<PAGE> 1
FORM 10 - Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- ---------
Commission File Number 811-3780
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PMC CAPITAL, INC.
-----------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2338439
- ---------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
18111 Preston Road, Suite 600, Dallas, TX 75252 (972) 349-3200
- ----------------------------------------------- -------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of August 1, 1999, Registrant had outstanding 11,829,116 shares of Common
Stock, par value $.01 per share.
<PAGE> 2
PMC CAPITAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
--------------------- --------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and December 31, 1998 2
Consolidated Statements of Income (Unaudited) -
Six Months Ended June 30, 1999 and 1998 3
Consolidated Statements of Income (Unaudited) -
Three Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
1
<PAGE> 4
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
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> 5
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> 6
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> 7
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> 8
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Financial Statements:
The accompanying consolidated balance sheet of PMC Capital, Inc. ("PMC") 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> 9
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> 10
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> 11
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONDENSED COMBINED FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED COMBINED STATEMENTS OF INCOME
---------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
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> 12
PART I
FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
GENERAL
The Company's operations include originating and servicing commercial loans for
its own account. In addition, the Company operates as an investment manager to
evaluate properties and loans and to service loans and lease contracts pursuant
to a fee arrangement with PMC Commercial Trust ("PMC Commercial"). The Company
sells the government guaranteed portion of its loans originated under the SBA
7(a) Program. Further, the Company has completed several structured sales of its
loan portfolio. Historically, the Company has retained servicing rights and
residual interests in all loans sold.
The Company's revenue sources include the following:
o Interest earned on commercial loans originated and retained
including the effect of commitment fees collected at the
inception of the loan.
o Fee income from the management of PMC Commercial.
o An equity interest in the income of non-investment company
subsidiaries.
o Premiums recognized from the sale of the government guaranteed
portion of SBA 7(a) Program loans into the secondary market.
o Interest earned on temporary (short-term) investments.
o Other fees, including: late fees, prepayment fees, construction
monitoring and site visit fees.
The Company primarily originates loans to individuals and small business
concerns in the lodging industry. The Company also targets the medical, food
service, service, retail and commercial real estate industries. The Company is a
national lender that primarily lends to businesses in the Southwest and
Southeast regions of the United States. A majority of the Company's loans in the
lodging industry are to owner-operated facilities generally operating under
national franchises. The Company believes that franchise operations offer
attractive lending opportunities because such businesses generally employ proven
business concepts, have national reservation systems, have consistent product
quality, are screened and monitored by franchisors and generally have a higher
rate of success as compared to other independently operated businesses.
The following table sets forth information concerning the aggregate gross loans
funded by the Company:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS YEARS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31,
----------------- ----------------- -----------------
COMPANY 1999 1998 1999 1998 1998 1997
- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PMIC .................... $ 2.0 $ 3.6 $ 6.7 $ 6.5 $ 14.1 $ 24.1
Western Financial ....... 1.0 2.8 1.0 7.1 12.0 12.9
First Western ........... 6.0 3.2 8.2 6.6 10.6 29.5
PMC Capital ............. 7.6 2.2 17.9 2.5 29.7 19.9
------- ------- ------- ------- ------- -------
Total .......... $ 16.6 $ 11.8 $ 33.8 $ 22.7 $ 66.4 $ 86.4
======= ======= ======= ======= ======= =======
</TABLE>
PMC Advisers, either directly or through its wholly-owned subsidiary,
has acted as the investment manager for PMC Commercial since PMC Commercial's
initial public offering in December 1993. During the six months ended June 30,
1999 and the years ended December 31,1998 and 1997, PMC Advisers and its
wholly-owned subsidiary earned management fees from PMC Commercial of
approximately $1.2 million, $2.6 million and $1.6 million, respectively.
10
<PAGE> 13
The fees during the six months ended June 30, 1999 and the year ended December
31, 1998 include fees earned related to the structured financing and property
acquisitions by PMC Commercial. The fee of PMC Advisers is primarily based on
the amount and value of assets. As a result, any increases in the dollar amount
of PMC Commercial's assets will benefit PMC Advisers, and PMC Advisers will have
a potential conflict in determining whether to advise PMC Commercial to acquire
assets and write down the value of any assets. In order to mitigate the risk to
PMC Commercial from increasing its asset base through leveraged transactions,
the Investment Management Agreements provide PMC Advisers with a reduced fee for
any loans originated through additional borrowings. Additionally, the potential
conflict for the management of PMC Advisers between PMC Commercial and the
Company is mitigated through a loan origination agreement among PMC Advisers,
PMC Commercial and the Company.
Pursuant to the Investment Management Agreements between PMC Commercial
and PMC Advisers, fees of between 0.40% and 1.67%, annually, are charged by the
Company based primarily upon the average principal outstanding of PMC
Commercial's loans. In addition, the Investment Management Agreement includes
compensation to PMC Advisers for its assistance in the issuance of PMC
Commercial's debt and equity securities. During June 1998, the Investment
Management Agreement was amended to provide for payment of fees relating to
property acquisitions by PMC Commercial (the "Property Management Agreement").
The Property Management Agreement provided for a one time fee of 0.75% of the
purchase price paid by PMC Commercial to Amerihost Properties, Inc. and its
subsidiaries ("Amerihost") (the "Amerihost Purchase Price") in connection with
the purchase of hotels from Amerihost and an annual management fee equal to the
product of 0.70% multiplied by the Amerihost Purchase Price (the "Amerihost
Fee"). In the event the Property Management Agreement with PMC Advisers is
terminated or not renewed by PMC Commercial (other than as a result of a
material breach by PMC Advisers) or by PMC Advisers (as a result of a material
breach by PMC Commercial), PMC Advisers would be entitled to receive the
Amerihost Fee for a period of five years from the termination date.
The Company also earns income through its equity ownership in the
unconsolidated subsidiaries, primarily the Limited Partnerships established by
the Company in connection with the structured sale/financing of the Company's
loans. The differential between the interest received by the Limited
Partnerships on the loans transferred to it by PMC Capital and the interest paid
by the Limited Partnerships on the notes issued by the Limited Partnerships in
connection with the structured sales (see Note 7 to the accompanying
consolidated financial statements), less the net cash flow relating to the
interest-only strip receivable on PMC's balance sheet and any loan losses,
contributes to the revenues of PMC Capital through its equity ownership in the
Limited Partnerships.
As a result of several factors, the number and dollar volume of loans
originated by First Western under the SBA 7(a) Program were at decreased levels
during 1998 and the first quarter of 1999. 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 to originate SBA 7(a) Program
loans from SBA 7(a) Program lenders, 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
had decreased and the premiums earned on the sales of the government guaranteed
portions of these loans have been significantly reduced from prior period
levels. In addition, due to the high rate of prepayment experienced in the
limited service hospitality industry, purchasers of the guaranteed portion of
the Company's SBA 7(a) loans have significantly decreased the premium paid for
these assets. For the six months ended June 30, 1999 and the years ended
December 31, 1998 and 1997, revenues generated by such loan sales were $382,000,
$776,000 and $1,776,000, respectively. The Company has partially offset First
Western's decreased revenues through emphasizing the Company's other lending
activities and offering lower fixed interest rates.
Recently, the Company has refocused its marketing effort to emphasize
loan originations under the SBA 7(a) Program. The Company believes that as a
result of this increased marketing effort for SBA 7(a) lending, revenues
generated from the sales of the guaranteed portion of the SBA 7 (a) Program
loans may be increasing over current and prior year levels. During the three
months ended June 30, 1999, funding of SBA 7(a) program loans was $6.0 million,
an increase of 87% from the $3.2 million funded during the three months ended
June 30, 1998.
As a result of the low interest rate environment, the Company has
experienced an increased rate in the prepayment of its loans. During the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997, the
Company received $11.3 million, $24.7 million and $10.1 million, respectively,
in collections of principal on retained loans including prepayments. For the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997,
principal collections including prepayments (as an annualized percentage of the
Company's total retained loan
11
<PAGE> 14
portfolio), were 19%, 19% and 11%, respectively. Prepayments generally increase
during times of declining interest rates. On such prepayments, to the extent the
loans were at a fixed rate of interest, the Company received the immediate
benefit of the prepayment charge. Prepayment fees result in one-time increases
in the Company's other income. However, the proceeds from the prepayments were
invested initially in temporary investments and have been re-loaned or committed
to be re-loaned at lower rates. These lower interest rates have had an adverse
effect on the Company's results of operations and depending upon the rate of
future prepayments may have an impact on the Company's 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 the Company's borrowings. First Western's loans (all
variable-rate) have no prepayment fees in accordance with SBA policy. Loans
originated pursuant to the Company's prime lending program (the "Prime Lending
Program") generally have prepayment fees equal to 95 days' interest. The Company
believes that while prepayments continued at accelerated levels during the
second quarter of 1999, as a result of recent changes in the credit markets, the
pace of prepayment activity may decrease later in the current fiscal year. See
"Prepayment Risk".
Late in the fourth quarter of 1996 the Company began marketing its
Prime Lending Program which is a variable interest rate lending program based on
the Prime Rate (as defined below). The Prime Lending Program is separate from
the SBA 7(a) Program of First Western, the Company's other variable rate lending
program. The Prime Lending Program provides funds to refinance existing real
estate secured commercial loans with borrowers who have proven timely payment
histories and loan-to-value and debt coverage ratios within the Company's
underwriting criteria. Several of the loans refinanced under this program were
originally SBA 7(a) Program loans and some of these loan originations have
refinanced First Western's loans.
Substantially all of the First Western loans and all loans originated
pursuant to the Prime Lending Program are variable-rate which reset quarterly
based on a spread above the prime rate of interest as stated in The Wall Street
Journal on the first day of the applicable period (the "Prime Rate"). The spread
over the Prime Rate charged by First Western ranges from 0.5% to 2.75% and the
weighted average spread over the Prime Rate for the Prime Lending Program is
approximately 1.3%.
The Prime Rates for variable-rate loans are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
First Quarter 7.75% 8.50% 8.25%
Second Quarter 7.75% 8.50% 8.50%
Third Quarter 8.00% (1) 8.50% 8.50%
Fourth Quarter 8.25% 8.50%
</TABLE>
(1) Effective July 1, 1999.
The Company's working capital requirements for loan originations, as
well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, require it to maintain temporary
short-term investments. See "Liquidity and Capital Resources."
The Company receives other investment income from various sources
including prepayment fees, late fees, construction monitoring fees and site
visit fees. The amount of other investment income earned will vary based on
volume of loans funded, the timing and amount of financings, volume of loans
which prepay, the mix of loans (construction versus non-construction), the rate
and type of loans originated (whether fixed or variable) as well as the general
level of interest rates.
Expenses primarily consist of interest expense, salaries and related
benefits and company overhead. The Company's operations are centralized in its
Dallas, Texas headquarters. The Company presently has additional business
development offices located in Atlanta, Georgia and Phoenix, Arizona.
General and administrative expenditures consist primarily of insurance,
advertising and promotional expense, telephone services, corporate printing
costs, commissions and general office expenses. It is anticipated that general
and administrative expenses will remain at present levels during the remainder
of the year ending December 31, 1999.
In addition, the Company has other administrative costs ("Other
Administrative Costs") which consist of profit sharing plan, rent, legal and
accounting, SBA fees and directors and shareholders expense. It is anticipated
that Other Administrative Costs will remain at present levels during the
remainder of the year ending December 31, 1999.
12
<PAGE> 15
CERTAIN ACCOUNTING CONSIDERATIONS
Effective January 1, 1997, the Company adopted, as required, SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides for the accounting and
reporting of transfers and servicing of financial assets based on a
financial-components approach.
The transfer of assets that qualifies for sale treatment under SFAS No.
125 is generally accounted for by the seller by: (i) derecognizing all assets
sold, (ii) recognizing all assets obtained and liabilities incurred at their
relative fair value, and (iii) recognizing all assets retained at their
allocated previous carrying amount based on relative fair values. The Company
typically receives cash and retains the right to receive contractual servicing
fees and the right to receive future interest income on loans sold that exceed
the contractually specified servicing fee (the interest-only strip receivable)
in exchange for a portion of the loan, typically the guaranteed portion of an
SBA 7(a) Program loan. The difference between (i) the carrying value of the
portion of loans sold and (ii) the sum of (a) cash received, (b) the fair values
of the servicing rights, and (c) the interest-only strip receivable retained,
constitutes the gain on sale.
In accordance with SFAS No. 125, the Company establishes a servicing
asset to the extent the Company receives contractual compensation for servicing
loans which is in excess of adequate compensation to service these loans.
Servicing the sold portion of government guaranteed loans requires First Western
to retain a minimum servicing spread of 1%. This spread is in excess of adequate
compensation to service these loans. Accordingly, the Company has recorded a
servicing asset relating to the servicing of the sold portion of First Western's
loans. The servicing asset is amortized in proportion to and over the period of
estimated net servicing income and is evaluated for impairment by stratifying
the servicing assets by one or more of the predominant risk characteristics of
the underlying financial assets.
As of the date a securitization is completed, an asset is established
and classified as an "interest-only strip receivable". This receivable is
initially valued based on management's estimate of the anticipated discounted
future cash flows retained by the Company related to the pool of securitized
loans. The discount rate is a market rate based on interest rate levels at the
time of completion of the transaction considering the risks inherent in the
transaction.
On a quarterly basis, income generated by the interest-only strip
receivable is recognized based on an "internal rate of return" (the "IRR") which
during the initial reporting period after completion of the securitization is
the market rate used in valuing the interest-only strip receivable. Management
updates the anticipated future cash flows on a quarterly basis and determines a
revised IRR based on the recorded interest-only strip receivable as of the
balance sheet date. If during any evaluation of the value of the interest-only
strip receivable it is determined that the IRR is lower than a "risk free" rate
for an asset of similar duration, a realized loss will be incurred which adjusts
the recorded value of the interest-only strip receivable to the market value.
In addition, on a quarterly basis, the Company measures the fair value
of the interest-only strip receivable based upon the future anticipated cash
flows discounted to reflect the current market interest rates for investments of
this type. Any appreciation (depreciation) of the interest-only strip receivable
is reflected on the accompanying consolidated statements of income as an
unrealized gain (loss) on investments. During the six months ended June 30, 1999
and the years ended December 31, 1998 and 1997, the Company recorded a net
unrealized loss of $414,000, a net unrealized gain of $120,000 and a net
unrealized loss of $300,000, respectively, related to the interest-only strip
receivables. At June 30, 1999 and December 31, 1998 and 1997, the interest-only
strip receivable on the Company's balance sheet was net of an unrealized loss of
$594,000, $180,000 and $300,000, respectively.
The estimated net servicing income and the investment in the
interest-only strip receivable are based in part upon management's estimate of
prepayment speeds, default rates and future loan losses. There can be no
assurance of the accuracy of these estimates. If the prepayment speeds occur at
a faster rate than anticipated, the amortization of the servicing asset will be
accelerated and the value of the interest-only strip receivable will decline. If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and total income in future periods would be enhanced.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
Net income increased by $1,137,000 from $6,623,000 during the six
months ended June 30, 1998 to $7,760,000 during
13
<PAGE> 16
the six months ended June 30, 1999. The weighted average common shares
outstanding was 11,772,000 during the six months ended June 30, 1998 and
11,829,000 during the six months ended June 30, 1999. As more fully detailed
below, the most significant reason for the increase in net income when comparing
the six months ended June 30, 1999 and 1998 was the gain of approximately $2.6
million recognized from the securitization and sale of loan portfolio during
June 1999. As a result of this transaction, future periods will not include
interest earnings on those sold loans. Until the proceeds received from this
transaction are reinvested in loans to small businesses, future earnings will
not be comparable with earnings of prior quarters. The Company anticipates that
the proceeds will be reinvested by the end of the first fiscal quarter of 2000.
This same effect occurred during the first two quarters following the
securitization transaction completed in November 1998 which reduced portfolio
earnings. See "Fluctuations in Quarterly Earnings." The increased net income
resulting from this gain was partially offset by: (i) the reduced amount of
income recognized from interest income as a result of the structured sales of
loan portfolio in November 1998 and June 1999, (ii) the recognition during June
1998 of fees from advisory services to PMC Commercial, (iii) a reduction in
premium income and (iv) the net valuation loss related to the interest-only
strip receivables.
Interest income: Interest income decreased by $558,000, from $8,256,000
for the six months ended June 30, 1998 to $7,698,000 for the six months ended
June 30, 1999. Interest income includes the interest earned on loans, the
interest earned on short-term ("temporary") investments, up-front fees collected
including the accretion of up-front fees and the interest earned on the
interest-only strip receivables. This overall decrease was primarily
attributable to a decline in interest rates on new loan originations and the
structured sale of over $40 million in loans in November 1998 and the structured
sale of over $60 million in loans during June 1999.
Interest on short-term investments for the six months ended June 30,
1999 was $633,000 which was $293,000 greater than the $340,000 in interest
income on short-term investments earned during the six months ended June 30,
1998. This increase was primarily due to the greater daily balances in the
restricted investments and cash and cash equivalents as a result of the
securitization and sale of loans in June 1999. The average outstanding temporary
investments fluctuate based on the size and timing of receipt of capital
resources and the volume of loan originations and prepayment activities.
Interest income on loans decreased by $851,000, or 11%, from $7,916,000
during the six months ended June 30, 1998 to $7,065,000 during the six months
ended June 30, 1999. The decrease in interest income on loans was primarily a
result of the decrease in the weighted average outstanding principal amount of
loans which decreased as a result of the structured sales of loans in November
1998 and June 1999. The average retained loan portfolio decreased by 10% to
$116.6 million during the six months ended June 30, 1999 from $130.1 million
during the six months ended June 30, 1998. The decrease in interest income was
also caused by a continuation of lower interest rates charged on new loan
originations and the prepayment of the higher interest rate loans. As
competition has increased and acceptability of hospitality lending was increased
by loan programs of major investment banks (commonly known as "conduit"
programs), the rate able to be charged by the Company was decreasing while
prepayments were increasing. The proceeds from the prepayments were invested
initially in temporary investments and have been re-loaned at lower interest
rates.
Premium income: Premium income decreased by $145,000 (28%) from
$527,000 for the six months ended June 30, 1998 to $382,000 for the six months
ended June 30, 1999. This decrease was attributable to (i) a $312,000 (5%)
decrease in the government guaranteed portion of loans held for sale or sold
(under the SBA 7(a) Program) from $6,404,000 during the six months ended June
30, 1998 to $6,092,000 during the six months ended June 30, 1999 and (ii) the
diminished premiums paid by purchasers of government guaranteed loans . As a
result of several factors, the number, dollar volume and premiums earned related
to 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. In addition, due to the high rate of
prepayment experienced in the limited service hospitality industry, purchasers
of the guaranteed portion of SBA 7(a) loans have significantly decreased the
premium paid for these assets. Accordingly, premiums earned have been
significantly reduced. Recently the Company has refocused its marketing effort
on SBA 7(a) lending and as a result it is anticipated that future fundings and
sales of the guaranteed portion of loans may occur at higher levels than
experienced during the last six months of the year ended December 31, 1998.
Other investment income, net: Other investment income, net, decreased
by $66,000 (14%) from $483,000 for the six months ended June 30, 1998 to
$417,000 for the six months ended June 30, 1999. This decrease was primarily
14
<PAGE> 17
attributable to a decrease in prepayment fees received, the recognition of
discounts related to fixed-rate loans which were prepaid in full and a decrease
in forfeited commitment fees during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998.
Equity in income (loss) of unconsolidated subsidiaries: Equity in
income (loss) of unconsolidated subsidiaries increased by $319,000 (27%), from
$1,175,000 during the six months ended June 30, 1998 to $1,494,000 during the
six months ended June 30, 1999. The primary reason for the increase was the
partnerships formed by the Company in November 1998 and June 1999, the income
from PMC Funding and the income from PMC Advisers. The Company recognized
$271,000 and $75,000 in net income related to the 1998 Partnership and the 1999
Partnership, respectively, during the six months ended June 30, 1999. The net
income of PMC Advisers was $316,000 during the six months ended June 30, 1999
primarily related to fees generated on the Investment Management Agreement
entered into in June 1998. No net income was earned by PMC Advisers during the
six months ended June 30, 1998. In addition, PMC Funding had a gain of $168,000
during the six months ended June 30, 1999 as compared to a $59,000 loss during
the six months ended June 30, 1998. The primary reason for such change was the
recognition of a gain on the sale of an asset during the first quarter of 1999.
These increases were partially offset by a decrease in profits from the 1996
Partnership. The 1996 Partnership formed by the Company in 1996 had net income
of $664,000 and $1,234,000 during the six months ended June 30, 1999 and 1998,
respectively. The decrease is primarily due to the continued reduction in
outstanding principal balance of loans held by the 1996 Partnership and the
recognition of significant prepayment fees by the 1996 Partnership during the
six months ended June 30, 1998. Accordingly, the interest earned on the 1996
Partnership assets is decreasing resulting in less net profits. The loans held
by each of the Limited Partnerships will continue to be reduced resulting in a
decline in profits to the Company in future periods. The Limited Partnership
profits include all yield generated from the loans transferred by PMC Capital
less the cost of the notes issued by the respective partnership.
Other income, net: Other income, net, decreased by $680,000 (38%) from
$1,790,000 during the six months ended June 30, 1998 to $1,110,000 during the
six months ended June 30, 1999. Other income decreased during the six months
ended June 30, 1999 primarily as a result of fee income earned by PMC Advisers
related to the completion of a structured financing by PMC Commercial and fees
related to the acquisition by PMC Commercial (during June 1998) of properties
which aggregated $631,000. There were no comparable fees during the six months
ended June 30, 1999.
Operating expenses: Operating expenses, not including interest,
increased by $54,000 from $2,722,000 during the six months ended June 30, 1998
to $2,776,000 during the six months ended June 30, 1999. 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 salaries and related
benefits which consist of salaries for the Company's officers and employees who
provide all of the Company's management, advisory, and portfolio functions,
including marketing, servicing, accounting and portfolio analysis. The Company
had a decrease in salaries and related benefits of $61,000 (3%) from $1,962,000
during the six months ended June 30, 1998, to $1,901,000 during the six months
ended June 30, 1999. The decrease in salaries and related benefits was
attributable to a decrease in the number of employees. The decrease in salaries
and related benefits was offset by an increase in general and administrative
expenses which increased $107,000 (32%) from $338,000 during the six months
ended June 30, 1998 to $445,000 during the six months ended June 30, 1999. This
increase was primarily attributable to an increase in commissions paid on loans
closed during the six months ended June 30, 1999. It is anticipated that
operating expenses will remain at present levels during the remainder of 1999.
Interest expense: Interest expense decreased by $6,000 ( - %) from
$2,653,000 during the six months ended June 30, 1998 to $2,647,000 during the
six months ended June 30, 1999. Interest expense results primarily from interest
payments made on (i) the Company's $35 million of unsecured notes with a
weighted average interest rate of 7.3% and weighted average remaining maturity
of 2.2 years as of June 30, 1999, and (ii) $39,790,000 of debentures due to the
SBA as a result of borrowings made by the Company's subsidiaries, with a
weighted average interest rate of approximately 6.6% and weighted average
remaining maturity of 3.7 years as of June 30, 1999. The decrease was
attributable to the repayment at maturity of approximately $1.5 million in SBA
debentures during February 1998.
Realized and unrealized gain (loss) on investments: Realized and
unrealized gain (loss) on investments changed from a loss of $233,000 during the
six months ended June 30, 1998 to a gain of $2,082,000 during the six months
ended June 30, 1999. The primary reason for this change was the gain recognized
on sale of assets (related to the sale of a loan pool) of $2,564,000 recognized
during June 1999. There was no comparable transaction during the six months
ended June 30, 1998. Offsetting a portion of the gain was the change in recorded
unrealized gains (losses)
15
<PAGE> 18
relating to the Company's interest-only strip receivables. During the six months
ended June 30, 1998, the Company recognized valuation gains of $5,000 compared
to valuation losses of $414,000 during the six months ended June 30, 1999 as a
result of increased prepayment speeds during the second quarter of 1999. The
Company also recognized $238,000 of loan valuation losses and loans written-off
during the six months ended June 30, 1998 compared to $68,000 during the six
months ended June 30, 1999.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
Net income increased by $1,684,000 from $3,331,000 during the three
months ended June 30, 1998 to $5,015,000 during the three months ended June 30,
1999. The weighted average common shares outstanding was 11,812,000 during the
three months ended June 30, 1998 and 11,829,000 during the three months ended
June 30, 1999. As more fully detailed below, the most significant reason for the
increase in net income when comparing the three months ended June 30, 1999 and
1998 was the gain recognized from the securitization and sale of loan portfolio
during June 1999. As a result of this transaction, future periods will not
include interest earnings on those sold loans. Until the proceeds received from
this transaction are reinvested in loans to small businesses, future earnings
will not be comparable with earnings of prior quarters. The Company anticipates
that the proceeds will be reinvested by the end of the first fiscal quarter of
2000. This same effect occurred during the first two quarters following the
securitization transaction completed in November 1998 which reduced portfolio
earnings. See "Fluctuations in Quarterly Earnings." The increased net income
from this gain was partially offset by the following (i) the reduced amount of
income recognized from interest income as a result of the structured sale of
loan portfolio in November 1998 and June 1999, (ii) the recognition during June
1998 of fees from advisory services to PMC Commercial, and (iii) the net
valuation loss related to the interest only-strip receivables.
Interest income: Interest income decreased by $234,000, from $4,163,000
for the three months ended June 30, 1998 to $3,929,000 for the three months
ended June 30, 1999. Interest income includes the interest earned on loans, the
interest earned on short-term ("temporary") investments, up-front fees collected
including the accretion of up-front fees and the interest earned on the
interest-only strip receivables. This overall decrease was primarily
attributable to a continued decline in interest rates on new loan originations
and the structured sale of over $40 million in loans in November 1998 and the
structured sale of over $60 million in loans during June 1999.
Interest on short-term investments for the three months ended June 30,
1999 was $209,000 greater than for the three months ended June 30, 1998 due to
the investment of proceeds from the sale of loans through a securitization in
June 1999 and the higher daily balances in the restricted investments. The
average outstanding temporary investments fluctuate based on the size and timing
of receipt of capital resources and the volume of loan originations and
prepayment activities.
Interest income on loans decreased by $445,000, or 9%, from $3,994,000
during the three months ended June 30, 1998 to $3,549,000 during the three
months ended June 30, 1999. The decrease in interest income on loans was
primarily a result of the decrease in the weighted average outstanding principal
amount of loans which decreased as a result of the structured sales of loans in
November 1998 and June 1999. The average retained loan portfolio decreased by
16% to $110.3 million during the three months ended June 30, 1999 from $131.6
million during the three months ended June 30, 1998. The decrease in interest
income was also caused by a continuation of lower interest rates charged on new
loan originations and the prepayment of the higher interest rate loans. As
competition has increased and acceptability of hospitality lending was increased
by loan programs of major investment banks (commonly known as "conduit"
programs), the rate able to be charged by the Company was decreasing while
prepayments were increasing. The proceeds from the prepayments were invested
initially in temporary investments and have been re-loaned at lower interest
rates.
Premium income: Premium income increased by $75,000 (54%) from $138,000
for the three months ended June 30, 1998 to $213,000 for the three months ended
June 30, 1999. This increase was primarily attributable to (i) a $824,000 (27%)
increase in the government guaranteed portion of loans held for sale or sold
(under the SBA 7(a) Program) from $3,096,000 during the three months ended June
30, 1998 to $3,920,000 during the three months ended June 30, 1999. Recently the
Company has refocused its marketing effort on SBA 7(a) lending which contributed
to the higher volume of SBA 7(a) lending during the three months ended June 30,
1999. As a result of these efforts, it is anticipated that future fundings and
sales of the guaranteed portion of loans may occur at higher levels than
experienced during the second half of the year ended December 31, 1998.
16
<PAGE> 19
Other investment income, net: Other investment income, net, decreased
by $117,000 (37%) from $313,000 for the three months ended June 30, 1998 to
$196,000 for the three months ended June 30, 1999. This decrease was primarily
attributable to a decrease in prepayment fees received, a decrease in the
recognition of discounts related to fixed-rate loans which were prepaid in full
and a decrease in forfeited commitment fees during the three months ended June
30, 1999 as compared to the three months ended June 30, 1998.
Equity in income (loss) of unconsolidated subsidiaries: Equity in
income (loss) of unconsolidated subsidiaries increased by $44,000 (7%), from
$587,000 during the three months ended June 30, 1998 to $631,000 during the
three months ended June 30, 1999. The primary reason for the increase was the
partnerships formed by the Company in November 1998 and June 1999 and the income
from PMC Advisers. The Company recognized $217,000 in net income related to the
1998 Partnership and the 1999 Partnership during the three months ended June 30,
1999. The net income of PMC Advisers was $108,000 during the three months ended
June 30, 1999 primarily related to fees generated on the Investment Management
Agreement entered into in June 1998. No net income was earned by PMC Advisers
during the six months ended June 30, 1998. In addition, PMC Funding had a loss
of $5,000 during the three months ended June 30, 1999 as compared to a $37,000
loss during the three months ended June 30, 1998. These increases were partially
offset by a decrease in profits from the 1996 Partnership. The Partnership
formed by the Company in 1996 had a decrease in net income of $326,000, from
$621,000 during the three months ended June 30, 1998 to $295,000 during the
three months ended June 30, 1999. The decrease is primarily due to the continued
reduction in outstanding principal balance of loans held by the 1996 Partnership
and the recognition of significant prepayment fees by the 1996 Partnership
during the three months ended June 30, 1998. Accordingly, the interest earned on
the 1996 Partnership assets is decreasing resulting in less net profits. The
loans held by each of Limited Partnerships will continue to be reduced resulting
in a decline in profits to the Company in future periods of operations. The
Limited Partnership profits include all yield generated from the loans
transferred by PMC Capital less the cost of the notes issued by the 1996
Partnership.
Other income, net: Other income, net, decreased by $712,000 (57%) from
$1,240,000 during the three months ended June 30, 1998 to $528,000 during the
three months ended June 30, 1999. Other income decreased during the three months
ended June 30, 1999 primarily as a result of fee income earned by PMC Advisers
related to the completion of a structured financing by PMC Commercial and fees
related to the acquisition by PMC Commercial of properties during June 1998
which aggregated $631,000. There were no comparable fees during the three months
ended June 30, 1999.
Operating expenses: Operating expenses, not including interest,
increased by $46,000 from $1,332,000 during the three months ended June 30, 1998
to $1,378,000 during the three months ended June 30, 1999. 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 salaries and related
benefits which consist of salaries for the Company's officers and employees who
provide all of the Company's management, advisory, and portfolio functions,
including marketing, servicing, accounting and portfolio analysis. The Company
had a decrease in salaries and related benefits of $10,000 (1%) from $946,000
during the three months ended June 30, 1998 to $936,000 during the three months
ended June 30, 1999. The decrease in salaries and related benefits was
attributable to a decrease in the number of employees. The decrease in salaries
and related benefits was offset by an increase in general and administrative
expenses, rent and legal and accounting expenses which increased $61,000 (21%)
from $294,000 during the three months ended June 30, 1998 to $355,000 during the
three months ended June 30, 1999. It is anticipated that operating expenses will
remain at present levels during the remainder of 1999.
Interest expense: Interest expense increased by $23,000 (2%) from
$1,321,000 during the three months ended June 30, 1998 to $1,344,000 during the
three months ended June 30, 1999. Interest expense results primarily from
interest payments made on (i) the Company's $35 million of unsecured notes with
a weighted average interest rate of 7.3% and weighted average remaining maturity
of 2.2 years as of June 30, 1999, and (ii) $39,790,000 of debentures due to the
SBA as a result of borrowings made by the Company's subsidiaries, with a
weighted average interest rate of approximately 6.6% and weighted average
remaining maturity of 3.7 years as of June 30, 1999. The increase was
attributable to the utilization of the Company's Revolving Credit Facility
during May 1999.
Realized and unrealized gain (loss) on investments: Realized and
unrealized gain (loss) on investments changed from a loss of $457,000 during the
three months ended June 30, 1998 to a gain of $2,240,000 during the three months
ended June 30, 1999. The primary reason for this change was the gain recognized
on sale of assets (related to the sale of a loan pool) of $2,564,000 recognized
during June 1999. The change in recorded unrealized gains (losses)
17
<PAGE> 20
relating to the Company's interest-only strip receivables was minimal. During
the three months ended June 30, 1998, the Company recognized valuation losses of
$250,000 compared to valuation losses of $231,000 during the three months ended
June 30, 1999 as a result of increased prepayment speeds. The Company also
recognized $207,000 of loan valuation losses and loans written-off during the
six months ended June 30, 1998, compared to $68,000 during the six months ended
June 30, 1999.
CASH FLOW ANALYSIS
The Company generated $5,885,000 and $7,329,000 from operating
activities during the six months ended June 30, 1999 and 1998, respectively. The
primary source of the Company's funds is net income. The source of funds from
net income is adjusted primarily by the gain recognized from the sale of assets,
the equity in the income of unconsolidated subsidiaries, the change in other
assets and liabilities and First Western's lending activities. The net operating
income and unrealized gain (loss) on investments adjusted for the change in
unrealized depreciation on investments and loans written-off and the gain (loss)
on sale of assets was $5,673,000 for the six months ended June 30, 1999,
compared to $6,860,000 during the six months ended June 30, 1998, which
represents a $1,187,000 (17%) decrease. The primary reason for the decrease was
the fees generated during June 1998 of $631,000 by PMC Advisers and a reduction
in interest income due to the loan sales in November 1998 and June 1999.
Included in cash flows from operating activities is the lending activity of
First Western relating to the government guaranteed portion of the SBA 7(a)
Program loans originated which are sold into the secondary market ("Government
Guaranteed Lending"). During the six months ended June 30, 1999 and 1998, the
Company had a net source of cash of $407,000 and $1,437,000, respectively, from
Government Guaranteed Lending activities representing a decrease in source of
funds of $1,030,000. During the six months ended June 30, 1999 and 1998, the
Company was provided with net cash of $1,533,000 and $13,000, respectively, from
the change in operating assets and liabilities.
The Company used $16,548,000 and $6,877,000, respectively from
investing activities during the six months ended June 30, 1999 and 1998,
respectively. The Company increased its use of funds relating to loan activity
from a net use of funds of $6,093,000 during the six months ended June 30, 1998
to a net use of funds of $16,802,000 during the six months ended June 30, 1999.
This increase of $10,709,000 was due to an increase in loans funded of
approximately $11.1 million when comparing the six months ended June 30, 1999 to
the six months ended June 30, 1998. Principal collected decreased by $339,000
from $11,616,000 during the six months ended June 30, 1998 to $11,277,000 during
the six months ended June 30, 1999. The Company also had a net use of cash of
approximately $1.8 million related to the investment in the 1999 Partnership
during June 1999.
The Company had a net source of cash of $49,096,000 and a net use of
cash of $6,849,000 from financing activities during the six months ended June
30, 1999 and 1998, respectively. The primary reason for the change in source of
funds by $55,945,000 was the receipt of approximately $55 million in proceeds
from the 1999 Partnership related to the sale of loans to the 1999 Partnership
and the issuance by the 1999 Partnership of notes payable. Dividends paid on
common stock during the six months ended June 30, 1999 were $5,915,000 as
compared to $7,289,000 during the six months ended June 30, 1998, a decrease of
$1,374,000 (19%). The Company also had a decrease in funds received from the
issuance of common stock of $2,064,000 due to the curtailment of the cash
portion of the Company's dividend reinvestment plan during 1998 and the
utilization of the market purchase option for plan purchases. Under the market
purchase option, the Company does not receive any of the proceeds from plan
participants. In addition, the Company did not have any SBA debenture repayments
during the six months ended June 30, 1999 while a $1,500,000 SBA debenture was
repaid at maturity during the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF FUNDS: As a regulated investment company, pursuant
to the Internal Revenue Code of 1986, the Company is required to pay out
substantially all of its net investment company taxable income to the common
shareholders (see "Dividends"). Consequently, the Company must procure funds
from sources other than earnings in order to meet its capital requirements. In
addition, as a Business Development Company ("BDC"), the Company is generally
required to maintain a ratio of at least 200% of total assets to total
borrowings, which may restrict its ability to borrow in certain circumstances.
The primary use of the Company's funds is to originate loans. The
Company also expends funds for payment of (i) dividends to shareholders, (ii)
principal due on borrowings, (iii) interest and related financing costs, (iv)
general and administrative expenses, (v) capital expenditures and (vi) advances
on loan liquidations.
18
<PAGE> 21
Historically, the Company's primary sources of capital and liquidity
have been debentures issued through programs of the SBA, private and public
issuances of common stock, the issuance of senior unsecured medium-term notes,
the securitization and sale of a portion of its loan portfolio and the
utilization of its short-term, unsecured revolving credit facility. During 1998,
the Company structured a collateralized sale of its variable-rate loans
primarily originated as part of the Prime Lending Program. During 1999, the
Company structured a collateralized sale of a pool of fixed-rate loans.
Prospectively, in order to generate growth in the size of its investment
portfolio, the Company will continually review the need for obtaining additional
funds from: (i) securitization and sale of a portion of the loan portfolio, (ii)
borrowings under its credit facility, (iii) medium-term debt offerings and/or
(iv) equity offerings. To the extent funds are necessary to originate loans , it
is anticipated that during the remainder of the year ending December 31, 1999
the Company will utilize its cash and cash equivalents on hand and the proceeds
from principal payments on loans, and if necessary, rely on its revolving credit
facility and the issuance of SBA debentures. During July 1999, $6.7 million in
senior unsecured notes were refinanced at maturity and $3.3 million in
additional funds were received. The new $10.0 million in notes mature in July
2005 with an interest rate of 7.44%. In addition, $4.2 million in SBA debentures
will mature during the latter half of 1999. The SBA debentures are expected to
be paid-off at maturity with cash and cash equivalents on-hand. As part of the
SBA's commitment to Western Financial and PMCIC to provide guaranties on $11.5
million in future debentures, $4.2 million will be utilized for the "roll-over"
of debentures during 2000. Management believes that these financing sources will
enable the Company to generate funds sufficient to meet both its short-term and
long-term capital needs.
RECENT TRANSACTIONS: 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. The 1999
Notes were issued with an interest rate of 6.60% and were originally
collateralized by approximately $60 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.
COMMITMENTS: Loan commitments outstanding at June 30, 1999 to various
prospective small business companies, including the unfunded portion of projects
in the construction phase, amounted to approximately $71 million. Of these
commitments, $23.1 million were for loans partially guaranteed by the SBA of
which approximately $18.5 million would be sold (when fully funded) into the
secondary market. Such commitments are made in the ordinary course of the
Company's business. Commitments to extend credit are agreements to lend to a
customer provided that the terms established in the contract are met.
Commitments generally have fixed expiration dates and require payment of a fee.
Since some commitments expire without the proposed loan closing, the total
commitment amounts do not necessarily represent future cash requirements.
REVOLVING CREDIT FACILITY: PMC Capital has a $15 million revolving
credit facility which expires in March 2000. At June 30, 1999, the Company had
no borrowings outstanding under this revolving credit facility, and had
availability of $15 million. Advances pursuant to the credit facility bear
interest at the Company's option at either the lender's prime rate less 50 basis
points or LIBOR plus 175 basis points. The credit facility requires the Company
to meet certain covenants, the most restrictive of which provides that the ratio
of net charge-offs to net loans receivable may not exceed 2%, and the ratio of
assets to senior debt (as defined in the credit facility) will not fall below
135%. At June 30, 1999 the Company was in compliance with all covenants of this
facility.
SBA DEBENTURES: Due to changes in the SBIC program increasing the cost
and availability of SBA debentures, the Company had been utilizing other sources
of funds to expand its loan portfolio. The cost and terms of these other sources
of funds are not as favorable as those historically achieved on SBA debentures
and SSBIC preferred stock; however, the Company had been able to issue debt
through private placement of notes and generate working capital
19
<PAGE> 22
through the securitization and sale of a portion of its portfolio at rates
generally better than available through the issuance of SBA debentures under the
relative terms in existence during the first half of 1998. As the cost of funds
through the issuance of asset-backed securities increased during the latter half
of 1998, the Company determined that the cost of debentures through the SBIC
program was potentially cost efficient. As a result, the Company applied for and
was approved by the SBA for the issuance of up to $11.5 million in SBA
debentures. It is not anticipated that any of these debentures will be issued
during the year ended December 31, 1999 and most will be utilized to "roll-over"
the Company's SBA debentures which mature in 2000 or new issuances in 2000.
During the twelve months ending June 30, 2000, approximately $11.5 million in
SBA debentures will mature.
INVESTMENT COMPANY ACT REQUIREMENTS: PMC Capital is in compliance with
the requirement to maintain a minimum of 200% asset coverage of debt as defined
in sections 18 and 61 of the 1940 Act as modified by exemptive orders obtained
by the Company from the Securities and Exchange Commission.
DIVIDENDS: PMC Capital has historically paid 100% of its investment
company taxable income and not paid any return of capital. There are certain
timing differences between book and tax income, most notably the recognition of
commitment fees received and the recognition of income relating to the 1998 and
1999 structured sale of loans. A portion of dividends paid during 1998 pertained
to earnings in 1997 including the effect of the gain from a securitization and
sale of certain loans originated by First Western completed in December 1997
(these amounts being referred to as the "Carry-Forward Amounts"). As a result of
these timing differences and the Carry-Forward Amounts, the payment and amount
of dividends does not necessarily coincide with the Company's earnings. The
Company utilized a substantial portion of its Carry-Forward Amounts during 1998
to pay dividends. The Company presently anticipates that the dividend will be
stabilized at $0.25 per share, per quarter during 1999. Each of the dividends
paid on January 11, 1999, April 12, 1999, and July 12, 1999 were $0.25 per
share. The Company may amend this stabilized dividend policy as warranted by
actual and/or anticipated earnings.
The most significant timing difference between investment company taxable income
and book earnings is the effect of securitization transactions. A reconciliation
of net income to the net income of the Company before the effect of
securitization transactions is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Net income before the effect of securitization
transactions ........................... $ 3,060 $ 3,581 $ 5,770 $ 6,618
Plus: Gains from securitization
transactions ........................... 2,564 -- 2,564 --
Plus (Less): Change in valuation of
securitization transactions ............ (414) (250) (254) 5
Less: Cash flow from securitized
assets ................................. (274) -- (441) --
Plus: Income recognized on
interest-only strip receivable ......... 79 -- 121 --
------- ------- ------- -------
NET INCOME ..................................... $ 5,015 $ 3,331 $ 7,760 $ 6,623
======= ======= ======= =======
</TABLE>
YEAR 2000 COMPLIANCE UPDATE
The Year 2000 issue concerns the potential impact of historic computer
software code that only utilized two digits to represent the calendar year (e.g.
"98" for "1998"). Software so developed, and not corrected, could produce
inaccurate or unpredictable results commencing January 1, 2000, when current and
future dates present a lower two digit year number than dates in the prior
century. The Company, similar to most financial services providers, is subject
to the potential impact of the Year 2000 issue due to the nature of financial
information. Potential impacts to the Company may arise from software, computer
hardware, and other equipment both within the Company's direct control and
outside of the Company's ownership, yet with which the Company electronically or
operationally interfaces. Regulators have intensively focused upon Year 2000
exposures, issuing guidance concerning the responsibilities of senior management
and directors. Year 2000 testing and certification is being addressed as a key
safety and soundness issue in conjunction with these regulatory concerns.
20
<PAGE> 23
During 1998, the Company formed an internal review team to address,
identify and resolve any Year 2000 issues that encompasses operating and
administrative areas of the Company. In addition, executive management monitors
the status of the Company's Year 2000 remediation plans, where necessary, as
they relate to internally used software, computer hardware and use of computer
applications in the Company's servicing processes. In addition, the Company is
engaged in assessing the Year 2000 issue with significant suppliers.
The Company used internal resources to test the software for Year 2000
modifications. The Company has substantially completed its Year 2000 assessment
and remediation. In addition, the Company has initiated and substantially
completed formal communications with its significant suppliers to determine the
extent to which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The total project cost was not considered
to be material. The majority of the project cost was attributable to employee
time necessary to test the present system and to meet future industry
requirements and has accordingly been expensed. To date, the Company has
installed new personal computer terminals at a cost of approximately $25,000
which was not related to any specific Year 2000 concern. The costs of the
project, the percentage completed to date and the date on which the Company
plans to fully complete its Year 2000 assessment and remediation are partially
based on management's estimates, which were derived utilizing assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates are accurate or future estimates will be achieved and
actual results could differ significantly from those plans. Specific factors
that might cause differences from management's estimates include, but are not
limited to, completion by third parties (primarily the Company's bank) of their
Year 2000 evaluations and their required modifications. Management believes that
the Company is devoting the necessary resources to identify and resolve
significant Year 2000 issues in a timely manner.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results will fluctuate based on a
number of factors. These include, among others, the completion of a
securitization transaction in a particular calendar quarter, the interest rates
on the securities issued in connection with its securitization transactions, the
volume of loans originated by the Company, the timing of prepayment of loans,
changes in and the timing of the recognition of realized and unrealized gains or
losses on investments, the degree to which the Company encounters competition in
its markets and general economic conditions. As a result of these factors,
results for any one quarter should not be relied upon as being indicative of
performance in future quarters.
IMPACT OF INFLATION
The Company does not believe that inflation materially affects its
business other than the impact that it may have on the securities markets, the
valuation of collateral underlying the loans and the relationship of the
valuations to underlying earnings. Those could all influence the value of the
Company's investments.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The forward-
looking statements included herein are based on current expectations that
involve numerous risks and uncertainties identified both in this Form 10-Q and
in the Company's Form 10-K for the fiscal year ended December 31, 1998.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this Form
10-Q will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
21
<PAGE> 24
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in interest rates.
The Company's balance sheet consists of two items subject to interest rate risk.
First, a majority of the Company's investment portfolio consists of fixed
interest rate loans. Given that the loans are priced at a fixed rate of
interest, changes in interest rates should not have a direct impact on interest
income. In addition, changes in market interest rates have not typically been a
significant factor in the board of directors' determination of fair value of
these loans. However, a significant rise in interest rates (greater than 2% for
long-term lending rates) may cause the Board of Directors to revalue the
Company's loan portfolio which may result in a material devaluation of the
Company's loan portfolio. The amount of such revaluation can not be quantified
at this time since it involves "marking to market" the loan portfolio which is a
procedure involving various factors depending upon then existing market
conditions. Significant reductions in interest rates, however, can prompt
increased prepayments of the Company's loans, resulting in possible decreases in
long-term revenues due to the relending of the prepayment proceeds at lower
interest rates. Second, the Company's liabilities consist of debt payable to the
SBA and the Company's senior unsecured debt. The SBA debentures and the senior
unsecured debt are payable at fixed rates of interest, so changes in interest
rates do not affect the Company's interest expense.
22
<PAGE> 25
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 12, 1999,
the following members were re-elected to the Board of Directors:
Robert Diamond
Martha Greenberg
Other members of the Board of Directors are as follows:
Fredric M. Rosemore
Andrew S. Rosemore
Lance B. Rosemore
Irvin M. Borish
Thomas Hamill
Barry A. Imber
The following proposal was approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Abstentions
Affirmation Negative and Broker
Votes Votes Non-Votes
----------- -------- ----------
<S> <C> <C> <C>
1. To ratify the appointment of PricewaterhouseCoopers
LLP as the independent public accountants of the
Company 9,191,901 23,359 130,270
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Servicing Agreement by and among Harris Trust and
Savings Bank, as Trustee and Supervisory Servicer,
PMC Capital, L.P. 1999-1, as Issuer, and PMC Capital,
Inc., as Servicer.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC Capital, Inc.
Date: 8/16/99 /s/ Lance B. Rosemore
--------------------- ----------------------------------
Lance B. Rosemore
President
Date: 8/16/99 /s/ Barry N. Berlin
--------------------- ----------------------------------
Barry N. Berlin
Chief Financial Officer
(Principal Accounting Officer)
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.1 Servicing Agreement by and among Harris
Trust and Savings Bank, as Trustee and Supervisory
Servicer, PMC Capital, L.P. 1999-1, as Issuer, and
PMC Capital, Inc., as Servicer
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SERVICING AGREEMENT
by and among
HARRIS TRUST AND SAVINGS BANK,
as Trustee and Supervisory Servicer
PMC CAPITAL, L.P. 1999-1
as Issuer
and
PMC CAPITAL, INC.
as Servicer
--------------------
Dated as of June 3, 1999
--------------------
$55,648,773
PMC CAPITAL, L.P. 1999-1
LOAN-BACKED FIXED RATE NOTES
<PAGE> 2
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS.........................................................................................1
ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS...........................................................1
Section 2.1 Representations and Warranties of Servicer............................................1
Section 2.2 Covenants of Servicer.................................................................3
Section 2.3 Closing Certificate and Opinion.......................................................5
Section 2.4 Fidelity Bond and Insurance...........................................................5
Section 2.5 Access to Certain Documentation and Information Regarding the Loans...................6
Section 2.6 Merger or Consolidation...............................................................6
Section 2.7 Indemnification.......................................................................6
ARTICLE III GENERAL ADMINISTRATION AND SERVICING OF LOANS.......................................................7
Section 3.1 General Duties of Servicer............................................................7
Section 3.2 No Assignment or Delegation of Duties by Servicer.....................................8
Section 3.3 Establishment of Lockbox Account; Notices to Obligors; Deposits in Lockbox
Account...............................................................................8
Section 3.4 Permitted Withdrawals From the Lockbox Account........................................9
Section 3.5 Payment of Taxes and Other Charges....................................................9
Section 3.6 Collection of Certain Loan Payments...................................................9
Section 3.7 Limitation of Liability of Servicer's Officers and Others............................10
Section 3.8 Servicing Compensation; Advances and Expenses........................................10
Section 3.9 The Trustee's, the Noteholders' and Supervisory Servicer's Right To Examine
Servicer Records and Audit Operations................................................10
Section 3.10 Maintenance and Release of Loan Documentation; Satisfaction of Mortgages.............11
Section 3.11 Notice of Liens and Other Actions....................................................13
Section 3.12 Waivers, Releases, Condemnations, Easements and Alterations..........................13
Section 3.13 Limitation on Liability of Servicer and Others.......................................13
Section 3.14 Property Address Change..............................................................14
ARTICLE IV SPECIFIC SERVICING PROCEDURES......................................................................14
Section 4.1 Assumption Agreements................................................................14
Section 4.2 Servicing Delinquent Accounts; Liquidation of Loans..................................15
Section 4.3 Foreclosure Expenses.................................................................17
Section 4.4 Title, Management and Disposition of REO Property....................................17
ARTICLE V REPORTS TO BE PROVIDED BY SERVICER.................................................................19
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 5.1 Determination Date Reports...........................................................19
Section 5.2 Reports of Foreclosure and Abandonment of Mortgaged Property.........................22
Section 5.3 Quarterly Statement as to Compliance.................................................22
Section 5.4 Annual Independent Public Accountants' Servicing Report..............................22
Section 5.5 Servicer's Financial Statements; Annual Certification................................22
ARTICLE VI DEFAULTS...........................................................................................23
Section 6.1 Servicer Defaults....................................................................23
Section 6.2 Notice of Servicer Default...........................................................24
Section 6.3 Remedies.............................................................................24
Section 6.4 Additional Remedies of Trustee Upon Servicer Defaults................................25
Section 6.5 Supervisory Servicer To Act; Appointment of Successor................................25
Section 6.6 Waiver of Defaults...................................................................26
ARTICLE VII TERMINATION........................................................................................26
Section 7.1 Servicer Not To Resign...............................................................26
Section 7.2 Term of Agreement....................................................................26
ARTICLE VIII MISCELLANEOUS PROVISIONS...........................................................................27
Section 8.1 Amendment............................................................................27
Section 8.2 Governing Law........................................................................27
Section 8.3 Notices..............................................................................27
Section 8.4 Severability of Provisions...........................................................27
Section 8.5 No Partnership.......................................................................27
Section 8.6 Counterparts.........................................................................28
Section 8.7 Successors and Assigns...............................................................28
Section 8.8 Notification to Rating Agency and Noteholders........................................28
Section 8.9 Indulgences; No Waivers..............................................................28
Section 8.10 Titles Not To Affect Interpretation..................................................28
Section 8.11 Entire Agreement.....................................................................28
Section 8.12 Recordation of Agreement.............................................................28
Section 8.13 Further Assurances...................................................................29
</TABLE>
EXHIBIT A - Form of Trust Receipt
EXHIBIT B - Form of Lockbox Letter Agreement
EXHIBIT C - Form of Lockbox Notice Letter
EXHIBIT D - Form of Determination Date Report
ii
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EXHIBIT E - Form of Annual Statement
EXHIBIT F - Quarterly Officer's Certificate
EXHIBIT G - Officer's Certificate
EXHIBIT H - Form of Obligor Letter
SCHEDULE - Definitions
iii
<PAGE> 5
SERVICING AGREEMENT
This Servicing Agreement (this "Agreement"), dated as of June 3, 1999,
is made and entered into by and among HARRIS TRUST AND SAVINGS BANK, as trustee
(the "Trustee"), and as Supervisory Servicer (the "Supervisory Servicer"), PMC
Capital, L.P. 1999-1, a Delaware limited partnership, as issuer (the "Issuer"),
and PMC Capital, Inc., a Florida corporation, as servicer (the "Servicer").
PRELIMINARY STATEMENT
The Issuer is the owner of the Loans and the other property being
pledged, assigned and conveyed by it to the Trustee for inclusion in the Trust
Estate pledged to secure the Notes issued pursuant to the Indenture. The
Servicer is in the business, among other things, of servicing mortgage loans.
The Issuer hereby appoints the Servicer to service the Loans which are included
in the Trust Estate, and the Servicer hereby accepts that appointment.
All covenants and agreements made by the Issuer, the Servicer, the
Supervisory Servicer and the Trustee herein are for the benefit of the Holders
from time to time of the Notes, the Trustee and the Supervisory Servicer. The
Issuer, the Trustee, the Supervisory Servicer and the Servicer are entering into
this Agreement for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged.
In consideration of the mutual agreements herein contained, the Issuer,
the Servicer, the Supervisory Servicer and the Trustee hereby agree as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used herein and not otherwise defined herein
shall have the meanings set forth in Schedule 1 attached hereto. Unless
otherwise provided, all calculations of interest pursuant to this Agreement are
based on a 360-day year of twelve 30-day months.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 2.1 REPRESENTATIONS AND WARRANTIES OF SERVICER. The Servicer
hereby represents and warrants to the Trustee for the benefit of the
Noteholders, the Supervisory Servicer and the Issuer as of the Closing Date, and
at all times during the term of this Agreement shall be deemed to represent and
warrant, that:
(a) The Servicer has been duly formed and is validly existing under the
laws of the jurisdiction of its formation and is duly qualified to do business
and is in good standing under the laws of each jurisdiction in which the failure
to be so qualified would have a material adverse
SERVICING AGREEMENT - PAGE 1
<PAGE> 6
effect on the enforceability of, or its ability to service, a Loan and no demand
for such qualification has been made upon the Servicer by any state, and, in any
event the Servicer is or will be in compliance with the laws of any such state
to the extent necessary to insure the enforceability of each Loan and the
servicing of the Loans in accordance with the terms of this Agreement;
(b) The Servicer holds all material licenses, certificates and permits
from all governmental authorities necessary for the conduct of its business
(except where the failure to obtain same would not materially and adversely
affect the Servicer's ability to perform its obligations hereunder in accordance
with the terms of this Agreement) and has received no notice of proceedings
relating to the revocation of any such license, certificate or permit which
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially and adversely affect the conduct of the business,
results of operations, net worth or condition (financial or otherwise) of the
Servicer;
(c) The Servicer has the full power and authority to execute, deliver
and perform, and to enter into and consummate all transactions contemplated by
this Agreement, has duly authorized the execution, delivery and performance of
this Agreement, has duly executed and delivered this Agreement and this
Agreement constitutes a legal, valid and binding obligation of the Servicer,
enforceable against it in accordance with its terms, except as such enforcement
may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights in general and
(ii) by general equity principles (regardless of whether such enforcement is
considered in a proceeding in equity or at law);
(d) Neither the execution and delivery by the Servicer of this
Agreement, the consummation by the Servicer of the transactions contemplated
hereby, nor the fulfillment of or compliance by the Servicer with the terms and
conditions of this Agreement will conflict with or result in a breach of any of
the terms, conditions or provisions of the Servicer's organizational documents
or bylaws or any legal restriction or any material agreement or instrument to
which the Servicer is now a party or by which it is bound, or constitute a
default or result in an acceleration under any of the foregoing, or result in
the violation of any law, rule, regulation, order, judgment or decree to which
the Servicer or its property is subject;
(e) At the date hereof, the Servicer does not believe, nor does it have
any reason or cause to believe, that it cannot perform each of its covenants
contained in this Agreement;
(f) There is no litigation pending or, to the Servicer's knowledge,
threatened, which, if determined adversely to the Servicer, would materially and
adversely affect the execution, delivery or enforceability of this Agreement, or
the ability of the Servicer to service the Loans hereunder in accordance with
the terms hereof or which would have a material adverse effect on the financial
condition of the Servicer;
(g) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Servicer of or compliance by the Servicer with this Agreement
or the consummation by the Servicer of the transactions contemplated by this
Agreement or if any such consent, approval, authorization or order is
SERVICING AGREEMENT - PAGE 2
<PAGE> 7
required, the Servicer has obtained or will obtain it prior to the time
necessary for the Servicer to perform its obligations hereunder;
(h) Neither this Agreement nor any statement, report or other document
furnished or to be furnished pursuant to this Agreement or in connection with
the transactions contemplated hereby contains any untrue statement of material
fact or omits to state a material fact necessary to make the statements relating
to the Servicer contained therein not misleading;
(i) The Servicer is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state, municipal
or governmental agency, which default might have consequences that would
materially and adversely affect the condition (financial or other) or operations
of the Servicer or its properties or might have consequences that would
materially and adversely affect its performance hereunder; and
(j) The Servicer has taken all reasonable actions necessary to mitigate
the risk that computer applications used by it may be unable to recognize and
properly perform date-sensitive functions involving certain dates prior to,
during and after the year 2000.
Upon discovery by either the Issuer, the Servicer, the Supervisory
Servicer or the Trustee of a material breach of any of the foregoing
representations and warranties, the party discovering such breach shall give
prompt written notice to the other parties, with a copy to the Noteholders and
the Rating Agency. Within 30 days of its discovery or its receipt of notice of
any such breach of a representation or warranty, the Servicer shall cure such
breach in all material respects; provided that, if such failure shall be of a
nature that it cannot be cured within 30 days, the Servicer shall give written
notice to the Supervisory Servicer and the Trustee, with a copy to the
Noteholders and the Rating Agency, within such 30 day period of the corrective
action, which has been approved by the Initial Purchaser, it proposes to take
and shall thereafter pursue such corrective action diligently until such default
is cured but in no event longer than 90 days from the date of such notice.
SECTION 2.2 COVENANTS OF SERVICER. The Servicer hereby agrees that
during the term of this Agreement:
(a) Compliance With Agreements and Applicable Laws. The Servicer shall
perform each of its obligations under this Agreement and comply with all
material requirements of any law, rule or regulation applicable to it and the
terms of the Loans and any related agreements.
(b) Existence. The Servicer shall maintain its existence and shall at
all times continue to be duly organized under the laws of the state of its
organization and duly qualified and duly authorized (as described in Sections
2.1(a), (b) and (c) hereof) and shall conduct its business in accordance with
the terms of its organizational documents and bylaws.
(c) Financial Statements; Accountants' Reports; Other Information. The
Servicer shall keep or cause to be kept in reasonable detail books and records
of account of the Servicer's assets and business, including, but not limited to,
books and records relating to the sale of the Loans to the Issuer and the
Servicing of such Loans by the Servicer, which books and records shall be
furnished to the Trustee upon reasonable request.
SERVICING AGREEMENT - PAGE 3
<PAGE> 8
(d) Access to Records; Discussions With Officers and Accountants. The
Servicer shall, upon the reasonable request of the Supervisory Servicer, the
Trustee or any Noteholder, permit the Supervisory Servicer, the Trustee or any
such Noteholder or any of their authorized designees:
(i) to inspect the books and records of the Servicer as they
may relate to the Loans and the obligations of the Servicer under
this Agreement; and
(ii) to discuss the affairs, finances and accounts of the
Servicer relating to the Loans and the obligations of the
Servicer under this Agreement with any Authorized Officer of the
Servicer.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the
Servicer. Such inspections shall be at the expense of the party
performing or requesting such inspection unless a Servicer Default
shall have occurred and be continuing, in which case any such
inspection shall be at the expense of the Servicer. The books and
records of the Servicer will be maintained in the United States at the
address of the Servicer designated herein for receipt of notices,
unless the Servicer shall otherwise advise the Supervisory Servicer,
the Trustee and the Noteholders in writing not less than fifteen (15)
Business Days prior to any such change of address.
(e) Notice of Material Events. The Servicer shall promptly and in any
event, within five (5) Business Days of the occurrence thereof, inform the
Supervisory Servicer, the Trustee, the Noteholders and the Rating Agency in
writing of the occurrence of any of the following:
(i) the submission of any claim or the initiation of any
legal process, litigation or administrative or judicial
investigation against the Servicer involving potential damages or
penalties in an uninsured amount in excess of $1,000,000 in any
one instance or $5,000,000 in the aggregate;
(ii) any change in the location of the Servicer's principal
office or any change in the location of the Servicer's books and
records;
(iii) the occurrence of any Servicer Default;
(iv) the commencement of any proceedings instituted by or
against the Servicer in any federal, state or local court or
before any governmental body or agency, or before any arbitration
board, or the promulgation of any proceeding or any proposed or
final rule which, if adversely determined, would result in a
material adverse change in the financial condition or operations
of the Servicer;
(v) the commencement of any proceedings by or against the
Servicer under any applicable bankruptcy, reorganization,
liquidation, rehabilitation, insolvency or other similar law now
or hereafter in effect or of any proceeding in which a receiver,
liquidator, conservator, trustee or similar official shall have
been, or may be, appointed or requested for the Servicer or any
of its assets;
SERVICING AGREEMENT - PAGE 4
<PAGE> 9
(vi) the receipt of notice that (A) any license, permit,
charter, registration or approval necessary for the performance
by the Servicer of its obligations under this Agreement is to be,
or may be, suspended or revoked, or (B) the Servicer is to cease
and desist any practice, procedure or policy employed by the
Servicer in the conduct of its business, and such cessation may
result in a material adverse change in the financial condition or
operations of the Servicer;
(vii) any merger, consolidation or sale of substantially all
of the assets of the Servicer; or
(viii) the final payment in full of the Notes.
(f) Maintenance of Licenses. The Servicer shall maintain all licenses,
permits, charters and registrations which are material to the performance by the
Servicer of its obligations under this Agreement.
(g) Notices. The Servicer shall promptly notify the Trustee, the
Noteholders, the Rating Agency and the Supervisory Servicer in writing of any
event, circumstance or occurrence which may materially and adversely affect the
ability of the Servicer to service any Loan or to otherwise perform and carry
out its duties, responsibilities and obligations under and in accordance with
this Agreement.
SECTION 2.3 CLOSING CERTIFICATE AND OPINION. On the Closing Date, the
Servicer will deliver to the Issuer, the Placement Agent, the Supervisory
Servicer, the Noteholders and the Trustee an Opinion of Counsel, dated the
Closing Date, in form and substance satisfactory to the Noteholders, as to the
due authorization, execution and delivery of this Agreement by the Servicer and
the enforceability thereof and such other matters as reasonably requested by the
Noteholders. On the Closing Date, the Servicer shall also deliver an Officers'
Certificate, dated the Closing Date, signed by two Authorized Officers, to the
effect that:
(a) the representations and warranties contained in Section 2.1
hereof are true and correct in all material respects as of the Closing
Date;
(b) no Servicer Default exists hereunder; and
(c) the Servicer maintains such errors and omissions insurance
and fidelity bond coverage as is required by this Agreement.
SECTION 2.4 FIDELITY BOND AND INSURANCE. The Servicer shall maintain
with a responsible company, at its own expense, a blanket fidelity bond in a
minimum amount of $1,000,000 and an errors and omissions insurance policy with
coverage in an amount deemed reasonable by the Servicer but in no event less
than $2,000,000, with coverage on all officers, employees or other persons
acting in any capacity requiring such persons to handle funds, money, documents
or papers relating to the Loans ("Servicer Employees"). Any such fidelity bond
and errors and omissions insurance shall protect and insure the Trust Estate and
the Trustee, as Trustee for the Noteholders, its officers, employees and agents
against losses, including losses resulting from forgery, theft, embezzlement,
fraud, errors and omissions and negligent acts of such Servicer Employees. No
provision of this Section 2.4 requiring such
SERVICING AGREEMENT - PAGE 5
<PAGE> 10
fidelity bond and errors and omissions insurance shall diminish or relieve the
Servicer from its duties and obligations as set forth in this Agreement. Upon
the request of the Trustee, the Servicer shall cause to be delivered to the
Trustee a certified true copy of such fidelity bond and insurance policy.
Coverage of the Servicer under a policy or bond obtained by an Affiliate of the
Servicer and providing the coverage required by this Section shall satisfy the
requirements of this Section.
SECTION 2.5 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING
THE LOANS. The Servicer shall provide to the Trustee, the Issuer, the
Supervisory Servicer, the Noteholders and their representatives or designees
access to the documentation regarding the Loans, such access being afforded
without charge but only upon reasonable request and during normal business hours
at the offices of the Servicer provided that such access shall not be requested
more frequently than is reasonable or justifiable; provided, further, however,
following the occurrence and during the continuance of a Servicer Default, the
Trustee, the Issuer, the Supervisory Servicer and the Noteholders shall have
unfettered access to the documentation regarding the Loans.
The Servicer shall at all times maintain accurate records and books of
account and an adequate system of audit and internal controls. All accounting
and loan servicing records pertaining to each Loan shall be maintained in such
manner as will permit the Trustee, the Noteholders and the Supervisory Servicer
or their duly authorized representatives and designees to examine and audit and
make legible reproductions of records during reasonable business hours. All such
records shall be maintained until no Notes remain Outstanding or such longer
period as is required by Law, including but not limited to, all transaction
registers and loan ledger histories.
SECTION 2.6 MERGER OR CONSOLIDATION. The Servicer will keep in full
effect its existence, rights and franchises, and will obtain and preserve its
qualification to do business in each jurisdiction in which such qualification is
or shall be necessary to protect the validity and enforceability of this
Agreement or any of the Loans and to perform its duties under this Agreement.
Any Person into which the Servicer may be merged or consolidated, or
any Person resulting from any merger, conversion or consolidation to which the
Servicer shall be a party, or any Person succeeding to the business of the
Servicer, shall be an established mortgage loan servicing institution that has a
net worth of at least $50,000,000 (unless otherwise consented to in writing by
the Trustee and the Noteholders) and shall be the successor of the Servicer
hereunder, without the execution or filing of any paper or any further act on
the part of any of the parties hereto except for notice thereof to the Rating
Agency, anything herein to the contrary notwithstanding, provided such successor
accepts the terms and conditions of this Agreement. The Servicer shall, upon
making a determination that it will enter into any such merger or consolidation,
send written notice thereof to the Trustee, the Noteholders, the Supervisory
Servicer and the Rating Agency which shall in no event be less than thirty (30)
days prior written notice.
SECTION 2.7 INDEMNIFICATION. The Servicer agrees to indemnify and hold
the Issuer, the Trust Estate, the Placement Agent, the Supervisory Servicer, the
Trustee and the Noteholders
SERVICING AGREEMENT - PAGE 6
<PAGE> 11
(and each of their respective officers, directors, employees and agents) each
harmless against any and all claims, losses, damages, penalties, fines,
forfeitures, reasonable legal fees and related costs, judgments, and other costs
and expenses ("Losses") resulting from any claim, demand, defense or assertion
based on or grounded upon, or resulting from, a breach of any of the Servicer's
representations and warranties contained in this Agreement or the negligence,
bad faith or willful misconduct of the Servicer relating to the performance of
its duties hereunder and servicing the Loans in compliance with the terms of
this Agreement. The Servicer agrees to indemnify and hold each of the Trustee
and the Supervisory Servicer and each of their respective officers, directors,
employees and agents harmless against any and all Losses incurred by it except
for such actions to the extent caused by any negligence, bad faith or willful
misconduct on its part, arising out of the administration of this Agreement, the
Indenture or the Supervisory Servicing Agreement or the exercise or performance
of any of its rights, powers or duties hereunder or thereunder. The Issuer, the
Placement Agent, the Supervisory Servicer or the Trustee, as the case may be,
shall immediately notify the Servicer if a claim is made by a third party with
respect to this Agreement or the Loans; provided, however, that failure to so
notify shall not relieve the Servicer of its obligations hereunder.
Notwithstanding anything to the contrary contained herein, no Person acting as
Servicer hereunder shall have any liability under this Section 2.7 for the
indemnification of any claim based upon or arising from the action or omission
of any predecessor Servicer.
ARTICLE III
GENERAL ADMINISTRATION AND SERVICING OF LOANS
SECTION 3.1 GENERAL DUTIES OF SERVICER. (a) For and on behalf of the
Issuer, the Trustee and the Holders, the Servicer shall service and administer
the Loans in accordance with the provisions of this Agreement and the
instructions of the Trustee hereunder. Unless otherwise specified herein with
respect to specific obligations of the Servicer, the Servicer shall service and
administer the Loans in the best interests of, and for the benefit of, the
Holders, in accordance with the Servicing Standard.
(b) Consistent with the terms of this Agreement, the Servicer may
waive, modify or vary any term of any Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Obligor if, in the Servicer's reasonable determination, such waiver,
modification, postponement or indulgence is not materially adverse to the
interests of the Trustee on behalf of the Noteholders and the Servicer would
make the same determination if it serviced the Loan for its own account;
provided, however, that the Servicer may not permit any modification with
respect to any Loan that would change the Loan Rate or the default rate, forgive
the payment of any principal or interest (unless in connection with the
liquidation of the related Loan), except as permitted by Section 3.6, waive any
prepayment fee or penalty, release any primary collateral (the first lien
Mortgage) securing the Loan or defer or extend the final maturity date of such
Loan beyond the term of the Notes without the written consent of all of the
Noteholders. Without limiting the generality of the foregoing, and subject to
the consent of the Trustee and in accordance with the Servicing Standard, the
Servicer shall continue, and is hereby authorized and empowered, to execute and
deliver on behalf of the Trustee, all instruments of satisfaction or
cancellation, or of partial or full release, discharge and all other comparable
SERVICING AGREEMENT - PAGE 7
<PAGE> 12
instruments, with respect to the Loans and with respect to the Mortgaged
Properties. If reasonably required by the Servicer, the Trustee shall furnish
the Servicer with any powers of attorney and other documents necessary or
appropriate to enable the Servicer to carry out its servicing and administrative
duties under this Agreement.
SECTION 3.2 NO ASSIGNMENT OR DELEGATION OF DUTIES BY SERVICER. The
Servicer, as an independent contractor, shall service and administer the Loans
and shall have full power and authority, acting alone, to do any and all things
in connection with such servicing and administration which the Servicer may deem
necessary or desirable and consistent with the terms of this Agreement. The
Servicer may not enter into subservicing agreements for any servicing and
administration of Loans without the prior written consent of the Required
Noteholders and the Trustee (acting at the written direction of the Required
Noteholders) (which consent shall not be unreasonably withheld) and without
notice thereof to the Rating Agency. Except as expressly provided herein, the
Servicer shall not assign or transfer any of its rights, benefits or privileges
hereunder to any other Person, or delegate to or subcontract with, or authorize
or appoint any other Person to perform any of the duties, covenants or
obligations to be performed by the Servicer hereunder, without notice to the
Rating Agency and without the prior written consent of the Required Noteholders
and the Trustee (acting at the written direction of the Required Noteholders)
(which consent shall not be unreasonably withheld), and absent such written
consent any agreement, instrument or act purporting to effect any such
assignment, transfer, delegation or appointment shall be void. The Servicer
shall be liable for all acts and omissions of any delegate, subcontractor or
other agent appointed pursuant to this Agreement. Nothing contained in this
Section 3.2 shall prohibit or be deemed to prohibit the Servicer from
contracting with third parties to perform duties that are not duties of the
Servicer hereunder that the Servicer deems reasonably necessary in connection
with the servicing of the Loans including, without limitation, title work,
surveying, environmental consulting, property management and maintenance,
construction, engineering and architectural consulting.
SECTION 3.3 ESTABLISHMENT OF LOCKBOX ACCOUNT; NOTICES TO OBLIGORS;
DEPOSITS IN LOCKBOX ACCOUNT. (a) On or prior to the Closing Date, the Trustee
shall cause to be established and maintained, at the Servicer's expense if the
Servicer is PMC, if not, then at the expense of the Trust Estate, the Lockbox
Account with Bank One, Texas, N.A. or another Financial Institution having a
long-term unsecured debt rating of at least A-2 or its equivalent by the Rating
Agency at all times that it holds the Lockbox Account (the "Required Rating").
The creation of the Lockbox Account shall be evidenced by a letter agreement
substantially in the form of Exhibit B hereto. A copy of such executed letter
agreement shall be furnished to the Servicer, the Placement Agent, the
Supervisory Servicer, the Noteholders and the Rating Agency.
(b) Within three (3) Business Days after the Closing Date, the Servicer
will prepare and deliver to each of the Obligors, with a copy of such
correspondence to the Trustee and to the Noteholders, notices in the form
attached hereto as Exhibit C, directing each such Obligor to send all future
Monthly Payments or Principal Prepayments directly to the Lockbox Account.
(c) Notwithstanding the foregoing notices, if the Servicer receives any
Collections, including, without limitation, any Monthly Payments, late payment
charges or other payments relating to a Loan, the Servicer will receive such
funds in trust for the Trustee and, if the Servicer
SERVICING AGREEMENT - PAGE 8
<PAGE> 13
is not a financial institution having a rating of at least "P-1" or its
equivalent by the Rating Agency, will forward such funds to the Lockbox Account
no later than the Business Day immediately following the date the Servicer
obtains knowledge of such receipt. In addition, any Liquidation Proceeds
received by the Servicer will be deposited into the Lockbox Account no later
than the Business Day immediately following the day the Servicer obtains
knowledge of such receipt.
(d) Upon receipt of notice that the institution holding the Lockbox
Account no longer has the Required Rating or that Bank One, Texas, N.A. no
longer wishes to hold the Lockbox Account, the Servicer will, within three (3)
Business Days, establish and maintain, at its expense if the Servicer is PMC, or
if not, at the expense of the Trust Estate, a new Lockbox Account at a Financial
Institution having the Required Rating. Such Lockbox Account shall be evidenced
by a letter agreement substantially in the form of Exhibit B hereto. A copy of
the executed letter agreement shall be furnished to the Servicer, the
Noteholders, the Supervisory Servicer and the Rating Agency within five (5)
Business Days after the new Lockbox Account is established. Within five (5)
Business Days of establishing the new Lockbox Account, the Servicer will prepare
and deliver to each of the Obligors, with copies of such correspondence to the
Trustee, and to the Noteholders, notices, in the form of Exhibit C attached
hereto, directing each such Obligor to send all future Monthly Payments directly
to the Lockbox Account.
SECTION 3.4 PERMITTED WITHDRAWALS FROM THE LOCKBOX ACCOUNT. The Trustee
shall have the sole right to withdraw funds from the Lockbox Account and shall,
on a daily basis, withdraw all deposits to the Lockbox Account and transfer such
funds to the Collection Account established under the Indenture. The Trustee
shall cause the entity holding the Lockbox Account to forward funds held therein
as provided herein.
SECTION 3.5 PAYMENT OF TAXES AND OTHER CHARGES. If the Servicer
receives notice that any taxes, assessments or other charges which are or may
become a lien upon the Mortgaged Property are overdue, the Servicer will give a
written demand to the Obligor to pay such amounts and will verify whether such
payment has been made within sixty (60) days after mailing such notice (but in
any event prior to the time that any taxing authority commences to exercise its
available remedies), subject to any right, pursuant to the Mortgage, of an
Obligor who is contesting the validity of such charges and has paid to the
Servicer a deposit or security in the amount of the contested charge plus
possible costs, interest and penalties or who has otherwise established adequate
reserves against such liability in accordance with generally accepted accounting
principles; provided, further, however, that this provision shall not have the
effect of permitting the Servicer to take, or fail to take, any action in
respect of the payments described herein that would adversely affect the
interest of the Trustee in any Mortgaged Property. If such amounts have not been
paid by the Obligor or the Obligor has not deposited or reserved funds therefor
as described in the immediately preceding sentence, the Servicer will promptly
make such payment as a Servicing Expense and request reimbursement from the
Obligor, and from the Trustee in accordance with Section 3.8 hereof.
SECTION 3.6 COLLECTION OF CERTAIN LOAN PAYMENTS. The Servicer shall
make reasonable efforts to collect all payments called for under the terms and
provisions of the Loans. Consistent with the foregoing, the Servicer shall not,
unless the charging or collection of any such late payment charge, prepayment
fee, assumption fee or any penalty or interest would result
SERVICING AGREEMENT - PAGE 9
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in the violation or contravention of applicable Law, waive or permit to be
waived, except pursuant to the Servicer's customary servicing procedures, any
late payment charge or assumption fee. The Servicer shall not, unless the
charging or collection of any such prepayment fee or penalty would result in the
violation or contravention of applicable Law, waive or permit to be waived any
prepayment fee or any penalty or interest in connection with the prepayment of a
Loan; provided, however, at any time on or after the date on which the
Outstanding Note Amount is less than 15% of the Outstanding Note Amount on the
Closing Date, the Servicer shall have the right, in its sole discretion, to
waive the payment of any prepayment fee or other penalty or interest in
connection with the prepayment of a Loan. Notwithstanding any other provisions
hereof, the Servicer shall not charge or impose on any Obligor, nor seek to
charge or impose on any Obligor, nor assert a right to receive, any fee, charge,
premium or penalty that if charged or collected would violate or contravene any
Law, including usury laws or the terms of the related Loan.
SECTION 3.7 LIMITATION OF LIABILITY OF SERVICER'S OFFICERS AND OTHERS.
No director, officer, employee or agent of the Servicer shall be under any
liability to the Trustee, the Issuer, the Supervisory Servicer, the Holders or
any other persons for any action taken by them or for their refraining to take
any action in good faith pursuant to this Agreement or for errors in judgment;
except that such provision shall not protect any of them from liability which
would be imposed by reason of willful misfeasance, willful misconduct, bad faith
or negligence.
SECTION 3.8 SERVICING COMPENSATION; ADVANCES AND EXPENSES. (a) As
compensation for its services hereunder, the Servicer shall be paid the
Servicing Fee. The Servicer shall be required to pay all expenses incurred by it
in connection with its servicing activities hereunder and shall be entitled to
reimbursement thereof as described below. The Servicing Fee shall be paid to the
Servicer and Servicing Expenses reimbursed to the Servicer pursuant to Section
6.4 of the Indenture.
(b) All reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance by the Servicer of its servicing obligations
hereunder ("Servicing Expenses") shall constitute routine servicing
responsibilities of the Servicer, which shall include, but are not limited to,
expenditures for the following, subject to the provisions of this Agreement, (i)
attorneys' fees, trustee fees under any deed of trust, recording, filing and
publication fees, title report and title search costs, costs associated with
environmental audits, court costs, witness fees and all other costs incurred in
respect of any enforcement of a Loan, any judicial foreclosure, or any
foreclosure sale, trustee's sale or acquisition in lieu of foreclosure, or in
respect of the insurance, sale or other disposition of any Mortgaged Property or
REO Property; (ii) repair, restoration, maintenance or other protection of any
Mortgaged Property (whether incurred before or after such property became an REO
Property) in accordance with and subject to the provisions of this Agreement, as
applicable; and (iii) compliance with the Servicer's obligations under Section
3.5 hereof. Servicing Expenses shall not include any portion of the Servicer's
overhead or normal salary and operating expenses.
SECTION 3.9 THE TRUSTEE'S, THE NOTEHOLDERS' AND SUPERVISORY SERVICER'S
RIGHT TO EXAMINE SERVICER RECORDS AND AUDIT OPERATIONS. The Trustee, the
Noteholders and the Supervisory Servicer and their designees shall have the
right upon reasonable prior notice, during normal business hours and as often as
reasonably required, to examine and audit (at no cost to
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the Servicer unless a Servicer Default has occurred and is then continuing) any
and all of the books, records or other information of the Servicer directly
relating to the Loans, whether held by the Servicer or by another on behalf of
the Servicer, which may be relevant to the performance or observance by the
Servicer of the terms, covenants or conditions of this Agreement. The Trustee,
the Noteholders and the Supervisory Servicer shall have the right upon
reasonable prior notice, during normal business hours and as often as reasonably
required to perform ongoing diligence of the Servicer's operations through loan
reviews, re-appraisals (at no cost to the Servicer) or other reasonable review
of Servicer operations. No amounts payable in respect of the foregoing (other
than costs associated with re-appraisals) shall be paid from the Trust Estate
unless a Servicer Default exists and is then continuing.
SECTION 3.10 MAINTENANCE AND RELEASE OF LOAN DOCUMENTATION;
SATISFACTION OF MORTGAGES. (a) The Servicer shall retain, with respect to each
Loan, the originals (or copies if originals are not available) of all of the
instruments and documents relating to the Loan that would be maintained by a
prudent lender servicing such Loan for its own account (the "Servicer Loan
File"), except for those original instruments and documents constituting a part
of the Trustee Loan File that are required to be held by the Trustee.
Each Servicer Loan File shall remain the property of the Issuer pledged
to the Trustee for the benefit of the Holders and shall be held by the Servicer
in trust for the benefit of the Trustee on behalf of the Holders. Upon written
request of the Trustee, the Servicer shall immediately deliver all or any of
such instruments, records and documents in its possession or custody to the
Trustee, together with a list identifying each Loan to which such records
pertain. The Servicer, at its option, may microfilm, microfiche or otherwise
condense any records or documents constituting a part of, or relating to, any
Loan or any Servicer Loan File, provided that the Servicer, upon written request
by the Trustee, promptly reproduces in their entirety any or all such records or
documents at no cost to the Trustee.
(b) The Servicer shall maintain each Servicer Loan File for a period of
four (4) years after the related Loan has been paid in full, is foreclosed upon
or is otherwise liquidated, or such longer period as may be required by Law. The
Servicer shall maintain an appropriate account record for each Loan which shall
include the permanent loan number for each Loan serviced by the Servicer as
shown on the Loan Schedule. Any system utilized for the Loan account records
shall be capable of producing, for any Loan, an account transcript itemizing in
chronological order the date, amount and application of each Monthly Payment by
due date and other information affecting the amounts paid by the Obligor,
including the latest outstanding Loan Principal Balance.
(c) The Servicer shall not grant a satisfaction or release of a
Mortgage without having obtained payment in full of the indebtedness secured by
the Mortgage or otherwise prejudice any right the Trustee may have under the
mortgage instruments, subject to Section 4.1 hereof. Upon the prepayment in full
or other liquidation of a Loan, the Servicer shall immediately deposit the
prepayment or Liquidation Proceeds in the Lockbox Account or the Collection
Account and prepare and deliver to the Trustee and Supervisory Servicer a
request for the appropriate instrument releasing the Mortgaged Property from the
lien of the Mortgage, together with an Officer's Certificate (i) certifying that
(A) all amounts that the Obligor is obligated to pay under the Underlying Note,
the Mortgage and any other document pertaining to the Loan, including, but not
limited to, all required payments of principal and interest, have been paid in
full and
SERVICING AGREEMENT - PAGE 11
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deposited in the Lockbox Account or the Collection Account; or (B) all
Liquidation Proceeds which the Servicer reasonably believes will be collected
with respect to a Liquidated Loan have been collected and deposited in the
Lockbox Account or the Collection Account; and (ii) requesting that (X) the
Trustee Loan File for such Loan be released by the Trustee to the Servicer and
(Y) the Trustee execute and deliver to the Servicer the appropriate instrument
prepared by the Servicer necessary to release the lien of the Mortgage, together
with the Underlying Note bearing written evidence of cancellation or assignment
thereof, as appropriate.
The Trustee shall, upon receipt of a written request from a Servicing
Officer and approval of the Supervisory Servicer, execute any document provided
to the Trustee by the Servicer or take any other action requested in such
request, that is, in the opinion of the Servicer as evidenced by such request,
required by any state or other jurisdiction to discharge the lien of a Mortgage
upon the satisfaction thereof and the Trustee will sign and post, but will not
guarantee receipt of, any such documents to the Servicer, or such other party as
the Servicer may direct in writing, within five (5) Business Days of the
Trustee's receipt of such certificate or documents. Such certificate or
documents shall establish to the Trustee's satisfaction that the related Loan
has been paid in full by or on behalf of the Obligor and that such payment has
been deposited in the Lockbox Account or the Collection Account, as the case may
be.
Upon receipt of the Trustee Loan File, the Servicer shall record the
mortgage release or satisfaction in the proper recording office, deliver the
Underlying Note and/or the recorded original of such instrument of release or
satisfaction to the Obligor, deposit any remaining documents into the Servicer
Loan File, and retain the Servicer Loan File as provided in section (a) and (b)
above. Any costs and expenses associated with the release of any Loan shall be
the expense of the Trust Estate to the extent not paid by the applicable
Obligor.
Any applications for partial release of any part of a Mortgaged
Property must be approved in the manner set forth in Section 3.12 hereof.
(d) From time to time as is appropriate, the Servicer may request the
Trustee to deliver or cause to be delivered to the Servicer all or part of the
documents constituting a part of the Trustee Loan File to facilitate the
servicing or foreclosure of any Loan, the acquisition of any Mortgaged Property
in lieu of foreclosure, the partial release of any Mortgaged Property from the
lien of the Mortgage or the making of any corrections to the Underlying Note or
the Mortgage or other documents constituting the Trustee Loan File. To make such
request, the Servicer shall deliver to the Trustee an Officer's Certificate
requesting that possession of all, or any document constituting part of, the
Trustee Loan File be released to the Servicer; such certificate shall certify
the reason for such release. The Servicer also shall deliver to the Trustee
together with such certificate a Trust Receipt signed by a Servicing Officer, in
substantially the form attached as Exhibit A hereto.
If the Servicer at any time seeks to initiate a foreclosure proceeding
with respect to any Mortgaged Property, then the Servicer shall deliver to the
Trustee, for signature by the Trustee, as appropriate, any court pleadings,
requests for Trustee's sale or other documents necessary to the foreclosure or
to any legal action brought to obtain judgment against the Obligor on the
Underlying Note or the Mortgage, or to obtain a deficiency judgment, or to
enforce any other remedies or rights provided by the Underlying Note or the
Mortgage or otherwise available at law or in equity. The Servicer shall also
deliver to the Trustee an Officer's Certificate requesting
SERVICING AGREEMENT - PAGE 12
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that such pleadings or documents be executed by the Trustee and certifying as to
the reason such documents or pleadings are required and that the execution and
delivery thereof by the Trustee will not invalidate the Mortgage except for the
termination of such lien upon completion of the proposed foreclosure.
Notwithstanding the foregoing, the Servicer shall cause possession of any
Trustee Loan File or documents therein that have been released by the Trustee to
be returned to the Trustee when the need for such file or documents no longer
exists, but in any event within thirty (30) calendar days after release by the
Trustee unless (i) the Loan has been liquidated and the Liquidation Proceeds
relating to the Loan have been deposited in the Lockbox Account or (ii) the
Trustee Loan File or documents so released have been delivered to an attorney, a
public trustee or other public official, as required by Law, to initiate or
pursue legal action or other proceedings to foreclose the applicable Mortgage,
and the Servicer has delivered to the Trustee an Officer's Certificate
certifying as to the name and address of the Person to which the Trustee Loan
File, or documents therefrom, have been delivered and the purpose or purposes of
such delivery.
(e) The Servicer shall, at its expense if the Servicer is PMC, if not,
at the expense of the Trust Estate, prepare and deliver to the Trustee any
instruments required in connection with substitution of a Loan pursuant to
Section 3.3 of the Indenture and will pay any recording or filing costs
associated therewith.
SECTION 3.11 NOTICE OF LIENS AND OTHER ACTIONS. The Servicer shall, at
all times, exercise reasonable efforts to prevent any lien or judicial levy upon
or writ of attachment against a Mortgaged Property of which the Servicer is
notified or otherwise has knowledge, which is, or may be, superior to the lien
of the Mortgage.
SECTION 3.12 WAIVERS, RELEASES, CONDEMNATIONS, EASEMENTS AND
ALTERATIONS. Any applications for partial releases of real property and releases
of personal property which are part of a Mortgaged Property, the creation or
release of easements, waivers of rights under any Mortgage, consent to
alteration, removal or demolition of improvements and other matters affecting
the Mortgage or the Mortgaged Property, other than those which are contractually
provided for in the Underlying Note or related loan documents, shall be subject
to the prior written approval of the Trustee which consent shall not be
unreasonably withheld and which shall be provided only upon written
certification by the Servicer that such action is consistent with the Servicing
Standard and the Mortgage and the ability to collect under the Underlying Note
will not be adversely affected by such release.
SECTION 3.13 LIMITATION ON LIABILITY OF SERVICER AND OTHERS. The
Servicer and any director, officer, employee or agent of the Servicer may rely
on any document of any kind which it in good faith reasonably believes to be
genuine and to have been adopted or signed by the proper authorities respecting
any matters arising hereunder. Subject to the terms of Section 2.7 herein, the
Servicer shall have no obligation to appear with respect to, prosecute or defend
any legal action which is not incidental to the Servicer's duty to service the
Loans in accordance with this Agreement. The Issuer agrees to indemnify and hold
the Servicer harmless from any loss, claim, demand, liability or expense
(including, without limitation, past acts of predecessor Servicers and fees and
expenses of legal counsel) arising from or relating to the performance of
SERVICING AGREEMENT - PAGE 13
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its duties under this Agreement which do not result from the Servicer's
negligence, bad faith or willful misconduct.
SECTION 3.14 PROPERTY ADDRESS CHANGE. The Servicer shall note in its
records and notify the Trustee of all changes of address of an Obligor or of a
Mortgaged Property of which the Servicer is notified or of which the Servicer
has knowledge.
ARTICLE IV
SPECIFIC SERVICING PROCEDURES
SECTION 4.1 ASSUMPTION AGREEMENTS. When a Mortgaged Property has been
or is about to be conveyed by the Obligor, the Servicer shall, to the extent it
has knowledge of such conveyance or prospective conveyance, exercise its rights
to accelerate the maturity of the related Loan under any "due-on-sale" clause
contained in the related Mortgage or Underlying Note; provided, however, that
the Servicer shall not exercise any such right if the "due-on-sale" clause, in
the reasonable belief of the Servicer, is not enforceable under applicable law
or if such enforcement would materially increase the risk of default or
delinquency on, or materially decrease the security for, such Loan. In such
event, the Servicer shall enter into an assumption and modification agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Underlying Note and,
unless prohibited by applicable law or the Mortgage, the Obligor remains liable
thereon, provided that the Servicer may enter into an assumption agreement with
the transferee and release the transferor-Obligor from liability only if (a) the
transferee qualifies for credit under the customary credit policies of the
Servicer, (b) any applicable Law requires that the transferor-Obligor be
released from liability on the Loan, (c) an officer of the Servicer has examined
and approved all instruments as are necessary to carry out the assumption
transaction and approved such instruments as to form and substance, (d) the
execution and delivery of such instruments by all necessary parties will not
cause the unpaid principal balance and any accrued interest thereon for the Loan
to be uncollectible in whole or in part, and (e) upon closing the assumption
transaction (i) the Mortgage will continue to be a first lien upon the Mortgaged
Property, and (ii) the Loan Rate and Monthly Payment for the Loan will not be
changed nor will the term of the Note be extended or shortened. For each
proposed assumption transaction, the Servicer shall deliver an Officer's
Certificate to the Trustee certifying that each of the applicable requirements
specified in the immediately preceding sentence have been satisfied together
with the assumption instruments requiring execution by the Trustee. Such
certificate shall also indicate whether the seller/transferor of the Mortgaged
Property will be released from liability on the Loan and that the Servicer has
made a good faith determination that any such release will not adversely affect
the collectibility of the Loan. The Servicer shall perform substantially the
same level of due diligence with respect to the transferee as was performed on
the seller/transferor in connection with the origination of the Loan.
The Servicer is also authorized with the prior approval of the Trustee
to enter into a substitution of liability agreement with such transferee,
pursuant to which the original Obligor is released from liability and such
person is substituted as Obligor and becomes liable under the
SERVICING AGREEMENT - PAGE 14
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Underlying Note. The Servicer shall notify the Trustee that any such
substitution or assumption agreement has been completed by forwarding to the
Trustee the original of such substitution or assumption agreement, which
original shall be added by the Trustee to the related Trustee's Loan File and
shall, for all purposes, be considered a part of such Trustee's Loan File to the
same extent as all other documents and instruments constituting a part thereof.
Any fee collected by the Servicer for consenting to any such conveyance or
entering into an assumption or substitution agreement shall be retained by or
paid to the Servicer as additional servicing compensation.
Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Servicer shall not be deemed to be in default, breach or any
other violation of its obligations hereunder by reason of any assumption of a
Loan by operation of law or any assumption which the Servicer may be restricted
by law from preventing, for any reason whatsoever.
SECTION 4.2 SERVICING DELINQUENT ACCOUNTS; LIQUIDATION OF LOANS. (a)
The Servicer shall exercise diligence in obtaining payment of Monthly Payments
when due under the terms of each Loan and shall use reasonable efforts to
contact any delinquent Obligor.
If any delinquent Obligor shall be or become a bankrupt or otherwise
become the subject of any insolvency or similar proceeding, the Servicer shall
notify the Trustee of such event and, thereafter, shall carry out all reasonable
actions necessary for the benefit and protection of the interests of the Trustee
and the Holders, including, but not limited to, retention of counsel to
represent the Trustee in any bankruptcy or other court proceedings relating to
such Obligor or the Mortgaged Property.
If any Loan previously reported on a Determination Date Report as more
than ninety (90) days delinquent is subsequently reported as being brought
current, the Servicer will verify with the relevant Obligor that the Obligor
paid the delinquent payments, by sending the Obligor the letter in the form
attached hereto as Exhibit H.
(b) In the event that any payment due under any Loan and not postponed
pursuant to Section 3.1 is not paid when the same becomes due and payable, or in
the event the Obligor fails to perform any other covenant or obligation under
such Loan and such failure continues beyond any applicable grace period, the
Servicer shall take such other action as it shall deem to be in the best
interests of the Trustee and the Holders. The Servicer shall foreclose upon or
otherwise effect the ownership in the name of the Trustee of Mortgaged
Properties relating to defaulted Loans as to which no satisfactory arrangements
can be made for collection of delinquent payments in accordance with the
customary collection policies of the Servicer and the provisions of Section 3.1.
In connection with such foreclosure or other conversion, the Servicer shall
exercise collection and foreclosure procedures with the same degree of care and
skill in its exercise or use as it would exercise or use under the circumstances
in the conduct of its own affairs and shall in any event, comply with the
Servicing Standard. The Servicer shall use its reasonable efforts to realize
upon such defaulted Loans in accordance with the Servicing Standard. The
Servicer shall be responsible for all other costs and expenses incurred by it in
any foreclosure proceedings; provided, however, that it shall be entitled to
reimbursement thereof as contemplated in Sections 3.8 and 4.3 hereof.
SERVICING AGREEMENT - PAGE 15
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No modification, recast or extension of a Loan other than as provided
above and in Section 3.1 is permitted without the prior written consent of the
Trustee as directed by the Initial Purchaser and which shall be provided only
upon written certification by the Servicer that such action is consistent with
the Servicing Standard and the Mortgage and the ability to collect under the
Underlying Note will not be adversely affected by such release.
Notwithstanding the foregoing provisions of this Section 4.2, the
Servicer shall not without the Initial Purchaser's prior consent, on behalf of
the Trustee, obtain title to a Mortgaged Property by deed in lieu of foreclosure
or otherwise, or take any other action with respect to any Mortgaged Property,
if, as a result of any such action, the Trustee, on behalf of the Noteholders,
could, in the reasonable judgment of the Servicer, made in accordance with the
Servicing Standard, be considered to hold title to, to be a "mortgagee-in
possession" of, or to be an "owner" or "operator" of such Mortgaged Property
within the meaning of CERCLA or any comparable law, unless the Servicer has
previously determined in accordance with the Servicing Standard, based on a
Phase I Environmental Assessment (and any additional environmental testing that
the Servicer deems necessary and prudent) of such Mortgaged Property conducted
by an Independent Person who regularly conducts Phase I Environmental
Assessments and performed during the twelve-month period preceding any such
acquisition of title or other action; that the Mortgaged Property is in material
compliance with applicable environmental laws and regulations or, if not, that
it would maximize the recovery to the Noteholders on a present value basis to
acquire title to or possession of the Mortgaged Property and to effect such
compliance.
(c) If the environmental testing contemplated by Section 4.2(b) above
establishes that any of the conditions set forth therein have not been satisfied
with respect to any Mortgaged Property securing a defaulted Loan, the Servicer
shall, in accordance with the Servicing Standard, prepare a written report to
the Trustee and the Noteholders summarizing the environmental condition of the
Mortgaged Property and proposing a course of action to pursue with respect to
such Mortgaged Property. In the event that the Servicer has not received through
the Trustee the written objection to such proposed course of action of the
Holders of more than 50% of the Outstanding Note Amount within thirty (30) days
of the Trustee's distributing such notice, the Servicer shall be deemed to have
been directed by the Noteholders to take such proposed action.
(d) The Servicer shall report to the Trustee monthly in writing as to
any actions taken by the Servicer with respect to any Mortgaged Property as to
which the environmental testing contemplated in Section 4.2(b) above has
revealed that any of the conditions set forth have not been satisfied, in each
case until the earliest to occur of satisfaction of all such conditions and the
release of the Lien of the related Mortgage on such Mortgaged Property.
(e) If foreclosure has been approved as provided above, the Servicer
shall initiate or cause to be initiated the foreclosure action according to such
procedures as are authorized by Law and the practices in the locality where the
Mortgaged Property is located. In the event that title to the Mortgaged Property
is acquired in foreclosure or by deed in lieu of foreclosure, the deed or
certificate of sale shall be taken in the name of the Trustee for the benefit of
the Holders.
SERVICING AGREEMENT - PAGE 16
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(f) The Servicer shall have the right to determine, in accordance with
the Servicing Standard, the advisability of seeking to obtain a deficiency
judgment if the state in which the Mortgaged Property is located and the terms
of the Loan permit such an action and shall, in accordance with the Servicing
Standard, seek such deficiency judgment if it deems advisable.
(g) After a Loan has become a Liquidated Loan, the Servicer shall
promptly prepare and forward to the Trustee a liquidation report detailing the
Liquidation Proceeds received from the Liquidated Loan, expenses incurred with
respect thereto and any Realized Loss incurred in connection therewith.
(h) If the requirements of Sections 4.2(b) and (c) hereof have been
satisfied, the Servicer may accept a deed in lieu of foreclosure, provided that
(i) marketable title as evidenced by a policy of title insurance can be conveyed
to and acquired by the Trustee or its designee; (ii) no cash consideration is to
be paid to the Obligor by the Trustee; and (iii) the Servicer has obtained from
the Obligor a written acknowledgment that the deed is being accepted as an
accommodation to the Obligor and on the condition that the Mortgaged Property
will be transferred to the Trustee or its designee free and clear of all claims,
liens, encumbrances, attachments, reservations or restrictions except for those
to which the Mortgaged Property was subject at the time the Mortgaged Property
became subject to the Mortgage. Title shall be conveyed directly from the
Obligor to the Trustee for the benefit of the Holders.
(i) The Servicer will indemnify and hold harmless the Trustee, the
Noteholders, the Supervisory Servicer and their respective directors, officers,
agents and employees from and against any and all claims, demands, losses,
penalties, liabilities, costs, damages, injuries and expenses, including,
without limitation, reasonable attorneys' fees and expenses, suffered or
sustained by such parties, either directly or indirectly, relating to or arising
out of the violation of an Environmental Law with respect to a Mortgaged
Property resulting from the Servicer's failure to perform its obligations
hereunder, including without limitation any expenses and other costs incurred in
connection with the defense of any such action, proceeding or claim. This
obligation shall survive the termination of this Agreement, the Indenture and
the Supervisory Servicing Agreement or the earlier resignation or removal of the
Trustee or the Supervisory Servicer, as the case may be.
SECTION 4.3 FORECLOSURE EXPENSES. The Servicer shall prepare a written
estimate of the amount of attorneys' fees, trustee's fees and other costs in
respect of any foreclosure or acquisition in lieu of foreclosure and shall send
copies of such estimate to the Trustee and the Initial Purchaser. The Servicer
shall arrange payment of attorneys' fees, trustees' fees and other foreclosure
costs at the commencement of foreclosure proceedings.
The Servicer may reimburse itself for any Servicing Expenses paid by
the Servicer, made in connection with such Loan or such foreclosure or other
action, out of amounts received by the Servicer in connection with liquidation
of the Loan, prior to remittance of any such amounts to the Lockbox Account.
SECTION 4.4 TITLE, MANAGEMENT AND DISPOSITION OF REO PROPERTY. (a) Upon
the acquisition of REO Property by the Servicer by foreclosure or conveyance in
lieu of foreclosure, the Servicer shall notify the Trustee promptly that the REO
Property has been acquired and shall
SERVICING AGREEMENT - PAGE 17
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thereafter: (i) deliver the deed or certificate of sale to the Trustee, or its
nominee; (ii) manage, conserve and protect the REO Property in the same manner
and to such extent as is customary in the locality where such REO Property is
located including the rental of the same, or any part thereof, as the Servicer
deems to be in the best interest of the Trustee for the benefit of the Holders;
(iii) pay all costs such as taxes and assessments relating to the REO Property;
(iv) process any claims for redemption and otherwise comply with any redemption
procedures required by Law; (v) sell or otherwise dispose of the REO Property
and remit the proceeds to the Trustee; and (vi) timely file any and all federal,
state and local tax or information returns or reports as are required as a
result of the acquisition or disposition of REO Property and perform any
withholding required in connection therewith. The Servicer shall not acquire any
REO Property relating to a Charged-Off Loan that is required to be released from
the lien of the Indenture and disposed of by the Issuer on the next Payment
Date. If any REO Property is expected to be acquired, the Servicer shall inform
the Issuer, the Noteholders and the Trustee and the Issuer shall comply with
Section 5.14 of the Indenture.
The Servicer shall manage, conserve, protect and operate each REO
Property for the Trustee solely for the purpose of its prudent and prompt
disposition and sale. The Servicer shall, either itself or through an agent
selected by the Servicer, manage, conserve, protect and operate the REO Property
in the same manner that it manages, conserves, protects and operates other
foreclosed property for its own account and in the same manner that similar
property in the same locality as the REO Property is managed. The Servicer shall
attempt to sell the same (and may temporarily rent the same) on such terms and
conditions as the Servicer deems to be in the best interest of the Holders.
(b) Until the REO Property is disposed of, the Servicer shall (i) take
appropriate action to secure the REO Property and maintain proper surveillance
over it; (ii) advance all costs such as taxes and assessments; (iii) maintain
the REO Property so as to preserve its value and prevent any additional deferred
maintenance; and (iv) submit monthly statements for services to the Trustee and
the Initial Purchaser, together with additional documentation including
statements of income and expenses (accompanied by copies of paid invoices for
every expense item).
(c) Until the REO Property is disposed of, the Servicer shall maintain
for such REO Property, a standard hazard insurance policy providing fire and
extended coverage in an amount equal to the full replacement cost of all
improvements on the Mortgaged Property, which requirement may be satisfied by a
master force placed or blanket insurance policy insuring against hazard losses.
If the Mortgaged Property is in an area identified in the Federal Register by
the Federal Emergency Management Agency as having special flood hazards (and
such flood insurance has been made available) Servicer shall maintain a flood
hazard insurance policy meeting the requirements of the current guidelines of
the Federal Insurance Administration with an insurance carrier generally
acceptable to commercial mortgage lending institutions for properties, similar
to the REO Property in an amount representing coverage not less than the lesser
of (i) the full insurable value of such REO Property, or (ii) the maximum amount
of insurance which is available under the Flood Disaster Protection Act of 1973,
as amended from time to time. The Servicer will also maintain comprehensive
general liability insurance and business interruption insurance (to the extent
applicable) in such amounts as are then customary for similarly situated
properties and businesses.
SERVICING AGREEMENT - PAGE 18
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(d) The Servicer shall advance all funds necessary for the proper
operation, management, insurance and maintenance of the REO Property. On each
Determination Date Report, the Servicer shall schedule its reasonable expenses
with respect to any REO Property for the related Collection Period.
(e) The Servicer shall deposit all funds collected and received in
connection with the operation or disposition of any REO Property in the Lockbox
Account no later than the Business Day immediately following notice of receipt
of such funds, net of funds necessary for the proper operation, management,
insurance and maintenance of the REO Property.
(f) If as of the date of disposition of any REO Property there remain
unpaid Servicing Fees with respect to the related Loan, the Servicer, shall be
entitled to payment for the unpaid Servicing Fees and reimbursement for the
unreimbursed related Servicing Expenses from proceeds received in connection
with the disposition prior to remittance of any proceeds to the Trustee.
Disposition of REO Property shall be carried out by the Servicer at
such price and upon such terms and conditions as the Servicer, in its judgment,
believes to be in the best interests of the Holders, subject to and in
accordance with Section 4.2. Upon the sale of any Mortgaged Property, the
Servicer shall remit the net cash proceeds remaining after payment of expenses
of the sale to the Lockbox Account.
(g) If any Charged-Off Loan is expected to be released from the lien of
the Indenture on the next Payment Date, the Servicer shall not commence a
foreclosure proceeding or accept a deed in lieu of foreclosure. Any
determination by the Servicer that a Loan is a Charged-Off Loan shall be made in
good faith.
ARTICLE V
REPORTS TO BE PROVIDED BY SERVICER
SECTION 5.1 DETERMINATION DATE REPORTS.
(a) Monthly Reports. Each month, not later than 12:00 noon Dallas time
on the fifth (5th) Business Day preceding each Payment Date, the Servicer shall
deliver to the Trustee, by telecopy, the receipt and legibility of which shall
be confirmed telephonically, with hard copy thereof to be delivered on the next
Business Day, with copies to the Supervisory Servicer (if other than the
Trustee), the Noteholders, the U.S. Small Business Administration and the Rating
Agency, a Determination Date Report in the form attached hereto as Exhibit D
signed by a Servicing Officer stating the date (day, month and year), referring
to this Agreement by name and date and stating, as of the close of business on
the immediately preceding Determination Date:
(i) the aggregate amount of all funds received in respect of
scheduled principal payments on the Loans during the related
Collection Period;
SERVICING AGREEMENT - PAGE 19
<PAGE> 24
(ii) the aggregate amount of interest received on the Loans
during the related Collection Period;
(iii) the number and Loan Principal Balances of all Loans which
were the subject of Principal Prepayments during the related
Collection Period and the aggregate amount of Principal Prepayments
received with respect to the Loans during such Collection Period;
(iv) the aggregate Loan Principal Balance of the Loans as of the
related Determination Date, stating any REO Properties separately;
(v) the loan number and Loan Principal Balance of each Delinquent
Loan for the related Collection Period;
(vi) the loan number and the aggregate number and aggregate Loan
Principal Balance of Loans delinquent thirty-one (31) days, ninety-one
(91) days and one hundred eighty-one (181) or more days as of the
Determination Date;
(vii) the loan number and the aggregate number and aggregate Loan
Principal Balance of Loans which were Charged-Off Loans as of the
Determination Date and the related recovery thereon;
(viii) the number and aggregate Loan Principal Balance of Loans
(i) which will be released from the lien of the Indenture during the
related Collection Period or on the related Payment Date, (ii) which
have been repurchased including the Takeout Price therefor and (iii)
which have been substituted for a Substitute Loan including any Asset
Substitution Shortfall therefor;
(ix) the number and aggregate Loan Principal Balance of Loans
which were in foreclosure as of the related Determination Date;
(x) with respect to any Loan that became an REO Property during
the related Collection Period, (a) the Loan Principal Balance of such
Loan as of the date title to such REO Property was acquired, (b) the
book value and length of time held of each REO Property as of the
related Determination Date, and (c) the income and expenses incurred
by the Servicer in connection with any REO Property during the related
Collection Period;
(xi) the amount of any Realized Losses incurred during the
related Collection Period;
(xii) the cumulative Realized Losses since the Closing Date;
(xiii) the Principal Distribution Amount for the related Payment
Date and information as to the calculation of such amount;
SERVICING AGREEMENT - PAGE 20
<PAGE> 25
(xiv) the Interest Distribution Amount for the related Payment
Date and information as to the calculation of such amount;
(xv) the Retained Distribution Amount, if any, for the related
Payment Date and information as to the calculation of such amount;
(xvi) the Outstanding Note Amount;
(xvii) the Servicing Fee, Supervisory Servicer's Fee, if any, and
Trustee's Fee due on the related Payment Date;
(xviii) the amount of all Servicing Expenses paid by Servicer
during such Collection Period and any and all other amounts deducted
by the Servicer in accordance with the terms hereof from Collections
received by the Servicer prior to remittance thereof to the Lockbox
Account and a detailed report describing the type and amount of all
such Servicing Expenses and other deductions;
(xix) information as to any Funds Retention Event or Redemption
Trigger Event;
(xx) the Specified Spread Account Requirement, including the
beginning balance of the Spread Account, additions thereto and
transfers therefrom during the related Collection Period; and
(xxi) such other information as the Trustee, the Noteholders or
the Rating Agency may reasonably require.
To the extent that there are inconsistencies between the telecopy of
the Servicer's Certificate and the hard copy thereof, the Trustee shall be
entitled to rely upon the telecopy.
(b) Annual Statement. Within ninety (90) days after the end of each
calendar year, the Servicer shall furnish to the Trustee and the Noteholders
such information in the form attached hereto as Exhibit E as is reasonably
necessary to provide to the Holders a statement containing the aggregate amount
of principal of and interest on the Notes paid during the prior calendar year,
aggregated for such calendar year or applicable portion thereof during which
such Person was a Holder. Such obligation of the Servicer shall be deemed to
have been satisfied to the extent that substantially comparable information
shall be provided by the Servicer pursuant to any requirements of the Code as
from time to time are in force.
(c) Computer Data. Prior to the Closing Date the Servicer shall provide
the Supervisory Servicer with all data on the Servicer's computerized servicing
system relating to the Loans in an electronically readable form specified by the
Supervisory Servicer and shall update such data at least monthly.
(d) Other Reports. The Servicer shall furnish to the Trustee, the
Noteholders, the Rating Agency and the Supervisory Servicer, during the term of
this Agreement, such periodic, special or other reports, Officer's Certificates,
data relating to the Loans or information, whether or not provided for herein,
as shall be reasonably requested, all such reports or information to be
SERVICING AGREEMENT - PAGE 21
<PAGE> 26
provided by and in accordance with such applicable instructions and directions
as the Trustee, the Noteholders or the Supervisory Servicer may reasonably
require; provided, however, the Servicer shall be reimbursed for the reasonable
cost of providing such additional reports.
SECTION 5.2 REPORTS OF FORECLOSURE AND ABANDONMENT OF MORTGAGED
PROPERTY. Each year the Servicer shall make any reports of foreclosures and
abandonments of any Mortgaged Property required by the Code.
SECTION 5.3 QUARTERLY STATEMENT AS TO COMPLIANCE. The Servicer will
deliver to the Trustee, the Noteholders, the Rating Agency and the Supervisory
Servicer, quarterly, no later than each April 15, July 15, October 15 and
January 15, for each quarterly period ending on each March 31, June 30,
September 30 and December 31, commencing on July 15, 1999, an Officer's
Certificate in the form attached hereto as Exhibit F stating that (a) the
Servicer has fully complied with the provisions of this Agreement, (b) a review
of the activities of the Servicer during the preceding quarter and of the
Servicer's performance under this Agreement has been made under such officer's
supervision and (c) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations, duties and
responsibilities under this Agreement throughout such quarterly period (or, with
respect to the first such report, since the Closing Date) and no Servicer
Default exists, or, if there has been a default or failure in the fulfillment of
any such obligation, specifying each such default or failure known to such
officer and the nature and status thereof and the action being taken by the
Servicer to cure such default.
SECTION 5.4 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT.
The Servicer at its expense shall cause a nationally recognized firm of
independent certified public accountants to furnish a statement to the Trustee,
the Supervisory Servicer, the Noteholders, and each Rating Agency on or before
May 1 of each year, commencing on May 1, 2000, to the effect that, with respect
to the most recently ended fiscal year, such firm has examined certain records
and documents relating to the Servicer's performance of its servicing
obligations and that, on the basis of such examination, conducted substantially
in compliance with the Uniform Single Attestation Program for Mortgage Bankers,
such firm is of the opinion that such servicing has been conducted substantially
in compliance in all material respects with the requirements of the standard
servicing procedures outlined in the Uniform Single Attestation Program for
Mortgage Bankers, except for such exceptions noted therein. In the event such
firm requires the Trustee or the Supervisory Servicer to agree to the procedures
performed by such firm, the Servicer shall direct the Trustee and the
Supervisory Servicer in writing to so agree; it being understood and agreed that
the Trustee and the Supervisory Servicer will deliver such letter of agreement
in conclusive reliance upon the direction of the Servicer, and each of the
Trustee and the Supervisory Servicer makes no independent inquiry or
investigation as to, and shall have no obligation or liability in respect of,
the sufficiency, validity or correctness of such procedures.
SECTION 5.5 SERVICER'S FINANCIAL STATEMENTS; ANNUAL CERTIFICATION.
Within one hundred twenty (120) days after the end of each fiscal year beginning
with the fiscal year ending December 31, 1999, the Servicer shall submit to the
Trustee, the Noteholders and the Rating Agency a copy of its annual audited
financial statements or in the event the Servicer is not PMC, a copy of the
annual audited consolidated financial statement of its parent. Within forty-five
(45) days after the end of each of the first three (3) fiscal quarters of each
fiscal year beginning with the quarter ending December 31, 1999, the Servicer
shall submit to the Trustee, the Noteholders
SERVICING AGREEMENT - PAGE 22
<PAGE> 27
and the Rating Agency a copy of its quarterly financial statements. Such
financial statements shall, to the extent required by the Securities Exchange
Act of 1934, as amended, whether or not the Servicer is subject to such Act,
include a balance sheet, income statement, statement of retained earnings,
beneficiaries' (or shareholders') equity, statement of cash flows and all
related notes and schedules and shall be in comparative form.
Contemporaneously with the submission of the financial statements
required by the preceding paragraph, the Servicer shall deliver to the Trustee,
the Noteholders and the Rating Agency an Officer's Certificate in the form
attached hereto as Exhibit G to the effect that:
(a) such officer has confirmed that the Fidelity Bond, the Errors and
Omissions Insurance Policy and any other bonds or insurance required by Section
2.4 hereof are in full force and effect; and
(b) the representations and warranties of the Servicer set forth in
Section 2.1 are true and correct in all material respects as if made on the date
of such certification.
The Servicer shall also furnish and certify such other information as
to its organization, activities and personnel as the Trustee, the Noteholders
the Rating Agency or the Supervisory Servicer may reasonably request from time
to time.
ARTICLE VI
DEFAULTS
SECTION 6.1 SERVICER DEFAULTS. The happening of any one or more of the
following events shall constitute a Servicer Default hereunder:
(a) Any failure by the Servicer to make any payment, deposit, advance
or transfer of funds required to be paid, deposited, advanced or transferred
under the terms of this Agreement, and such failure continues unremedied for
five (5) Business Days after discovery by Servicer of such failure or receipt by
Servicer of notice of such failure;
(b) Failure on the part of the Servicer duly to observe or perform in
any material respect any of the covenants or agreements contained in this
Agreement or the Supervisory Servicing Agreement which continues unremedied for
thirty (30) days after the earlier to occur of the Servicer obtaining actual
knowledge of such failure or the Servicer's receipt of written notice of such
failure or breach as the case may be; provided, however, if such failure shall
be of a nature that it cannot be cured within thirty (30) days, such failure
shall not constitute a Servicer Default hereunder if within such 30-day period
the Servicer gives notice to the Trustee and the Supervisory Servicer of the
corrective action it proposes to take, which corrective action is agreed in
writing by the Trustee to be satisfactory and the Servicer shall thereafter
pursue such corrective action diligently until such default is cured but in no
event longer than ninety (90) days;
(c) A decree or order of a court or agency or supervisory authority
having jurisdiction in the premises for the appointment of a conservator or
receiver or liquidator in any insolvency,
SERVICING AGREEMENT - PAGE 23
<PAGE> 28
readjustment of debt, marshaling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall have
been entered against the Servicer, and such decree or order shall have remained
in force undischarged or unstayed for a period of ninety (90) days;
(d) The Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings of or relating to the Servicer or
of or relating to all or substantially all of its property;
(e) The Servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors or voluntarily suspend payments of its obligations;
(f) The Servicer shall cease to be an Eligible Servicer;
(g) A material adverse change occurs in the financial condition of the
Servicer, which change materially impairs the ability of the Servicer to perform
its obligations under this Agreement; or
(h) Any representation or warranty made by the Servicer in any
Transaction Document proves to have been incorrect in any material respect when
made, which has a material adverse effect on the Noteholders and which continues
to have a material adverse effect or be incorrect in any material respect for a
period of thirty (30) days after written notice of such inaccuracy, requiring it
to be remedied, has been given to the Servicer by the Trustee, the Supervisory
Servicer or any Noteholder; provided, however, if such inaccuracy is of a nature
that it cannot be remedied within such 30-day period the Servicer gives notices
to the Trustee and the Supervisory Servicer of the corrective action it proposes
to take, which corrective action is agreed in writing by the Trustee to be
satisfactory and the Servicer shall thereafter pursue such corrective action
diligently until such default is cured but in no event longer than ninety (90)
days from the date of such notice.
SECTION 6.2 NOTICE OF SERVICER DEFAULT. In the case of a Servicer
Default referred to in Section 6.1 hereof or upon any termination of the
Servicer pursuant to Article VII hereof, the Trustee shall immediately notify
the Supervisory Servicer by telephone or telecopy (telephonic notice to be
followed by written notice within one Business Day) and shall promptly notify
the Rating Agency and the Holders in writing.
SECTION 6.3 REMEDIES. So long as any such Servicer Default shall not
have been remedied within any applicable cure period, the Trustee may, and at
the written direction of the Noteholders holding not less than 66 2/3% of the
Outstanding Note Amount shall, by notice in writing specifying the termination
date to the Servicer and the Supervisory Servicer (and to the Trustee if given
by the Holders), terminate all of the rights and obligations of the Servicer
under this Agreement and in and to the Loans and the proceeds thereof. On or
after the receipt by the Servicer of such written notice, all authority and
power shall pass to and be vested in the Supervisory Servicer pursuant to and
under this Section; and, without limitation, the Supervisory
SERVICING AGREEMENT - PAGE 24
<PAGE> 29
Servicer is hereby authorized and empowered to execute and deliver, on behalf of
the Servicer, as attorney-in-fact or otherwise, any and all documents and other
instruments, and to do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the purposes of such notice of termination, whether to complete the
transfer and assignment of the Loans and related documents or otherwise. All
reasonable costs and expenses (including, without limitation, attorneys' fees)
of the Trustee, the Supervisory Servicer or the Servicer incurred in connection
with such termination and transfer will be at the expense of the Servicer. The
Servicer agrees to cooperate with the Supervisory Servicer and the Trustee in
effecting the termination of the Servicer's responsibilities and rights
hereunder, including, without limitation, the transfer to the Supervisory
Servicer for administration by it of any cash amounts held by the Servicer or
thereafter received relating to the Loans and all Servicer Files. In addition to
any other amounts which are then, or, notwithstanding the termination of its
activities as Servicer, may become payable to the Servicer under this Agreement,
the Servicer shall be entitled to receive out of any delinquent payment on
account of interest on a Loan due during a Collection Period prior to the notice
of termination received pursuant to this Section 6.3 and received after such
notice, that portion of such payment which it would have received pursuant to
Section 3.8 hereof if such notice had not been given.
SECTION 6.4 ADDITIONAL REMEDIES OF TRUSTEE UPON SERVICER DEFAULTS. Upon
any Servicer Default, the Trustee, in addition to the rights specified in
Section 6.3 hereof, shall have the right, in its own name and as Trustee, to
take all actions now or hereafter existing at law, in equity or by statute to
enforce its rights and remedies and to protect the interests, and enforce the
rights and remedies, of the Noteholders (including the institution and
prosecution of all judicial, administrative and other proceedings and the
filings of proofs of claim and debt in connection therewith). No remedy provided
for by this Agreement shall be exclusive of any other remedy, and each and every
remedy shall be cumulative and in addition to any other remedy and no delay or
omission to exercise any right or remedy shall impair any such right or remedy
or shall be deemed to be a waiver of any Servicer Default.
SECTION 6.5 SUPERVISORY SERVICER TO ACT; APPOINTMENT OF SUCCESSOR. On
the effective date of any resignation of the Servicer pursuant to Section 7.1
hereof or on the date the Servicer is removed as servicer pursuant to this
Article VI, the Supervisory Servicer (or any successor appointed by the
Supervisory Servicer pursuant to the Supervisory Servicing Agreement) hereof
shall be the successor in all respects to the Servicer in its capacity as
servicer under this Agreement and the transactions set forth or provided for
herein and shall be subject to all the responsibilities, duties and liabilities
relating thereto placed on the Servicer by the terms and provisions hereof in
accordance with and subject to the terms and conditions of the Supervisory
Servicing Agreement; provided, however, that the Supervisory Servicer or
successor Servicer shall not be liable for any acts or omissions of the Servicer
occurring prior to such succession or for any breach by the Servicer of any of
its representations or warranties contained herein or in any related document or
agreement. The Supervisory Servicer (or other successor) shall assume all of the
rights and obligations of the Servicer in accordance with the terms and
conditions of the Supervisory Servicing Agreement which shall control over any
provisions herein covering the same subject matter. The Servicer shall, upon
request of the Trustee or the Supervisory Servicer but at the expense of the
Servicer, deliver to the Supervisory Servicer (or other successor), all Servicer
Loan Files, documents and records (including computer tapes and diskettes)
relating to the Loans and an accounting of any amounts collected and held by the
SERVICING AGREEMENT - PAGE 25
<PAGE> 30
Servicer and otherwise use its reasonable efforts to effect the orderly and
efficient transfer of servicing rights and obligations to the assuming party.
The Servicer agrees to cooperate with the Trustee and the Supervisory
Servicer or any other successor servicer in effecting the termination of the
Servicer's servicing responsibilities and rights hereunder and shall promptly
provide the Supervisory Servicer or such successor servicer, as applicable, all
documents and records reasonably requested by it to enable it to assume the
Servicer's functions hereunder and shall promptly also transfer to the
Supervisory Servicer or such successor servicer, as applicable, all amounts
which then have been or should have been deposited in the Lockbox Account by the
Servicer or which are thereafter received with respect to the Loans. Neither the
Trustee, the Supervisory Servicer nor any other successor servicer shall be held
liable by reason of any failure to make, or any delay in making, any
distribution hereunder or any portion thereof caused by (i) the failure of the
Servicer to deliver, or any delay in delivering, cash, documents or records to
it, or (ii) restrictions imposed by any regulatory authority having jurisdiction
over the Servicer hereunder. The Supervisory Servicer shall provide written
notice of each appointment of a successor to the Servicer hereunder, other than
the Supervisory Servicer, to each Holder and the Rating Agency, and the Trustee.
SECTION 6.6 WAIVER OF DEFAULTS. The Trustee (with the written consent
of Required Noteholders and with notice to the Rating Agency) may, on behalf of
all Noteholders, waive any events permitting removal of the Servicer as servicer
pursuant to this Article VI. Upon any waiver of a past default, such default
shall cease to exist, and any Servicer Default arising therefrom shall be deemed
to have been remedied for every purpose of this Agreement. No such waiver shall
extend to any subsequent or other default or impair any right consequent thereto
except to the extent expressly so waived.
ARTICLE VII
TERMINATION
SECTION 7.1 SERVICER NOT TO RESIGN. The Servicer shall not assign this
Agreement or resign from the obligations and duties hereby imposed on it except
by mutual consent of the Servicer and the Trustee (with the Required
Noteholders' consent), or upon the determination that the Servicer's duties
hereunder are no longer permissible under applicable law and such incapacity
cannot be cured by the Servicer. Any such determination permitting the
resignation of the Servicer shall be evidenced by a Certificate of an Authorized
Officer of the Servicer to such effect delivered to the Trustee, the
Noteholders, the Supervisory Servicer and the Rating Agency. No such resignation
shall become effective until a successor has assumed the Servicer's
responsibilities and obligations hereunder in accordance with Section 6.5.
SECTION 7.2 TERM OF AGREEMENT. This Agreement shall continue in
existence and effect until the earlier of (a) the later of the final payment or
other liquidation of the last Loan or the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any Loan and the remittance
of all funds due thereunder, (b) the payment in full of the Notes in accordance
with the Indenture, in addition to all other amounts payable thereunder, and the
SERVICING AGREEMENT - PAGE 26
<PAGE> 31
discharge of the Indenture in accordance with the terms thereof, or (c) mutual
consent of the Servicer, the Trustee, the Supervisory Servicer and all Holders
in writing.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1 AMENDMENT. This Agreement may be amended from time to time
by the Servicer, the Issuer and the Trustee (acting at the written direction of
the Required Noteholders) by written agreement, with thirty (30) days prior
written notice to the Rating Agency and with prior written notice to and consent
of the Supervisory Servicer. Notwithstanding the foregoing, this Agreement may
be amended without the written direction of the Required Noteholders to modify
any provisions of this Agreement required by the Rating Agency to maintain the
rating of the Notes or to cure any ambiguity, defect, omission, conflict or
inconsistency in this Agreement or between the terms of this Agreement and any
other document executed or delivered in connection herewith. This Agreement may
also be amended without the written direction of the Required Noteholders, so
long as such amendment does not materially adversely affect the rights of the
Noteholders; provided, however, this Agreement may not be amended without the
prior written consent of the Initial Purchaser.
SECTION 8.2 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND THE OBLIGATIONS, RIGHTS AND
REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
SECTION 8.3 NOTICES. All demands, notices and communications hereunder
shall be in writing and shall be duly given if addressed to the appropriate
Notice Address and delivered by hand or sent by nationally recognized express
courier, or mailed by registered mail, postage prepaid, or transmitted by
telecopy, and shall be effective upon receipt, except when telecopied, in which
case, any such communication shall be effective upon telecopy against receipt of
answer back or written confirmation thereof.
SECTION 8.4 SEVERABILITY OF PROVISIONS. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other covenants, agreements, provisions or terms of this
Agreement. The parties hereto further agree that the holding by any court of
competent jurisdiction that any remedy pursued by the Trustee hereunder is
unavailable or unenforceable shall not affect in any way the ability of the
Trustee to pursue any other remedy available to it.
SECTION 8.5 NO PARTNERSHIP. Nothing herein contained shall be deemed or
construed to create a partnership or joint venture between the parties hereto,
and the services of the Servicer shall be rendered as an independent contractor
and not as agent for the Trustee.
SERVICING AGREEMENT - PAGE 27
<PAGE> 32
SECTION 8.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and by the different parties hereto on separate counterparts, each
of which, when so executed, shall be deemed to be an original; such
counterparts, together, shall constitute one and the same agreement.
SECTION 8.7 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the Servicer, the Issuer, the Supervisory
Servicer and the Trustee and their respective successors and assigns.
SECTION 8.8 NOTIFICATION TO RATING AGENCY AND NOTEHOLDERS. The Trustee
shall give prompt notice to the Rating Agency and the Noteholders of the
occurrence of any of the following events of which it has received notice: (a)
any modification or amendment to this Agreement, the Indenture or any other
Transaction Documents, (b) any proposed removal, replacement, resignation or
change of the Trustee or the Servicer, (c) any Event of Default under the
Indenture or any Servicer Default and (d) the final payment in full of the
Notes. Whenever the terms of this Agreement require that notice or reports be
given to the Rating Agency or the Noteholders, the Person to provide such notice
or reports shall first give them to the Trustee who shall provide them to the
Rating Agency or the Noteholders, as applicable. Additionally, the Trustee, upon
receipt, shall provide copies to the Rating Agency and the Noteholders of all
compliance reports, Determination Date Reports, financial statements, operating
reports, environmental reports and any and all other reports received by the
Trustee from the Servicer, the Issuer or the Supervisory Servicer from time to
time to the extent such reports have not been otherwise forwarded to the Rating
Agency and the Noteholders pursuant to the provisions of this Agreement or the
other Transaction Documents.
SECTION 8.9 INDULGENCES; NO WAIVERS. Neither the failure nor any delay
on the part of a party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
SECTION 8.10 TITLES NOT TO AFFECT INTERPRETATION. The titles of
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used in
the construction or interpretation hereof.
SECTION 8.11 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding among the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or written,
of any nature whatsoever with respect to the subject matter hereof. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof.
SECTION 8.12 RECORDATION OF AGREEMENT. To the extent permitted by
applicable law, this Agreement is subject to recordation in all appropriate
public offices for real property records
SERVICING AGREEMENT - PAGE 28
<PAGE> 33
in all the counties or the comparable jurisdictions in which any Mortgaged
Property is situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Servicer and at its expense
upon the written request of the Trustee.
SECTION 8.13 FURTHER ASSURANCES. Notwithstanding any other provision of
this Agreement, neither Trustee nor the Supervisory Servicer shall have any
obligation to consent to any amendment or modification of this Agreement unless
it has been provided reasonable security or indemnity against its out-of-pocket
expenses (including reasonable attorneys' fees) to be incurred in connection
therewith by the person requesting the amendment. To the extent permitted by
law, the Servicer agrees that it will, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such further
instruments as the Trustee may reasonably request to effectuate the intention of
or facilitate the performance of this Agreement.
[The immediately following page contains the signatures.]
SERVICING AGREEMENT - PAGE 29
<PAGE> 34
IN WITNESS WHEREOF, the Issuer, the Servicer, the Supervisory Servicer
and the Trustee have caused their names to be signed hereto by their respective
officers thereunto duly authorized as of the day and year first above written.
PMC CAPITAL, INC., as Servicer
By:
-------------------------------
Jan F. Salit
Executive Vice President
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By:
-------------------------------
Marian Onischak
Assistant Vice President
HARRIS TRUST AND SAVINGS BANK,
as Supervisory Servicer
By:
-------------------------------
Marian Onischak
Assistant Vice President
PMC CAPITAL, L.P. 1999-1
as Issuer
By: PMC Capital Corp. 1999-1
Its General Partner
By:
----------------------------
Jan F. Salit
Executive Vice President
SERVICING AGREEMENT - PAGE 30
<PAGE> 35
EXHIBIT A
TO
SERVICING AGREEMENT
FORM OF TRUST RECEIPT
Loan Information
Name of Obligor:
----------------------------------------------------------
Servicer Loan No.:
--------------------------------------------------------
Trustee Loan No.:
---------------------------------------------------------
Trustee
Name:
---------------------------------------------------------------------
Address:
------------------------------------------------------------------
The undersigned Servicer hereby acknowledges that it has received from
the Trustee the documents referred to below (the "Documents"). All capitalized
terms not otherwise defined in this Trust Receipt shall have the meanings given
them in the Servicing Agreement.
( ) Deed of Trust Note dated ___________________ in the original principal
sum of $_________ made by _________ , payable to, or endorsed to the order
of, the Trustee.
( ) Mortgage recorded on _____ as instrument no. ________ in the County
Recorder's Office of the County of_____________________________ , State
of_________________________ in book/reel/docket _______________ of official
records at page/image _________________________
( ) Deed of Trust recorded on ______ as instrument no. _______ in the County
Recorder's Office of the County of _______, State of _______________ in
book/reel/docket _______________ of official records at page/image
__________
( ) Assignment of Mortgage or Deed of Trust to the Trustee, recorded on _____
as instrument no. __________________ in the County Recorder's Office of the
County of ________________, State of _____________________ in
book/reel/docket _______________ of official records at page/image
________________________
( ) Power of Attorney to other instrument authorizing _______________ to sign
on behalf of the Obligor.
( ) Other documents as follows (describe by date, names of parties and title of
documents):
( )
--------------------------
<PAGE> 36
( )
--------------------------
( )
--------------------------
( )
--------------------------
1. The Servicer shall hold and retain possession of the Documents in
trust for the benefit of the Trustee, solely for the purposes provided in the
Servicing Agreement.
2. The Servicer shall not cause or permit the Documents to become
subject to, or encumbered by, any claim, liens, security interest, charges,
writs of attachment or other impositions nor shall the Servicer assert or seek
to assert any claims or rights of setoff to or against the Documents or any
proceeds thereof.
3. The Servicer shall not retain possession or custody of the Documents
for more than 30 days following the date such Documents are released by the
Trustee, and the Servicer shall return the Documents to the Trustee within such
time, unless (i) the Loan relating to the Documents has been liquidated and paid
in full and the proceeds thereof have been remitted to the Lockbox Account prior
to the expiration of the 30-day period, or (ii) the Documents have been
delivered to an attorney, or to a public trustee or other public official as
required by law, for purposes of initiating or pursuing legal action or other
proceedings for the foreclosure of the Mortgaged Property, either judicially or
nonjudicially, and the Servicer has delivered to the Trustee an Officer's
Certificate certifying as to name and address of the Person to which the
Documents were delivered and the purpose of such delivery.
4. The Documents and any proceeds thereof, and any proceeds of
proceeds, coming into the possession or control of the Servicer, shall at all
times be earmarked for the account of the Trustee and the Servicer shall keep
the Documents and any proceeds separate and distinct from all other property in
the Servicer's possession, custody or control.
PMC CAPITAL, INC., Servicer
By:
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
Dated:
<PAGE> 37
EXHIBIT B
TO
SERVICING AGREEMENT
FORM OF LOCKBOX AGREEMENT
<PAGE> 38
EXHIBIT C
TO
SERVICING AGREEMENT
FORM OF LOCKBOX NOTICE LETTER
[PMC Capital, Inc., Letterhead]
[Date]
[Name of Obligor]
[Address]
[Address]
[Address]
Re: PMC Capital, Inc., (PMC)
Loan Number
Dear [Obligor]:
Please send all future payments on your loan including, all monthly
payments of principal and interest and any and all prepayments to the following
address:
PMC Capital, Inc.
P. O. Box ______
Dallas, Texas ______
You should, however, continue to direct any and all inquiries or other
correspondence relating to your loan to the following address:
PMC Capital, Inc.
18111 Preston Road, Suite 600
Dallas, Texas 75252
If you have any questions, please contact the undersigned at (XXX)
XXX-XXXX.
Sincerely,
[Officer]
[Title]
<PAGE> 39
EXHIBIT D
TO
SERVICING AGREEMENT
DETERMINATION DATE REPORT
D-1
<PAGE> 40
EXHIBIT E
TO
SERVICING AGREEMENT
FORM OF ANNUAL STATEMENT
PMC CAPITAL, L.P. 1999-1
LOAN-BACKED FIXED RATE NOTES
ANNUAL STATEMENT FROM SERVICER REQUIRED BY SECTION 5.1(b) OF THE SERVICING
AGREEMENT
YEAR XX/XX/XX THRU XX/XX/XX
NOTEHOLDER INFORMATION Total
Beginning Noteholder Balance XXX,XXX.XX
Less: Principal Paid XXX,XXX.XX
(Due but not paid XXX,XXX.XX)
Ending Noteholder Balance XXX,XXX.XX
Interest Paid XXX,XXX.XX
Interest Accrued XXX,XXX.XX
Total
Beginning Loan Balance XXX,XXX.XX
Less: Principal Paid XXX,XXX.XX
Ending Loan Balance XXX,XXX.XX
E-1
<PAGE> 41
EXHIBIT F
TO
SERVICING AGREEMENT
QUARTERLY OFFICER'S CERTIFICATE
------------, -----
I, _______________, ________________, of [PMC Capital, Inc.] (the
"Servicer"), pursuant to the provisions of Section 5.3 of the Servicing
Agreement dated as of June ____, 1999 (the "Agreement"), by and among Harris
Trust and Savings Bank, in its capacity as Trustee and Supervisory Servicer, PMC
Capital, L.P. 1999-1 and the Servicer, do hereby certify as follows:
(i) the Servicer has fully complied with the provisions of the
Agreement;
(ii) a review of the activities of the Servicer during the
preceding quarter and of the Servicer's performance under the
Agreement has been made under my supervision; and
(iii) to the best of my knowledge, based on the review referred
to in (ii) above, the Servicer has fulfilled all of its obligations,
duties and responsibilities under the Agreement throughout the
preceding quarterly period, and unless otherwise described on Schedule
I hereto, no Servicer Default exists.
Capitalized terms used but not otherwise defined herein shall have the
same meanings ascribed to such terms in the Agreement.
IN WITNESS WHEREOF, I have executed this certificate this ____ day of
_________, 19____.
PMC CAPITAL, INC., Servicer
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE> 42
EXHIBIT G
TO
SERVICING AGREEMENT
OFFICER'S CERTIFICATE
------------, ------
I, ________________, ______________________, of [PMC Capital, Inc.]
(the "Servicer"), pursuant to the provisions of Section 5.5 of the Servicing
Agreement dated as of June ____, 1999 (the "Agreement"), by and among Harris
Trust and Savings Bank, in its capacity as Trustee and Supervisory Servicer, PMC
Capital, L.P. 1999-1 and the Servicer, do hereby certify as follows:
(iv) I have confirmed that the Fidelity Bond, the Errors and
Omissions Insurance Policy and any other bonds required by Section 2.4
of the Agreement are in full force and effect; and
(v) The representations and warranties of the Servicer set forth
in Section 2.1 of the Agreement are true and correct in all material
respects as if made on the date hereof.
Capitalized terms used but not otherwise defined herein shall have the
same meanings ascribed to such terms in the Agreement.
IN WITNESS WHEREOF, I have executed this certificate this ____ day of
_________, _____.
PMC CAPITAL, INC., Servicer
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
G-1
<PAGE> 43
EXHIBIT H
TO
SERVICING AGREEMENT
FORM OF OBLIGOR LETTER
[Date]
VIA CERTIFIED MAIL
[Obligor]
[Address]
[Address]
[Address]
Re: PMC Capital, Inc. ("PMC")
Loan Number
------------------------
Dear [Obligor]:
Your loan serviced by PMC is part of a pool of loans for which
___________________ serves as trustee. As part of our servicing responsibility
we are required to verify certain information with respect to your loan.
Our records indicate your loan was previously delinquent by more than
90 days and has recently been brought current. We are required to demonstrate
that you did in fact make the delinquent payments.
If these facts are correct, please indicate your acknowledgment by
signing and returning a copy of this letter to our attention, in the envelope
provided. If these facts are not correct, please indicate your disagreement by
signing this letter and indicating your disagreement beneath your signature and
returning a copy of this letter to our attention, in the envelope provided.
If we do not hear from you within 30 days of the date of this letter we
will assume that these facts are true.
H-1
<PAGE> 44
If you have any questions, please contact the undersigned at (XXX)
XXX-XXXX.
Sincerely,
[Officer]
[Title]
Acknowledged by:
- ----------------------------------
Mortgagor Name Date
H-2
<PAGE> 45
Schedule 1
to
Quarterly Officer's Certificate
SERVICER DEFAULTS
[Describe any Servicer Defaults and the status thereof and the action
being taken by the Servicer to cure any such Servicer Default.]
<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>
