive officers and directors as a group does not exceed the lesser
of 10% of all such person's annual salary and bonus or $650,000
($50,000 multiplied by 13, the number of executive officers and
directors). Accordingly, none of those perquisites and other personal
benefits is included in the above table.
(2) The participants in our profit sharing plan consist of all employees
who are at least 20-1/2 years old, have been employed by us for six
months and are employed at the end of each fiscal year or have died,
become totally disabled or retired after age 65 during that fiscal
year. The profit sharing plan is intended to qualify under Section
401(a) of the Internal Revenue Code. A required distribution of $28,699
was paid to Dr. Fredric M. Rosemore. No monies were withdrawn from the
plan during 1998 for the benefit of Mr. Lance B. Rosemore or Dr. Andrew
S. Rosemore. Mr. Lance B. Rosemore and Dr. Fredric M.
Rosemore are co-administrators of the plan.
(3) Our 1997 Director Stock Option Plan automatically grants options to
purchase 2,000 shares to each non-employee director on the first June
1st following the effective date of the director plan and to each newly
elected non-employee director on the first June 1st following his or
her election to our board of directors. Additional options to purchase
1,000 shares each June 1st thereafter shall be granted to each
non-employee director so long as that non-employee director is a
director on such date. The options granted under the director plan
become exercisable one year after date of grant and expire if not
exercised on the earlier of (1) thirty (30) days after the option
holder no longer holds office as a director for any reason and (2)
within five (5) years after the date of grant. In 1998 and 1999, each
non-employee director was granted an option to acquire 1,000 shares on
each of June 1, 1998 and June 1, 1999 at an exercise price of $14.125
and $7.8125 per share, respectively.
OPTION GRANTS
The following table sets forth information regarding stock options
granted to each of our executive officers under our 1997 Employee Share Option
Plan in the fiscal year ended December 31, 1998.
55
<PAGE> 61
<TABLE>
<CAPTION>
Potential Realizable
Number of Value at Assumed
Securities % of Total Options Exercise Final Annual Rates of Share
Underlying Options Granted to Employees Price Exercise Price Appreciation for
Name Granted (#) In Fiscal Year ($/Share) Date Option Term
---- ----------- -------------- --------- ---- -----------
(5%) (10%)
--- ----
<S> <C> <C> <C> <C> <C> <C>
Fredric M. Rosemore 5,000 9.8% 14.0625 6/11/03 $19,426 $42,926
Lance B. Rosemore 5,000 9.8% 14.0625 6/11/03 19,426 42,926
Andrew S. Rosemore 5,000 9.8% 14.0625 6/11/03 19,426 42,926
Jan F. Salit 4,500 8.8% 14.0625 6/11/03 17,483 38,634
Barry N. Berlin 4,500 8.8% 14.0625 6/11/03 17,483 38,634
Mary J. Brownmiller 3,000 5.9% 14.0625 6/11/03 11,656 25,756
Cheryl T. Murray 3,000 5.9% 14.0625 6/11/03 11,656 25,756
</TABLE>
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth, for each of our executive officers,
information regarding exercise of stock options during the fiscal year ended
December 31, 1998 and the value of unexercised stock options as of December 31,
1998. The closing price for the common stock, as reported by the American Stock
Exchange, on December 31, 1998 (the last trading day of the fiscal year) was
$8.5625.
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-
Acquired Options at the-Money Options at
on Value December 31, 1998 December 31, 1998
Exercise Realized (exercisable/unexercisable) (exercisable/unexercisable)
Name (#) ($) (#) ($)
------------- -------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Fredric M. Rosemore - - 6,985(e)/ - (e)/
5,000(u) - (u)
Lance B. Rosemore - - 6,985(e)/ - (e)/
5,000(u) - (u)
Andrew S. Rosemore - - 6,985(e)/ - (e)/
5,000(u) - (u)
Jan F. Salit - - 6,500(e)/ - (e)/
4,500(u) - (u)
Barry N. Berlin - - 6,500(e)/ - (e)/
4,500(u) - (u)
Mary J. Brownmiller - - 4,000(e)/ - (e)/
3,000(u) - (u)
Cheryl T. Murray - - 4,000(e)/ - (e)/
3,000(u) - (u)
</TABLE>
(u) Options are not exercisable within 60 days of the date hereof.
(e) Options are exercisable within 60 days of the date hereof.
EMPLOYMENT AGREEMENTS
PMC Capital entered into employment agreements with Dr. Fredric M.
Rosemore, Mr. Lance B. Rosemore, Dr. Andrew S. Rosemore, Mr. Jan F. Salit, Mr.
Barry N. Berlin, Ms. Mary J. Brownmiller and Ms. Cheryl T. Murray. Each of these
employment agreements provides for at least annual reviews by our board of
directors of the salaries contained therein, with a mandatory minimum increase
based on percentage increases to the cost of living index. In addition, our
board of directors may determine, in its discretion, to award bonuses to each of
the foregoing persons based on our performance. Each of the employment
agreements also provides that if we substantially modify the duties or working
conditions of the executive, the executive could resign
56
<PAGE> 62
and be entitled to be paid by us an amount equal to 2.99 times the annualized
compensation paid to the executive as of June 30, 1998.
HOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
On August 31, 1999, we had outstanding 11,829,116 shares of common
stock. The table below lists, as of the same date, certain information regarding
the beneficial ownership of common stock by all persons who are known by us to
be the beneficial owners of more than 5% of the common stock, our directors, our
executive officers and by all our executive officers and directors as a group.
<TABLE>
<CAPTION>
Names and Addresses Amount and Nature of Percent of
of Beneficial Owners Beneficial Ownership Ownership
-------------------- --------------------- ----------
<S> <C> <C>
Dr. Irvin M. Borish (1) 143,000 1.2%
18111 Preston Road, Suite 600
Dallas, Texas 75252
Mr. Robert Diamond (2) 351,635 3.0%
18111 Preston Road, Suite 600
Dallas, Texas 75252
Dr. Martha R. Greenberg *(3) 572,321 4.8%
18111 Preston Road, Suite 600
Dallas, Texas 75252
Mr. Thomas Hamill (4) 9,000 **
18111 Preston Road, Suite 600
Dallas, Texas 75252
Mr. Barry A. Imber (5) 4,100 **
18111 Preston Road, Suite 600
Dallas, Texas 75252
Dr. Andrew S. Rosemore *(6) 775,102 6.6%
18111 Preston Road, Suite 600
Dallas, Texas 75252
Dr. Fredric M. Rosemore *(7) 605,051 5.1%
18111 Preston Road, Suite 600
Dallas, Texas 75252
Mr. Lance B. Rosemore *(8) 248,619 2.1%
18111 Preston Road, Suite 600
Dallas, Texas 75252
Mr. Jan F. Salit (9) 11,850 **
18111 Preston Road, Suite 600
Dallas, Texas 75252
Mr. Barry N. Berlin (10) 11,350 **
18111 Preston Road, Suite 600
Dallas, Texas 75252
</TABLE>
57
<PAGE> 63
<TABLE>
<S> <C> <C>
Ms. Mary J. Brownmiller (11) 9,110 **
18111 Preston Road, Suite 600
Dallas, Texas 75252
Ms. Cheryl T. Murray (12) 7,000 **
18111 Preston Road, Suite 600
Dallas, Texas 75252
Directors and executive officers 2,748,138 23.2%
as a group (12 persons)
</TABLE>
58
<PAGE> 64
- ----------------------
(1) Includes 120,000 shares held by a partnership of which Dr. Borish is
the general partner, 20,000 shares held in two charitable lead trusts
of which Dr. Borish is the trustee and 3,000 unexercised exercisable
options.
(2) Includes 179,691 shares held in an individual retirement rollover
account, 5,300 shares held in grandchildren's trusts of which Mr.
Diamond is the trustee and 3,000 unexercised exercisable options.
(3) Includes 21,344 shares in which her children have a beneficial
interest, 31,400 shares held in an individual retirement account,
145,000 shares held jointly with her husband, 157,917 shares held in a
pension trust, 4,000 shares held by a partnership for the benefit of
Dr. Greenberg, 25,300 shares held in a trust for the benefit of Dr.
Greenberg and her children and 3,000 unexercised exercisable options.
Does not include 225,660 shares owned by her husband, as to which
shares she disclaims any beneficial interest.
(4) Includes 1,000 shares owned by Mr. Hamill's minor son and 3,000
unexercised exercisable options.
(5) Includes 3,000 unexercised exercisable options.
(6) Includes 371,332 shares held by a partnership of which Dr. Rosemore and
his wife are general partners, 6,150 shares held as custodian for his
children, 360,850 shares held in individual retirement accounts, 24,785
shares held in trust for the benefit of Dr. Rosemore and his children
and 11,985 unexercised exercisable options.
(7) Represents shares held by a partnership of which Dr. Fredric M.
Rosemore is a general partner. Also includes 11,985 unexercised
exercisable options.
(8) Includes 4,025 shares in which his minor children have beneficial
interest, 143,989 shares held jointly with his wife, 11,486 shares held
in an individual retirement account, 26,095 shares held in trust for
the benefit of Mr. Rosemore and his children, 6,600 shares held by a
partnership for the benefit of Mr. Rosemore and his children, 4,020
shares owned individually by Mr. Rosemore's wife and 11,985 unexercised
exercisable options.
(9) Consists of 850 shares held in an individual retirement account and
includes 11,000 unexercised exercisable options.
(10) Includes 11,000 unexercised exercisable options.
(11) Includes 7,000 unexercised exercisable options.
(12) Includes 7,000 unexercised exercisable options.
* Mr. Lance B. Rosemore and Dr. Andrew S. Rosemore are the sons, and Dr.
Martha R. Greenberg is the daughter, of Dr. Fredric M. Rosemore. Drs.
Andrew S. Rosemore and Fredric M. Rosemore each own in excess of 5% of
the shares of the Company. Consequently, all such persons may be deemed
to be "interested persons" as defined under the Investment Company Act.
** Less than 1.0%
DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT
CAPITAL STOCK OF PMC CAPITAL
The following summary of the terms of the shares of our capital stock
contains all material terms of our capital stock, but it does not set forth all
the provisions of our articles of incorporation or our bylaws. For additional
information about our articles of incorporation and bylaws, we
59
<PAGE> 65
encourage you to read those documents which are exhibits to the registration
statement of which this prospectus is a part.
GENERAL. The authorized share capital of PMC Capital consists of
30,000,000 shares of common stock. As of August 31, 1999, PMC Capital had
11,829,116 shares of common stock issued and outstanding. In addition, PMC
Capital has reserved for issuance 1,000,000 shares under the plan.
VOTING RIGHTS. Each holder of common stock is entitled to one vote per
share on all matters submitted to a vote of shareholders. Holders of common
stock do not have cumulative voting rights.
DIVIDEND RIGHTS. Holders of common stock are entitled to receive
dividends out of funds legally available therefor when, as and if declared by
our board of directors.
LIQUIDATION AND OTHER PROVISIONS. All shares of common stock have equal
rights to receive pro rata, our net assets upon liquidation or dissolution after
payments to creditors and the prior payment of any preferential amounts payable
to holders of preferred stock, if any. The common stock is not redeemable and
has no preemptive or conversion rights. All outstanding shares of common stock
are, and the shares of common stock offered hereby will be, when issued, fully
paid and non-assessable.
LIABILITY AND INDEMNIFICATION OF DIRECTORS. Florida law limits the
liability of a director of a Florida corporation if the director discharges his
duties in accordance with standards specified by statute. Florida law and our
bylaws also authorize us to indemnify our directors, officers, employees and
agents. Each of our directors has entered into an agreement with us which
provides for their indemnification in certain circumstances.
PREFERRED STOCK OF PMC INVESTMENT
PMC Investment has outstanding 30,000 shares of $100 par value, 3%
cumulative preferred stock and 40,000 shares of $100 par vale, 4% cumulative
preferred stock. The 3% preferred stock and the 4% preferred stock are held by
the SBA pursuant to the SBIA.
PMC Investment 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
$90,000 on the 3% Preferred Stock were recognized during each of the years ended
December 31, 1998 and 1997, respectively.
The 4% preferred stock was issued during September 1994 ($2,000,000)
and May 1995 ($2,000,000), and must be redeemed at par no later than 15 years
from the date of issuance. Dividends of approximately $160,000 were recognized
during each of the years ended December 31, 1998 and 1997, 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.
60
<PAGE> 66
LONG-TERM DEBT
We have a $15 million uncollateralized revolving credit facility which
expires in March 2000. Advances pursuant to the credit facility bear interest at
our option at the lender's prime rate less 50 basis points or the London
Interbank Offering Rate (LIBOR) plus 175 basis points. The credit facility
requires us to meet certain covenants, the most restrictive of which includes
that the ratio of net charge-offs to net loans receivable will not exceed 2.0%,
and the ratio of assets to senior debt (as defined in the credit facility) will
not fall below 135%. At December 31, 1998, we had no outstanding borrowings
under this credit facility. At December 31, 1998, the Company was in compliance
with all covenants of this facility.
We have completed $35 million in private placements of uncollateralized
senior notes. These borrowings have been utilized to fund commitments of our
non-SBA lending program. The notes require us to meet certain covenants, the
most restrictive of which require:
(i) that net loans receivable (as defined in the note agreement) exceed
150% of senior funded debt,
(ii) the increase in our loan valuation reserve for any 12 month period
must not exceed 3% of net loans receivable, and
(iii) our consolidated earnings plus interest expense must exceed 150%
of interest expense. At December 31, 1998, we were in compliance with all of the
covenants of these notes. At December 31, 1998 outstanding uncollateralized
senior notes were as follows:
<TABLE>
<CAPTION>
Date Interest Final
---- Rate Amount Maturity
---- ------ --------
<S> <C> <C> <C>
July 19,1993(1) 7.20% $20,000,000 July 19, 2001
December 15, 1995 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%(2) 5,000,000 April 19,2004
----------
$35,000,000
</TABLE>
- -------------------
(1) A portion of this debt ($6.7 million) matured during July 1999 and was
refinanced at 7.44%, maturing in full during July 2005. The remaining
approximately $13.3 million is due in two equal installments commencing
July 2000.
(2) Reset quarterly, 6.30% at June 30, 1999.
61
<PAGE> 67
Principal payments required on the senior notes at June 30, 1999 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>
Western Financial and PMC Investment have issued debentures to the SBA
to partially fund their lending activities. These debentures require semi-annual
interest payments, with the entire principal amount due at maturity. The
debentures are not convertible, have no sinking fund provisions, impose
restrictions on the ability of Western Financial and PMC Investment to
repurchase their securities, to make distributions to PMC Capital other than out
of retained earnings and to increase the aggregate amount of salaries or other
compensation of officers, directors, or employees in excess of the amount
previously approved by the SBA.
At June 30, 1999, the maturities, interest rates and principal
outstanding on the SBA debentures were as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Amount
- ------------- ------------- ------
<S> <C> <C>
August 18, 1999................................. 8.125% $ 1,000,000
September 1, 1999............................... 8.800% 2,500,000
December 1, 1999................................ 8.600% (1) 650,000
January 2, 2000................................. 7.875% 3,000,000
March 1, 2000................................... 9.350% 1,000,000
June 1, 2000.................................... 9.300% 2,000,000
June 1, 2000.................................... 9.300% (1) 300,000
June 1, 2000.................................... 9.300% (3) 1,030,000
September 1, 2000............................... 9.600% 4,310,000
December 1, 2002................................ 7.510% (1) 510,000
September 1, 2004............................... 5.200% (2) 3,000,000
September 1, 2004............................... 8.200% 3,000,000
March 1, 2005................................... 4.840% (4) 3,000,000
June 1, 2005.................................... 3.690% (5) 5,000,000
September 1, 2005............................... 3.875% (6) 7,000,000
September 1, 2006............................... 7.590% 2,490,000
-----------
$39,790,000
</TABLE>
- ---------------
(1) In April 1995, we assumed $2,260,000 in SBA debentures from a
non-affiliated small business investment corporation in exchange for
loans receivable of $2,109,062 and cash of $150,938. The loans acquired
were initially originated by us and a portion sold
62
<PAGE> 68
to the non-affiliated SBIC. All of these loans were purchased at par
and were performing according to their terms at the time of
reacquisition.
(2) The interest rate will increase to 8.200% in September 1999 until
maturity.
(3) In May 1996, we assumed $1,030,000 in SBA debentures from a
non-affiliated SBIC in exchange for loans receivable of approximately
$200,000 and cash of approximately $900,000. The loans were initially
originated by us and a portion sold to the non-affiliated SBIC. All of
these loans were purchased at par and were performing according to
their terms at the time of reacquisition.
(4) The interest rate will increase to 7.840% in March 2000 until maturity.
(5) The interest rate will increase to 6.690% in June 2000 until maturity.
(6) The interest rate will increase to 6.875% in September 2000 until
maturity.
OUTSTANDING SECURITIES
The following chart indicates the common stock and preferred stock
of PMC Investment outstanding as of June 30, 1999:
<TABLE>
<CAPTION>
Amount Outstanding
Amount held by Exclusive of Amount
Amount the Company or Held by the Company
Title of Class Authorized for its Account for its Account
-------------- ---------- --------------- ---------------
(Rounded to the nearest thousand)
<S> <C> <C> <C>
Common Stock 30,000,000 -- 11,829,116
Class A Cumulative 30,000 -- 30,000
Preferred Stock of
PMIC
Class B Cumulative 40,000 -- 40,000
Preferred Stock of
PMIC
</TABLE>
TRANSFER AGENT AND DIVIDEND-PAYING AGENT
Our transfer and dividend-paying agent is American Stock & Trust
Company, 40 Wall Street, 46th Floor, New York, N.Y. 10005.
BROKERAGE ALLOCATION AND OTHER PRACTICES
We generally do not pay brokerage fees on the securities in our
portfolio. Although we may pay those fees in the future in connection with the
purchase of short-term investments, there is no arrangement to allocate
brokerage expenses.
We have no obligation to deal with any broker, dealer or group of
brokers or dealers in purchasing or selling portfolio securities, and orders for
such transactions may be placed with a number of brokers and dealers.
In purchasing and selling portfolio securities, we select brokers and
dealers on the basis of the price of the security, commission rates and other
factors. Where practicable, we will survey a
63
<PAGE> 69
number of brokers and dealers in connection with a proposed portfolio
transaction and select the broker or dealer that offers us the best price and
execution or other services. At least annually, we evaluate the overall
reasonableness of the brokerage commissions we have paid, if any.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be
passed upon for us by Locke Liddell & Sapp LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements of PMC Capital, Inc. and
Subsidiaries as of December 31, 1998 and 1997 and 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 and the accompanying
consolidating financial statements as of and for the year ended December 31,
1998, the financial statements of PMC Capital Limited Partnership as of December
31, 1998 and 1997 and 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,
and the financial statements of PMC Capital L.P. 1998-1 at December 31, 1998 and
for the period from October 23, 1998 (inception) to December 31, 1998, included
in this Prospectus, have been so included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
64
<PAGE> 70
PMC CAPITAL, INC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For Inclusion in Form N-2
Filed with the
Securities and Exchange Commission
65
<PAGE> 71
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> 72
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> 73
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> 74
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> 75
- --------------------------------------------------------------------------------
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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> 108
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
PMC Capital Limited Partnership ("the Partnership") was formed as a
Delaware limited partnership in November 1996 to act as a special
purpose affiliate of PMC Capital, Inc. ("PMC Capital"), 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> 109
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEFERRED BORROWING COSTS
Costs incurred in connection with the issuance of notes payable are
included in deferred borrowing costs. These costs are amortized over
the estimated life of the related obligation.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents for
purposes of the statement of cash flows.
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> 110
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 4. NOTES PAYABLE:
On November 13, 1996, the Partnership completed a private placement of
approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "Notes"). The Notes, issued at par, which have a
stated maturity in 2005 and bear interest at the rate of 6.725% per
annum, are collateralized by the loans contributed by PMC Capital to
the Partnership. In connection with this private placement, the Notes
were given a rating of "Aa2" by Moody's Investors Service. The
Partnership has the exclusive obligation for the repayment of the
Notes, and the holders of the Notes have no recourse to PMC Capital or
its other subsidiaries or their assets in the event of nonpayment of
the loans. Required principal payments to the noteholders are based
upon the collection of principal on the Contributed Loans. All
principal collected on the Contributed Loans during the monthly period
(as defined in the Trust Indenture) are used to make the required
principal payment on the first business day of the following month. 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> 111
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
Restricted investments : The carrying amount is a reasonable
estimation of fair value.
Notes payable: The estimated fair value is based on present value
calculation using prices of the same or similar instruments after
considering risk, current interest rates and remaining maturities.
NOTE 7. RELATED PARTY TRANSACTIONS:
At December 31, 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> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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> 120
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> 121
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net .............................................. $ 73,087 $ 116,711
Cash equivalents ................................................... 56,187 18,489
Investment in unconsolidated subsidiaries .......................... 19,726 12,930
Interest-only strip receivables .................................... 6,289 4,168
Restricted investments ............................................. 2,984 2,525
Mortgage-backed security of affiliate .............................. 2,042 2,168
Real property owned ................................................ 35 109
--------- ---------
TOTAL INVESTMENTS AT VALUE ........................................... 160,350 157,100
--------- ---------
OTHER ASSETS:
Receivable for loans sold .......................................... 164 156
Due from unconsolidated subsidiaries ............................... 2,394 2,579
Servicing asset .................................................... 1,127 1,330
Deferred charges, deposits and other assets ........................ 937 1,140
Accrued interest receivable ........................................ 379 581
Cash ............................................................... 970 235
Property and equipment, net ........................................ 229 228
--------- ---------
TOTAL OTHER ASSETS ................................................... 6,200 6,249
--------- ---------
TOTAL ASSETS ......................................................... $ 166,550 $ 163,349
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ............................................. $ 39,790 $ 39,790
Notes payable ...................................................... 35,000 35,000
Accounts payable ................................................... 2,507 1,728
Dividends payable .................................................. 3,019 3,020
Borrower advances .................................................. 2,391 1,598
Accrued interest payable ........................................... 1,254 1,264
Due to unconsolidated subsidiaries ................................. 100 1
Deferred fee revenue ............................................... 869 666
Other liabilities .................................................. 749 1,131
--------- ---------
TOTAL LIABILITIES .................................................... 85,679 84,198
--------- ---------
Commitments and contingencies
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY ............................. 7,000 7,000
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares of $.01 par value,
11,829,116 shares issued and outstanding
at June 30, 1999 and December 31, 1998 ........................ 118 118
Additional paid-in capital ......................................... 71,312 71,312
Undistributed net operating income ................................. 3,170 1,495
Net unrealized depreciation on investments ......................... (729) (774)
--------- ---------
73,871 72,151
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 166,550 $ 163,349
========= =========
NET ASSET VALUE PER COMMON SHARE ..................................... $ 6.24 $ 6.10
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE> 122
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest ................................................................ $ 7,698 $ 8,256
Premium income .......................................................... 382 527
Other investment income, net ............................................ 417 483
-------- --------
Total investment income ................................................... 8,497 9,266
Equity in income of unconsolidated subsidiaries, net ...................... 1,494 1,175
Other income .............................................................. 1,110 1,790
-------- --------
Total income .............................................................. 11,101 12,231
-------- --------
EXPENSES:
Interest ................................................................ 2,647 2,653
Salaries and related benefits ........................................... 1,901 1,962
General and administrative .............................................. 445 338
Profit sharing plan ..................................................... 78 78
Rent .................................................................... 132 118
Legal and accounting .................................................... 143 134
Small Business Administration fees ...................................... 39 49
Directors and shareholders expense ...................................... 38 43
-------- --------
TOTAL EXPENSES ............................................................ 5,423 5,375
-------- --------
Net operating income ...................................................... 5,678 6,856
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ..................................................... (527) (111)
Gain on sale .......................................................... 2,564 --
Change in unrealized appreciation
(depreciation) on investments ....................................... 45 (122)
-------- --------
Total realized and unrealized gain (loss) on investments .................. 2,082 (233)
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS .............................................. $ 7,760 $ 6,623
======== ========
PREFERRED DIVIDENDS ....................................................... $ 125 $ 125
======== ========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .............. 11,829 11,772
======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE ............................... $ 0.65 $ 0.55
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 123
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest ........................................................... $ 3,929 $ 4,163
Premium income ..................................................... 213 138
Other investment income, net ....................................... 196 313
-------- --------
Total investment income .............................................. 4,338 4,614
Equity in income of unconsolidated subsidiaries, net ................. 631 587
Other income, net .................................................... 528 1,240
-------- --------
Total income ......................................................... 5,497 6,441
-------- --------
EXPENSES:
Interest ........................................................... 1,344 1,321
Salaries and related benefits ...................................... 936 946
General and administrative ......................................... 194 174
Profit sharing plan ................................................ 40 40
Rent ............................................................... 79 57
Legal and accounting ............................................... 82 63
Small Business Administration fees ................................. 19 20
Directors and shareholders expense ................................. 28 32
-------- --------
TOTAL EXPENSES ....................................................... 2,722 2,653
-------- --------
Net operating income ................................................. 2,775 3,788
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ................................................ -- (23)
Gain on sale ..................................................... 2,564 --
Change in unrealized appreciation
(depreciation) on investments .................................. (324) (434)
-------- --------
Total realized and unrealized gain (loss) on investments ............. 2,240 (457)
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ......................................... $ 5,015 $ 3,331
======== ========
PREFERRED DIVIDENDS .................................................. $ 63 $ 63
======== ========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ......... 11,829 11,812
======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE .......................... $ 0.42 $ 0.28
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 124
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
--------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments ............ $ 7,760 $ 6,623
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 ...................................................... (5,685) (4,967)
Proceeds from sale of guaranteed loans ........................................... 6,092 6,404
Change in unrealized depreciation on investments and loans written-off ........... 482 233
Unrealized premium income, net ................................................... (106) --
Depreciation and amortization .................................................... 544 639
Accretion of loan discount and deferred fees ..................................... (739) (495)
Deferred fees collected .......................................................... 67 49
(Gain) loss on sale of assets .................................................... (2,569) 5
Equity in income of subsidiaries, net ............................................ (1,494) (1,174)
Net change in operating assets and liabilities:
Accrued interest receivable ................................................... 33 38
Other assets .................................................................. 142 404
Accrued interest payable ...................................................... (10) (50)
Borrower advances ............................................................. 793 342
Other liabilities ............................................................. 575 (722)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................................ 5,885 7,329
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ........................................................................... (28,079) (17,709)
Principal collected and other adjustments .............................................. 11,277 11,616
Proceeds from interest-only strip receivable ........................................... 295 450
Proceeds from partnership distributions ................................................ 1,794 1,200
Proceeds from mortgage-backed security of affiliate .................................... 126 --
Proceeds from sale of assets ........................................................... 80 171
Purchase of furniture and fixtures and other assets .................................... (32) (54)
Investment in restricted cash .......................................................... (459) (1,424)
Investment in unconsolidated subsidiary ................................................ (1,834) --
Advances to (from) unconsolidated affiliates, net ...................................... 284 (1,127)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................................................... (16,548) (6,877)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................................ -- 2,064
Proceeds from sale of loans to unconsolidated subsidiary .............................. 55,136 --
Payment of SBA debentures ............................................................. -- (1,500)
Payment of dividends on common stock .................................................. (5,915) (7,289)
Payment of dividends on preferred stock ............................................... (125) (124)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ...................................... 49,096 (6,849)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... 38,433 (6,397)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 18,724 17,502
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 57,157 $ 11,105
======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ......................................................................... $ 2,636 $ 2,681
======== ========
Dividends reinvested .................................................................. $ -- $ 499
======== ========
Loans to facilitate sale of real property owned ....................................... $ -- $ 122
======== ========
Reclassification from loans receivable to real property owned,
including Unconsolidated Subsidiaries ............................................. $ 323 $ 45
======== ========
Loans and interest receivable transferred in exchange for
investment in unconsolidated subsidiary ........................................... $ 4,993 $ --
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 125
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Financial Statements:
The accompanying consolidated balance sheet of PMC Capital, Inc. ("PMC") and its
wholly-owned regulated investment company subsidiaries (collectively, the
"Company") as of June 30, 1999 and the consolidated statements of income for the
three and six months ended June 30, 1999 and 1998 and cash flows for the six
months ended June 30, 1999 and 1998 have not been audited by independent
accountants. In the opinion of the Company's management, the financial
statements reflect all adjustments necessary to present fairly the Company's
financial position at June 30, 1999, the results of operations for the three and
six months ended June 30, 1999 and 1998 and cash flows for the six months ended
June 30, 1999 and 1998. These adjustments are of a normal recurring nature.
Certain notes and other information have been omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q. Therefore, these
financial statements should be read in conjunction with the Company's 1998
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results for the three and six months ended June 30, 1999 are not necessarily
indicative of future financial results.
NOTE 2. RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to the current
year presentation.
NOTE 3. BUSINESS:
PMC is a diversified, closed-end management investment company that has elected
to operate as a business development company under the Investment Company Act of
1940 (the "1940 Act"). PMC engages in the business of originating loans to small
businesses either directly or through its three principal subsidiaries: First
Western SBLC, Inc. ("First Western"), PMC Investment Corporation ("PMCIC") and
Western Financial Capital Corporation ("Western Financial"). First Western,
PMCIC and Western Financial are registered under the 1940 Act as diversified,
closed-end management investment companies. In addition, PMC is directly or
indirectly either the sole shareholder or partner of several non-investment
company act subsidiaries. These are: PMC Advisers, Ltd. and its subsidiary ("PMC
Advisers"); PMC Funding Corp. and its subsidiary ("PMC Funding"); PMC Capital
Limited Partnership (the "1996 Partnership") and its related general partner and
trust; PMC Capital, L.P. 1998-1 (the "1998 Partnership") and its related general
partner and PMC Capital, L.P. 1999-1 (the "1999 Partnership" and together with
the 1996 Partnership and the 1998 Partnership, the "Limited Partnerships") and
its related general partner. PMC has elected to be taxed as a regulated
investment company and consequently distributes substantially all of its taxable
income as dividends to shareholders.
NOTE 4. BASIS FOR CONSOLIDATION:
The consolidated financial statements include the accounts of PMC and its
wholly-owned regulated investment company subsidiaries. Intercompany
transactions have been eliminated in consolidation.
The accounts of PMC Advisers, PMC Funding, and the Limited Partnerships are
accounted for by the equity method of accounting in conformity with Federal
securities laws.
Consolidated Subsidiaries
First Western is a small business lending company ("SBLC") that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration ("SBA") pursuant to its Section 7(a) Program (the "7(a)
Program"). 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,
6
<PAGE> 126
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BASIS FOR CONSOLIDATION: (CONTINUED)
to provide long-term collateralized loans to eligible small businesses owned by
"disadvantaged" persons, as defined under the regulations of the SBA. The
interest rates on loans originated by PMCIC are either fixed-rate or a variable-
rate which is based on the prime lending rate ("Prime Rate"). As an SSBIC, PMCIC
is eligible to obtain long-term, fixed-rate funding from the SBA through the
issuance of debentures (which are guaranteed by the SBA and on which the
interest rate was reduced through an SBA subsidy by 3% during the first five
years). The SBA subsidy is no longer provided on new issuances under the SSBIC
program.
Western Financial is a licensed small business investment company ("SBIC") under
the SBIA that provides loans to borrowers whether or not they qualify as
"disadvantaged." The interest rates on loans originated by Western Financial are
either fixed-rate or a variable-rate which is based on the Prime Rate. As an
SBIC, Western Financial is eligible to obtain long-term, fixed-rate funding from
the SBA through the issuance of debentures.
PMC originates loans to borrowers on a non-SBA supported basis using similar
criteria as that used for other loans that are funded under the SBA programs
utilized by the subsidiaries. These loans are made to borrowers who exceed the
eligibility requirements of the 7(a) Program or SBIC programs.
Unconsolidated Subsidiaries
PMC Advisers, acts as the investment advisor for PMC Commercial Trust ("PMC
Commercial"), a Texas real estate investment trust and an affiliate of PMC
Capital.
PMC Funding is a Florida corporation that holds assets on behalf of the Company.
PMC Capital is the sole shareholder of PMC Funding.
The 1996 Partnership was formed as a Delaware limited partnership in November
1996 to act as a special purpose affiliate of the Company. The 1996 Partnership
was established to acquire fixed-rate 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 variable-rate loans from the Company and to issue
variable-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.
The 1999 Partnership was formed as a Delaware limited partnership in June 1999
to act as a special purpose affiliate of the Company. The 1999 Partnership was
established to acquire fixed-rate loans from the Company and to issue fixed-rate
debt through a private placement. PMC Capital Corp. 1999-1 is a Delaware
corporation formed in June 1999 to be the general partner of the 1999
Partnership.
NOTE 5. DIVIDENDS PAID AND DECLARED:
During January 1999 and April 1999, the Company paid $0.250 per share in
dividends to common shareholders of record on December 31, 1998 and March 31,
1999. During June 1999, the Company declared a $0.250 per share dividend to
common shareholders of record on June 30, 1999 which was paid during July 1999.
NOTE 6. INVESTMENT IN LIMITED PARTNERSHIPS:
On June 3, 1999, the 1999 Partnership, a Delaware limited partnership, completed
a structured sale of a pool of fixed-rate loans through a private placement (the
"1999 Private Placement") of approximately $55.6 million of its 1999 Loan-
Backed Fixed Rate Notes (the "1999 Notes"). The 1999 Notes were issued at par
and have a stated maturity of July 2024. These notes were issued with an
interest rate of 6.60% and were originally collateralized by approximately $60
7
<PAGE> 127
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INVESTMENT IN LIMITED PARTNERSHIPS: (CONTINUED)
million of loans contributed by PMC Capital to the 1999 Partnership. In
connection with the 1999 Private Placement, the 1999 Notes were given a rating
of "Aaa" by Moody's Investors Service. The terms of the 1999 Notes provide that
the partners of the 1999 Partnership are not liable for any payments on the 1999
Notes. Accordingly, if the 1999 Partnership fails to pay the 1999 Notes, the
sole recourse of the holders of the 1999 Notes is against the assets of the 1999
Partnership. The Company, therefore, has no obligation to pay the 1999 Notes,
nor do the holders of the 1999 Notes have any recourse against the assets of the
Company. The net proceeds from the issuance of the 1999 Notes (approximately
$55.6 million prior to payment of issuance costs of approximately $500,000 and
the funding of approximately $1.8 million for a reserve fund held by the trustee
as collateral) were distributed to PMC Capital. PMC Capital Corp. 1999-1 was
formed in June 1999 to act as the general partner of the 1999 Partnership and
owns a 1% general partnership interest in the 1999 Partnership. PMC Capital owns
a 99% limited partnership interest in the 1999 Partnership. PMC is the servicer
for all loans held by the 1999 Partnership. In connection with this transaction,
the Company recorded a gain of approximately $2.6 million which is included on
the accompanying statements of operations for the three and six months ended
June 30, 1999.
As described in Note 4, the accounts of the Limited Partnerships are accounted
for by the equity method of accounting in conformity with Federal securities
law. During the three and six months ended June 30, 1999, the Limited
Partnerships had $1,957,000 and $3,556,000 in total income, respectively, and
net income of $785,000 and $1,451,000 before the elimination of the net cash
flow relating to the interest-only strip receivables.
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS:
As described in Note 4, the consolidated financial statements include the
accounts of PMC and its wholly-owned regulated investment company subsidiaries.
The following are condensed combined financial statements of the Unconsolidated
Entities as of June 30, 1999 and December 31, 1998 and for the three and six
months ended June 30, 1999 and 1998:
CONDENSED COMBINED BALANCE SHEETS
---------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(Unaudited)
ASSETS (IN THOUSANDS)
<S> <C> <C>
INVESTMENTS AT VALUE:
Loans receivable, net ................................. $116,465 $ 61,768
Cash equivalents ...................................... 40 64
Restricted investments and real property owned ........ 11,289 9,096
-------- --------
127,794 70,928
OTHER ASSETS ............................................... 741 1,673
-------- --------
Total assets .......................................... $128,535 $ 72,601
======== ========
LIABILITIES AND OWNERS' EQUITY
LIABILITIES:
Notes payable ......................................... $106,220 $ 57,053
Other liabilities ..................................... 2,589 2,618
-------- --------
108,809 59,671
-------- --------
OWNERS' EQUITY:
Common stock and additional paid-in capital ........... 526 526
Partners' capital ..................................... 19,052 12,740
Retained earnings (deficit) ........................... 148 (336)
-------- --------
19,726 12,930
-------- --------
Total liabilities and owners' equity .................. $128,535 $ 72,601
======== ========
</TABLE>
8
<PAGE> 128
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED STATEMENTS OF INCOME
---------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited, in thousands)
<S> <C> <C> <C> <C>
INCOME:
Investment income ........................ $ 3,554 $ 2,173 $ 2,002 $ 1,064
Other income, net ........................ 545 22 93 (13)
------- ------- ------- -------
Total income ..................... 4,099 2,195 2,095 1,051
------- ------- ------- -------
EXPENSES:
Interest ................................. 2,046 887 1,141 415
General and administrative expenses ..... 118 133 49 49
Unrealized loss on loans ................. 71 -- 71 --
------- ------- ------- -------
Total expense ....................... 2,235 1,020 1,261 464
------- ------- ------- -------
NET INCOME ................................... 1,864 1,175 834 587
Less: elimination of the net cash flow and
unrealized gain (loss) on loans
relating to the interest-only strip
receivable in consolidation ......... 370 -- 203 --
------- ------- ------- -------
EQUITY IN INCOME OF UNCONSOLIDATED
SUBSIDIARIES, NET .................. $ 1,494 $ 1,175 $ 631 $ 587
======= ======= ======= =======
</TABLE>
Included in restricted investments and real property owned on the accompanying
condensed combined balance sheet of the Unconsolidated Entities at June 30, 1999
is $370,000 in real property owned including $323,000 which was transferred from
loans receivable. During March 1999, PMC Funding acquired the property as part
of liquidating a loan receivable owned primarily by PMCIC. The asset was
recorded at the expected net realizable value as determined by the Company's
Board of Directors.
NOTE 8. EARNINGS PER COMMON SHARE COMPUTATIONS:
The computations of basic earnings per common share are based on the weighted
average number of shares outstanding during the period. For the purposes of
determining the diluted earnings per share, there was no change in the weighted
average shares outstanding for the effect of stock options during the three and
six months ended June 30, 1999 and 1998 since the stock options were
anti-dilutive. Earnings are defined as the net operating income and realized and
unrealized gain (loss) on investments and are reduced by the preferred stock
dividend requirements of PMCIC. Preferred stock dividend requirements were
approximately $125,000 during each of the six months ended June 30, 1999 and
1998 and $62,000 during each of the three months ended June 30, 1999 and 1998.
The weighted average number of shares used in the computations of basic and
diluted earnings per common share were 11.8 million for the three months and six
months ended June 30, 1999 and 1998.
NOTE 9. COMMITMENTS AND CONTINGENCIES:
Loan commitments outstanding at June 30, 1999, to various small business
companies, including the unfunded portion of projects in the construction phase,
amounted to approximately $74.1 million. Of these commitments, $23.1 million are
for loans to be originated by First Western, a portion of which will be sold
into the secondary market. These commitments are made in the ordinary course of
the Company's business and, in management's opinion, are generally on the same
terms as those to existing borrowers. Commitments to extend credit are
agreements to lend to a customer provided that the terms established in the
contract are met. Commitments generally have fixed expiration dates and require
payment of a fee. Since some commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
9
<PAGE> 129
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Investments at value:
Loans receivable, net .............................................. $ 128,450 $ 116,711
Cash equivalents ................................................... 7,537 18,489
Investment in unconsolidated subsidiaries .......................... 12,824 12,930
Interest-only strip receivables .................................... 3,790 4,168
Restricted investments ............................................. 2,627 2,525
Mortgage-backed security of affiliate .............................. 2,055 2,168
Real property owned ................................................ 109 109
--------- ---------
Total investments at value ........................................... 157,392 157,100
--------- ---------
Other assets:
Receivable for loans sold .......................................... 168 156
Due from unconsolidated subsidiaries ............................... 1,668 2,579
Servicing asset .................................................... 1,146 1,330
Deferred charges, deposits and other assets ........................ 1,096 1,140
Accrued interest receivable ........................................ 626 581
Cash ............................................................... 250 235
Property and equipment, net ........................................ 240 228
--------- ---------
Total other assets ................................................... 5,194 6,249
--------- ---------
Total assets ......................................................... $ 162,586 $ 163,349
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
SBA debentures payable ............................................. $ 39,790 $ 39,790
Notes payable ...................................................... 35,000 35,000
Accounts payable ................................................... 2,071 1,728
Dividends payable .................................................. 3,019 3,020
Borrower advances .................................................. 1,506 1,598
Accrued interest payable ........................................... 893 1,264
Due to unconsolidated subsidiaries ................................. 21 1
Deferred fee revenue ............................................... 804 666
Other liabilities .................................................. 606 1,131
--------- ---------
Total liabilities .................................................... 83,710 84,198
--------- ---------
Commitments and contingencies
Cumulative preferred stock of subsidiary ............................. 7,000 7,000
--------- ---------
Shareholders' equity:
Common stock, authorized 30,000,000 shares of $.01 par value,
11,829,000 shares issued and outstanding
at March 31, 1999 and December 31, 1998 ....................... 118 118
Additional paid-in capital ......................................... 71,312 71,312
Undistributed net operating income ................................. 851 1,495
Net unrealized depreciation on investments ......................... (405) (774)
--------- ---------
71,876 72,151
--------- ---------
Total liabilities and shareholders' equity ........................... $ 162,586 $ 163,349
========= =========
Net asset value per common share ..................................... $ 6.08 $ 6.10
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
2
<PAGE> 130
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
----------- ----------
(UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest ........................................................... $ 3,769 $ 4,093
Premium income ..................................................... 169 389
Other investment income, net ....................................... 221 170
-------- --------
Total investment income .............................................. 4,159 4,652
Equity in income of unconsolidated subsidiaries, net ................. 863 588
Other income ......................................................... 582 550
-------- --------
Total income ......................................................... 5,604 5,790
-------- --------
EXPENSES:
Interest ........................................................... 1,303 1,332
Salaries and related benefits ...................................... 965 1,016
General and administrative ......................................... 251 164
Profit sharing plan ................................................ 38 38
Rent ............................................................... 53 61
Legal and accounting ............................................... 61 71
Small Business Administration fees ................................. 20 29
Directors and shareholders expense ................................. 10 11
-------- --------
Total expenses ....................................................... 2,701 2,722
-------- --------
Net operating income ................................................ 2,903 3,068
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Loans written-off ................................................ (527) (133)
Change in unrealized appreciation
(depreciation) on investments .................................. 369 357
-------- --------
Total realized and unrealized gain (loss) on investments ............. (158) 224
-------- --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ......................................... $ 2,745 $ 3,292
======== ========
PREFERRED DIVIDENDS .................................................. $ 62 $ 62
======== ========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ......... 11,829 11,731
======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE .......................... $ 0.23 $ 0.28
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE> 131
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized gain (loss) on investments ............ $ 2,745 $ 3,292
Adjustments to reconcile net operating income and realized and unrealized gain
(loss) on investments to net cash provided by operating activities:
Loans funded, held for sale ...................................................... (1,538) (2,570)
Proceeds from sale of guaranteed loans ........................................... 2,172 3,308
Change in unrealized depreciation on investments and loans written-off ........... 158 (224)
Unrealized premium income, net ................................................... (17) (8)
Depreciation and amortization .................................................... 323 254
Accretion of loan discount and deferred fees ..................................... (242) (189)
Deferred fees collected .......................................................... 46 (27)
Loss on sale of assets ........................................................... -- 12
Equity in income of subsidiaries, net ............................................ (863) (588)
Net change in operating assets and liabilities:
Accrued interest receivable ................................................... (45) (45)
Other assets .................................................................. (7) 213
Accrued interest payable ...................................................... (371) (424)
Borrower advances ............................................................. (92) 206
Other liabilities ............................................................. (72) (1,433)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................................ 2,197 1,777
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ........................................................................... (15,693) (8,367)
Principal collected and other adjustments .............................................. 3,384 4,110
Proceeds from interest-only strip receivable ........................................... 148 316
Proceeds from partnership distributions ................................................ 1,135 640
Proceeds from mortgage-backed security of affiliate .................................... 113 --
Proceeds from sale of assets ........................................................... -- 66
Purchase of furniture and fixtures and other assets .................................... (31) (38)
Investment in restricted cash .......................................................... (102) (228)
Advances to (from) unconsolidated affiliates, net ...................................... 931 (477)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................................................... (10,115) (3,978)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................................ -- 2,061
Payment of SBA debentures ............................................................. -- (1,500)
Payment of dividends on common stock .................................................. (2,957) (3,702)
Payment of dividends on preferred stock ............................................... (63) (61)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES .................................................... (3,020) (3,202)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................................ (10,938) (5,403)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 18,725 17,502
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 7,787 $ 12,099
======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ......................................................................... $ 1,663 $ 1,746
======== ========
Reclassification from loans receivable to real property owned
by an Unconsolidated Subsidiary ................................................... $ 323 $ 45
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 132
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet of PMC Capital, Inc. ("PMC") and its
wholly-owned regulated investment company subsidiaries (collectively, the
"Company") as of March 31, 1999 and the consolidated statements of income and
cash flows for the three months ended March 31, 1999 and 1998 have not been
audited by independent accountants. In the opinion of the Company's management,
the financial statements reflect all adjustments necessary to present fairly the
Company's financial position at March 31, 1999 and the results of operations and
cash flows for the three months ended March 31, 1999 and 1998. These adjustments
are of a normal recurring nature.
Certain notes and other information have been omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q. Therefore, these
financial statements should be read in conjunction with the Company's 1998
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results for the three months ended March 31, 1999 are not necessarily
indicative of future financial results.
NOTE 2. RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to the current
year presentation.
NOTE 3. BUSINESS:
PMC is a diversified, closed-end management investment company that has elected
to operate as a business development company under the Investment Company Act of
1940 (the "1940 Act"). PMC engages in the business of originating loans to small
businesses either directly or through its three principal subsidiaries: First
Western SBLC, Inc. ("First Western"), PMC Investment Corporation ("PMCIC") and
Western Financial Capital Corporation ("Western Financial"). First Western,
PMCIC and Western Financial are registered under the 1940 Act as diversified,
closed-end management investment companies. In addition, PMC is directly or
indirectly either the sole shareholder or partner of several non-investment
company act subsidiaries. These are: PMC Advisers, Ltd. and its subsidiary ("PMC
Advisers"); PMC Funding Corp. and its subsidiary ("PMC Funding"); PMC Capital
Limited Partnership (the "96 Partnership") and its related general partner and
trust; and PMC Capital, L.P. 1998-1 and its related general partner (the "98
Partnership" and together with the 1996 Partnership, the "Limited
Partnerships"). PMC has elected to be taxed as a regulated investment company
and consequently distributes substantially all of its taxable income as
dividends to shareholders.
NOTE 4. BASIS FOR CONSOLIDATION:
The consolidated financial statements include the accounts of PMC and its
wholly-owned regulated investment company subsidiaries. Intercompany
transactions have been eliminated in consolidation.
The accounts of PMC Advisers, PMC Funding, and the Limited Partnerships are
accounted for by the equity method of accounting in conformity with Federal
securities laws.
Consolidated Subsidiaries
First Western is a small business lending company ("SBLC") that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration ("SBA") pursuant to its Section 7(a) Program (the "7(a)
Program").
5
<PAGE> 133
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BASIS FOR CONSOLIDATION: (CONTINUED)
PMCIC is a licensed specialized small business investment company ("SSBIC")
under the Small Business Investment Act of 1958, as amended ("SBIA"). PMCIC uses
long-term funds provided by the SBA, together with its own capital, to provide
long-term collateralized loans to eligible small businesses owned by
"disadvantaged" persons, as defined under the regulations of the SBA. The
interest rates on loans originated by PMCIC are either fixed rate or a variable
rate which is based on the prime lending rate ("Prime Rate"). As an SSBIC, PMCIC
is eligible to obtain long-term, fixed-rate funding from the SBA through the
issuance of debentures (which are guaranteed by the SBA and on which the
interest rate was reduced through an SBA subsidy by 3% during the first five
years). The SBA subsidy is no longer provided on new issuances under the SSBIC
program.
Western Financial is a licensed small business investment company ("SBIC") under
the SBIA that provides loans to borrowers whether or not they qualify as
"disadvantaged." The interest rates on loans originated by Western Financial are
either fixed rate or a variable rate which is based on the Prime Rate. As an
SBIC, Western Financial is eligible to obtain long-term, fixed-rate funding from
the SBA through the issuance of debentures.
PMC originates loans to borrowers on a non-SBA supported basis using similar
criteria as that used for other loans that are funded under the SBA programs
utilized by the subsidiaries. These loans are made to borrowers who exceed the
eligibility requirements of the 7(a) Program or SBIC programs.
Unconsolidated Subsidiaries
PMC Advisers, acts as the investment advisor for PMC Commercial Trust ("PMC
Commercial"), a Texas real estate investment trust and an affiliate of PMC
Capital.
PMC Funding is a Florida corporation that holds assets on behalf of the Company.
PMC Capital is the sole shareholder of PMC Funding.
The 1996 Partnership was formed as a Delaware limited partnership in November
1996 to act as a special purpose affiliate of the Company. The 1996 Partnership
was established to acquire loans from the Company and to issue fixed-rate debt
through a private placement. PMC Capital Corp. is a Delaware Corporation formed
in November 1996 to be the independent trustee of the general partner of the
Partnership. PMC Trust 1996-A is a Delaware business trust formed in November
1996 to be the general partner of the Partnership.
The 1998 Partnership was formed as a Delaware limited partnership in November
1998 to act as a special purpose affiliate of the Company. The 1998 Partnership
was established to acquire loans from the Company and to issue fixed-rate debt
through a private placement. PMC Capital Corp. 1998-1 is a Delaware corporation
formed in November 1998 to be the general partner of the 1998 Partnership.
NOTE 5. DIVIDENDS PAID AND DECLARED:
During January 1999, the Company paid $0.250 per share in dividends to common
shareholders of record on December 31, 1998. During March 1999, the Company
declared a $0.250 per share dividend to common shareholders of record on March
31, 1999 which was paid on April 12, 1999.
NOTE 6. INVESTMENT IN LIMITED PARTNERSHIPS:
As described in Note 4, the accounts of the Limited Partnerships are accounted
for by the equity method of accounting in conformity with Federal securities
law. During the three months ended March 31, 1999, the Limited Partnerships had
$1,599,000 in total income and net income of $666,000 before the elimination of
the net cash flow relating to the interest-only strip receivable.
6
<PAGE> 134
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS:
As described in Note 4, the consolidated financial statements include the
accounts of PMC and its wholly-owned regulated investment company subsidiaries.
The following are condensed combined financial statements of the Unconsolidated
Entities as of March 31, 1999 and December 31, 1998 and for the three months
ended March 31, 1999 and 1998.
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
(Unaudited)
ASSETS (IN THOUSANDS)
<S> <C> <C>
Investments at value:
Loans receivable, net ................................. $ 58,808 $ 61,768
Cash equivalents ...................................... 95 64
Restricted investments and real property owned ........ 6,447 9,096
-------- --------
65,350 70,928
Other assets ............................................... 465 1,673
-------- --------
Total assets .......................................... $ 65,815 $ 72,601
======== ========
LIABILITIES AND OWNERS' EQUITY
LIABILITIES:
Notes payable ......................................... $ 51,295 $ 57,053
Other liabilities ..................................... 1,696 2,618
-------- --------
52,991 59,671
-------- --------
OWNERS' EQUITY:
Common Stock and additional paid-in capital ........... 526 526
Partners' Capital ..................................... 12,271 12,740
Retained earnings (deficit) ........................... 27 (336)
-------- --------
12,824 12,930
-------- --------
Total liabilities and owners' equity .................. $ 65,815 $ 72,601
======== ========
</TABLE>
CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
INCOME: (Unaudited)
Investment income ............................................... $1,552 $1,109
Other income, net ............................................... 452 35
------ ------
Total income .................................................... 2,004 1,144
------ ------
EXPENSES:
Interest ........................................................ 905 472
General and administrative expenses ............................. 69 84
------ ------
Total expense ................................................... 974 556
------ ------
NET INCOME ...................................................... 1,030 588
Less: elimination of the net cash flow relating to the
interest-only strip receivable in consolidation ........ 167 --
------ ------
Equity in income of unconsolidated subsidiaries, net ............ $ 863 $ 588
====== ======
</TABLE>
7
<PAGE> 135
PMC CAPITAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
Included in restricted investments and real property owned on the accompanying
condensed combined balance sheet of the Unconsolidated Entities at March 31,
1999 is $350,000 in real property owned including $323,000 which was transferred
from loans receivable. During the three months ended March 31, 1999, PMC Funding
acquired the property as part of liquidating a loan receivable owned primarily
by PMCIC. The asset was recorded at the expected net realizable value as
determined by the Company's Board of Directors.
NOTE 8. EARNINGS PER COMMON SHARE COMPUTATIONS:
The computations of basic earnings per common share are based on the weighted
average number of shares outstanding during the period. For the purposes of
determining the diluted earnings per share, there was no change in the weighted
average shares outstanding for the effect of stock options during the three
months ended March 31, 1999 and 1998 since the stock options were anti-dilutive.
Earnings are defined as the net operating income and realized and unrealized
gain (loss) on investments and are reduced by the preferred stock dividend
requirements of PMCIC. Preferred stock dividend requirements were approximately
$62,000 during each of the three months ended March 31, 1999 and 1998. The
weighted average number of shares used in the computations of basic and diluted
earnings per common share were 11.8 million and 11.7 million for the three
months ended March 31, 1999 and 1998, respectively.
NOTE 9. COMMITMENTS AND CONTINGENCIES:
Loan commitments outstanding at March 31, 1999, to various prospective small
business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $63.7 million. Of these
commitments, $19.5 million are for loans to be originated by First Western, a
portion of which will be sold into the secondary market. These commitments are
made in the ordinary course of the Company's business and in management's
opinion, are generally on the same terms as those to existing borrowers.
Commitments to extend credit are agreements to lend to a customer provided that
the terms established in the contract are met. Commitments generally have fixed
expiration dates and require payment of a fee. Since some commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
8
<PAGE> 136
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) The listing of the financial statements and notes thereto in the Index to
Consolidated Financial Statements in the Registration Statement attached hereto
is incorporated herein by reference.
(2) Exhibits.
Exhibit Description
------- -----------
a. Charter documents:
a.1 Articles of Incorporation, as amended
(previously filed as Exhibit 4(b)(1) to the
Registrant's Registration Statement on Form
N-2 (Registration No. 33-2535) (the
"Registration Statement"), dated November
29, 1991, and incorporated herein by
reference).
b. Bylaws:
b.1 Bylaws, as amended (previously filed as
Exhibit 2 to Amendment No. 7 to the
Registration Statement, dated April 27,
1989, and incorporated herein by reference).
c. Not applicable.
d. Certificate of Common Stock, par value $.01 per share
(previously filed as Exhibit 4 to Amendment No. 1 to
the Registration Statement, dated November 10, 1983,
and incorporated herein by reference).
f. Long term debt instruments:
f.1 Debenture dated September 24, 1996 for
$2,490,000 loan with SBA (previously filed
as Exhibit 4.2 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1996
and incorporated herein by reference).
f.2 Debenture dated June 27, 1990 for $2,000,000
loan with SBA (previously filed as Exhibit
4(b)(5)(n) to Amendment No. 9 to the
Registration Statement, dated April 29,
1991, and incorporated herein by reference).
C-1
<PAGE> 137
f.3 Debenture dated September 26, 1990 for
$2,810,000 loan with SBA (previously filed
as Exhibit 4(b)(5)(o) to Amendment 9 to the
Registration Statement, dated April 29,
1991, and incorporated
herein by reference).
f.4 Debenture dated September 26, 1990 for
$1,500,000 loan with SBA (previously filed
as Exhibit 4(b)(5)(p) to Amendment 9 to the
Registration Statement, dated April 29,
1991, and incorporated
herein by reference).
f.5 Debenture dated March 29, 1990 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(q) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.6 Debenture dated September 27, 1989 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(r) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.7 Debenture dated September 27, 1989 for
$1,500,000 loan with SBA (previously filed
as Exhibit 5(s) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.8 Debenture dated January 2, 1990 for
$3,000,000 loan with SBA (previously filed
as Exhibit 5(t) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.9 Debenture dated August 18, 1989 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(u) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.10 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.13 to the Registrant's Form
10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
f.11 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.14 to the Registrant's Form
10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
C-2
<PAGE> 138
f.12 Senior Note dated July 19, 1993 for
$6,000,000 with Columbine Life Insurance
Company (previously filed as Exhibit 4.15 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.13 Senior Note dated July 19, 1993 for
$9,000,000 with Life Insurance Company of
Georgia (previously filed as Exhibit 4.16 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.14 Senior Note dated July 19, 1993 for
$5,000,000 with SouthLand Life Insurance
Company (previously filed as Exhibit 4.17 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.15 Senior Note dated December 15, 1993 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.18 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated
herein by reference).
f.16 Senior Note dated December 15, 1993 for
$3,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.19 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.17 Debenture dated March 29, 1995 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.20 to the Registrant's Form
10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.18 Debenture dated June 28, 1995 for $5,000,000
loan with SBA (previously filed as Exhibit
4.21 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
f.19 Debenture dated September 27, 1995 for
$7,000,000 loan with SBA (previously filed
as Exhibit 4.22 to the Registrant's Form
10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.20 Debenture dated December 20, 1989 for
$650,000 loan with SBA (previously filed as
Exhibit 4.24 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
C-3
<PAGE> 139
f.21 Debenture dated June 27, 1990 for $300,000
loan with SBA (previously filed as Exhibit
4.25 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
f.22 Debenture dated December 6, 1992 for
$510,000 loan with SBA (previously filed as
Exhibit 4.26 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.23 Senior Note Dated April 19, 1995 for
$5,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.27 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.24 Senior Note Dated April 19, 1995 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.28 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.25 Senior Note Dated April 19, 1995 for
$2,000,000 with Indiana Insurance Company
(previously filed as Exhibit 4.29 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.26 Senior Note Dated April 19, 1995 for
$1,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.30 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.27 Debenture dated June 27, 1990 for $1,030,000
with SBA (previously filed as Exhibit 4.31
to the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and
incorporated herein by reference).
f.28 First Amended and Restated Revolving Credit
Note dated as of March 15, 1998 (previously
filed as an exhibit to the Registrant's Form
10-Q for the fiscal quarter ended March 31,
1998 and incorporated herein by reference).
g. Not applicable.
h. Not applicable.
i. Not applicable.
j. Not applicable.
k. Material Contracts
C-4
<PAGE> 140
k.1 Employment contract between the Registrant
and Lance B. Rosemore dated July 1, 1998
(previously filed as Exhibit 10.1 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.2 Employment contract between the Registrant
and Andrew S. Rosemore dated July 1, 1998
(previously filed as Exhibit 10.2 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.3 Employment contract between the Registrant
and Fredric M. Rosemore dated June 30, 1996
(previously filed as an exhibit to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.4 Employment contract between the Registrant
and Jan F. Salit dated July 1, 1998
(previously filed as Exhibit 10.4 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.5 Employment contract between the Registrant
and Barry N. Berlin dated July 1, 1998
(previously filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.6 Employment contract between the Registrant
and Mary J. Brownmiller dated July 1, 1998
(previously filed as Exhibit 10.6 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.7 Employment contract between the Registrant
and Cheryl T. Murray dated July 1, 1998
(previously filed as Exhibit 10.11 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.8 Servicing Agreement by and among Sun Trust,
PMC Capital Limited Partnership and PMC
Capital (previously filed as Exhibit 10.8 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and
incorporated herein by reference).
l. Opinion of counsel, as to the legality of the shares being
registered.*
m. Not applicable
C-5
<PAGE> 141
n. Consents
n.1 Consent of PricewaterhouseCoopers LLP as to
inclusion of their report.**
o. Not applicable.
p. Not applicable.
q. Not applicable.
r. Financial Data Schedule**
s. Financial Data Schedule**
--------------------
* Previously filed as an exhibit to the Registrant's
Registration Statement on Form N-2 Registration No. 333-33151.
** Filed herewith
ITEM 25. MARKETING ARRANGEMENTS
None
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Registration Fees $ 1,173
Stock Exchange Fees 1,000
Printing and Mailing 3,000
Accounting Fees 5,000
Legal Fees 10,000
Plan Administrator Fee 1,000
Miscellaneous 1,827
---------
TOTAL $ 23,000
=========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Registrant owns 100% of the issued and outstanding common
stock or is the sole owner (either directly or indirectly) of
the following: Western Financial Capital Corporation ("WFCC"),
a Florida corporation, First Western SBLC, Inc. ("First
Western"), a Florida corporation, PMC Investment Corporation
("PMIC"), a Florida corporation, PMC Funding Corp., a Florida
corporation ("PMC Funding"), PMC Advisers, Ltd., a Texas
limited partnership ("PMC Advisers"), PMC Capital Corp.
1996-A, a Texas corporation, PMC Trust 1996-A, a Delaware
Trust, PMC Asset Management, Inc. a Texas corporation ("PMC
Asset Management") PMC Capital Limited Partnership, a Delaware
Limited Partnership, Asset Investments Series A, L.L.C., a
Delaware limited liability company ("Asset Investments"),
First Western
C-6
<PAGE> 142
Series 1994-1 L.L.C., a Delaware limited liability company
("First Western LLC"), FW97 L.L.C., a Delaware limited
liability company ("FW97"), PMC Capital, L.P. 1998-1, a
Delaware limited partnership ("PMC 1998 LP"), and PMC Capital
Corp. 1998-1, a Delaware corporation ("PMC Capital Corp.
1998"). WFCC, First Western and PMIC are registered under the
Investment Company Act. Each of the investment company
subsidiaries is included in the consolidated financial
statements of PMC Capital included herein. PMC Advisers, PMC
Funding, PMC Capital Corp. 1996-A, PMC Trust 1996-A, PMC
Capital Limited Partnership, PMC Asset Management, Asset
Investments, First Western LLC, FW97, PMC 1998 LP and PMC
Capital Corp. 1998 are not consolidated because they are not
investment companies.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of June 30, 1999 there were approximately 1,081 holders of
record of the Registrant's common stock, par value $.01 per
share.
ITEM 29. INDEMNIFICATION
Section 607.0850 of the Florida Statutes and Article IX of the
Articles of Incorporation and Article VI of the Bylaws of the Registrant provide
for indemnification of the Registrant's directors and officers under certain
circumstances. Additionally, in 1992, each of the Company's directors entered
into an indemnification agreement with the Company which provides for such
director's indemnification under certain circumstances.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereby, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Not applicable.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Registrant's books and records are located at 18111
Preston Road, Suite 600, Dallas, Texas 75252, c/o Lance B.
Rosemore, President
C-7
<PAGE> 143
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers
or sales are being made, a post-effective
amendment to this registration statement:
(i) To include any prospectus required
by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any
facts or events arising after the
effective date of the registration
statement (or the most recent
post-effective amendment thereof)
which, individually or in the
aggregate, represent a fundamental
change in the information set forth
in the registration statement; and
(iii) To include any material information
with respect to the plan of
distribution not previously
disclosed in the registration
statement or any material change to
such information in the registration
statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933,
each such post-effective amendment shall be
deemed to be a new registration statement
relating to the securities offered therein,
and the offering of such securities at that
time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the
securities being registered which remain
unsold at the termination of the offering.
B. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person
in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent,
C-8
<PAGE> 144
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
C-9
<PAGE> 145
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement on Form N-2 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Dallas, and State
of Texas, on the 27th day of September 1999.
PMC CAPITAL, INC.
By: /s/ Lance B. Rosemore
------------------------------------
Lance B. Rosemore, President
Pursuant to the requirements of the Securities Act of 1933, this
September 27, 1999 Registration Statement on Form N-2 has been signed below on
September 27, 1999 by the following persons in the capacities indicated.
/s/ Fredric M. Rosemore Chairman of the Board and Treasurer
- --------------------------------------
FREDRIC M. ROSEMORE
/s/ Lance B. Rosemore President, Chief Executive Officer,
- -------------------------------------- Secretary and Director
LANCE B. ROSEMORE
/s/ Andrew S. Rosemore Executive Vice President and Chief
- -------------------------------------- Operating Officer
ANDREW S. ROSEMORE
/s/ Barry N. Berlin Chief Financial Officer and
- -------------------------------------- Principal Accounting Officer
BARRY N. BERLIN
/s/ Robert Diamond Director
- --------------------------------------
ROBERT DIAMOND
/s/ Martha R. Greenberg Director
- --------------------------------------
MARTHA R. GREENBERG
C-10
<PAGE> 146
/s/ Barry A. Imber Director
- --------------------------------------
BARRY A. IMBER
/s/ Irvin M. Borish Director
- --------------------------------------
IRVIN M. BORISH
/s/ Thomas Hamill Director
- --------------------------------------
THOMAS HAMILL
C-11
<PAGE> 147
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
a. Charter documents:
a.1 Articles of Incorporation, as amended
(previously filed as Exhibit 4(b)(1) to the
Registrant's Registration Statement on Form
N-2 (Registration No. 33-2535) (the
"Registration Statement"), dated November
29, 1991, and incorporated herein by
reference).
b. Bylaws:
b.1 Bylaws, as amended (previously filed as
Exhibit 2 to Amendment No. 7 to the
Registration Statement, dated April 27,
1989, and incorporated herein by reference).
c. Not applicable.
d. Certificate of Common Stock, par value $.01 per share
(previously filed as Exhibit 4 to Amendment No. 1 to
the Registration Statement, dated November 10, 1983,
and incorporated herein by reference).
f. Long term debt instruments:
f.1 Debenture dated September 24, 1996 for
$2,490,000 loan with SBA (previously filed
as Exhibit 4.2 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1996
and incorporated herein by reference).
f.2 Debenture dated June 27, 1990 for $2,000,000
loan with SBA (previously filed as Exhibit
4(b)(5)(n) to Amendment No. 9 to the
Registration Statement, dated April 29,
1991, and incorporated herein by reference).
f.3 Debenture dated September 26, 1990 for
$2,810,000 loan with SBA (previously filed
as Exhibit 4(b)(5)(o)
</TABLE>
<PAGE> 148
<TABLE>
<S> <C>
to Amendment 9 to the Registration
Statement, dated April 29, 1991, and
incorporated herein by reference).
f.4 Debenture dated September 26, 1990 for
$1,500,000 loan with SBA (previously filed
as Exhibit 4(b)(5)(p) to Amendment 9 to the
Registration Statement, dated April 29,
1991, and incorporated
herein by reference).
f.5 Debenture dated March 29, 1990 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(q) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.6 Debenture dated September 27, 1989 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(r) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.7 Debenture dated September 27, 1989 for
$1,500,000 loan with SBA (previously filed
as Exhibit 5(s) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.8 Debenture dated January 2, 1990 for
$3,000,000 loan with SBA (previously filed
as Exhibit 5(t) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.9 Debenture dated August 18, 1989 for
$1,000,000 loan with SBA (previously filed
as Exhibit 5(u) to Amendment No. 3 to the
Registration Statement, dated August 18,
1992, and incorporated
herein by reference).
f.10 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.13 to the Registrant's Form
10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
</TABLE>
<PAGE> 149
<TABLE>
<S> <C>
f.11 Debenture dated September 28, 1994 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.14 to the Registrant's Form
10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
f.12 Senior Note dated July 19, 1993 for
$6,000,000 with Columbine Life Insurance
Company (previously filed as Exhibit 4.15 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.13 Senior Note dated July 19, 1993 for
$9,000,000 with Life Insurance Company of
Georgia (previously filed as Exhibit 4.16 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.14 Senior Note dated July 19, 1993 for
$5,000,000 with SouthLand Life Insurance
Company (previously filed as Exhibit 4.17 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1994 and
incorporated herein by reference).
f.15 Senior Note dated December 15, 1993 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.18 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated
herein by reference).
f.16 Senior Note dated December 15, 1993 for
$3,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.19 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994
and incorporated herein by reference).
f.17 Debenture dated March 29, 1995 for
$3,000,000 loan with SBA (previously filed
as Exhibit 4.20 to the Registrant's Form
10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.18 Debenture dated June 28, 1995 for $5,000,000
loan with SBA (previously filed as Exhibit
4.21 to the Registrant's Form 10-K for the
fiscal year ended
</TABLE>
<PAGE> 150
<TABLE>
<S> <C>
December 31, 1995 and incorporated herein by
reference).
f.19 Debenture dated September 27, 1995 for
$7,000,000 loan with SBA (previously filed
as Exhibit 4.22 to the Registrant's Form
10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference).
f.20 Debenture dated December 20, 1989 for
$650,000 loan with SBA (previously filed as
Exhibit 4.24 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.21 Debenture dated June 27, 1990 for $300,000
loan with SBA (previously filed as Exhibit
4.25 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and
incorporated herein by reference).
f.22 Debenture dated December 6, 1992 for
$510,000 loan with SBA (previously filed as
Exhibit 4.26 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.23 Senior Note Dated April 19, 1995 for
$5,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.27 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.24 Senior Note Dated April 19, 1995 for
$2,000,000 with Peerless Insurance Company
(previously filed as Exhibit 4.28 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
f.25 Senior Note Dated April 19, 1995 for
$2,000,000 with Indiana Insurance Company
(previously filed as Exhibit 4.29 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated
herein by reference).
</TABLE>
<PAGE> 151
<TABLE>
<S> <C> <C> <C> <C>
f.26 Senior Note Dated April 19, 1995 for
$1,000,000 with Security Life of Denver
Insurance Company (previously filed as
Exhibit 4.30 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1995
and incorporated herein by reference).
f.27 Debenture dated June 27, 1990 for $1,030,000
with SBA (previously filed as Exhibit 4.31
to the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and
incorporated herein by reference).
f.28 First Amended and Restated Revolving Credit
Note dated as of March 15, 1998 (previously
filed as an exhibit to the Registrant's Form
10-Q for the fiscal quarter ended March 31,
1998 and incorporated herein by reference).
g. Not applicable.
h. Not applicable.
i. Not applicable.
j. Not applicable.
k. Material Contracts
k.1 Employment contract between the Registrant
and Lance B. Rosemore dated July 1, 1998
(previously filed as Exhibit 10.1 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.2 Employment contract between the Registrant
and Andrew S. Rosemore dated July 1, 1998
(previously filed as Exhibit 10.2 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
k.3 Employment contract between the Registrant
and Fredric M. Rosemore dated June 30, 1996
(previously filed as an exhibit to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated
herein by reference).
</TABLE>
<PAGE> 152
<TABLE>
<S> <C> <C> <C> <C>
k.4 Employment contract between the Registrant
and Jan F. Salit dated July 1, 1998
(previously filed as Exhibit 10.4 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.5 Employment contract between the Registrant
and Barry N. Berlin dated July 1, 1998
(previously filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.6 Employment contract between the Registrant
and Mary J. Brownmiller dated July 1, 1998
(previously filed as Exhibit 10.6 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.7 Employment contract between the Registrant
and Cheryl T. Murray dated July 1, 1998
(previously filed as Exhibit 10.11 to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated
herein by reference).
k.8 Servicing Agreement by and among Sun Trust,
PMC Capital Limited Partnership and PMC
Capital (previously filed as Exhibit 10.8 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and
incorporated herein by reference).
l. Opinion of counsel, as to the legality of the shares being
registered.*
m. Not applicable
n. Consents
n.1 Consent of PricewaterhouseCoopers LLP as to
inclusion of their report.**
o. Not applicable.
p. Not applicable.
q. Not applicable.
r. Financial Data Schedule**
s. Financial Data Schedule**
</TABLE>
--------------------
* Previously filed as an exhibit to the Registrant's
Registration Statement on Form N-2 Registration No. 333-33151.
** Filed herewith
<PAGE> 1
EXHIBIT n.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this registration statement on Form N-2 of
our reports dated March 4, 1999 on our audits of the consolidated financial
statements including the schedule of investments and financial highlights of PMC
Capital, Inc. and subsidiaries and of the accompanying consolidating financial
statements of PMC Capital, Inc. and subsidiaries, the financial statements of
PMC Capital Limited Partnership and the financial statements of PMC Capital L.P.
1998-1. We also consent to the reference to our firm under the caption "Experts"
and "Selected Consolidated Financial Data"
PricewaterhouseCoopers LLP
Dallas, Texas
September 27, 1999
E-1
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q OF PMC CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<INVESTMENTS-AT-COST> 161,079
<INVESTMENTS-AT-VALUE> 160,350<F1>
<RECEIVABLES> 543<F2>
<ASSETS-OTHER> 5,657<F3>
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 166,550
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 74,790<F4>
<OTHER-ITEMS-LIABILITIES> 10,889<F5>
<TOTAL-LIABILITIES> 85,679
<SENIOR-EQUITY> 118<F6>
<PAID-IN-CAPITAL-COMMON> 71,312
<SHARES-COMMON-STOCK> 11,829
<SHARES-COMMON-PRIOR> 11,829
<ACCUMULATED-NII-CURRENT> 3,170
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (729)
<NET-ASSETS> 73,871
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,698
<OTHER-INCOME> 799<F7>
<EXPENSES-NET> 5,423
<NET-INVESTMENT-INCOME> 5,678
<REALIZED-GAINS-CURRENT> 2,037<F8>
<APPREC-INCREASE-CURRENT> 45
<NET-CHANGE-FROM-OPS> 7,760
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,915
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,720
<ACCUMULATED-NII-PRIOR> 1,495
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 2,647
<GROSS-EXPENSE> 5,423
<AVERAGE-NET-ASSETS> 73,011
<PER-SHARE-NAV-BEGIN> 6.10
<PER-SHARE-NII> 0.65
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.50
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.24
<EXPENSE-RATIO> 0.15
<FN>
<F1>INCLUDES CURRENT AND LONG TERM PORTION OF ALL LOANS
RECEIVABLE - AND INVESTMENTS.
<F2>INCLUDES THE FOLLOWING:
(i) RECEIVABLE FOR LOANS SOLD $ 164
(ii) ACCRUED INTEREST RECEIVABLE 379
-----
$ 543
=====
<F3>
INCLUDES THE FOLLOWING:
(i) DUE FROM UNCONSOLIDATED SUBSIDIARIES $ 2,394
(ii) SERVICING ASSET 1,127
(iii) DEFERRED CHARGES, DEPOSITS
AND OTHER ASSETS 937
(iv) CASH 970
(v) PROPERTY AND EQUIPMENT, NET 229
-------
$ 5,657
=======
<F4>
INCLUDES $39,790,000 IN SBA DEBENTURES ISSUED TO SBIC'S
<F5>
INCLUDES THE FOLLOWING:
(i) ACCOUNTS PAYABLE $ 2,507
(ii) DIVIDENDS PAYABLE 3,019
(iii) BORROWER ADVANCES 2,391
(iv) ACCRUED INTEREST PAYABLE 1,254
(v) DUE TO UNCONSOLIDATED
SUBSIDIARIES 100
(vi) DEFERRED FEE REVENUE 869
(vii) OTHER LIABILITIES 749
--------
$ 10,889
========
<F6>
DOES NOT INCLUDE THE PREFERRED STOCK
OF CONSOLIDATED SUBSIDIARY
<F7>
INCLUDES THE FOLLOWING:
(i) PREMIUM INCOME $ 382
(ii) OTHER INVESTMENT INCOME 417
------
$ 799
======
<F8>
INCLUDES THE FOLLOWING:
(i) LOANS WRITTEN-OFF $ (527)
(ii) GAIN ON SALE 2,564
------
$2,037
======
</FN>
</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-BASIC> 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>
