FORM 10-QSB
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 SEPTEMBER 30, 1996
[ ] 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 0-14937
PMC INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 84-0627374
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
555 17th Street, 14th Floor, Denver, Colorado 80202
(Address of principal executive offices)
(303) 292-1177
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 .
State the number of shares outstanding of each of the issuer's classes of
common equity, as of September 30, 1996.
Common Stock $0.01 Par Value 5,555,713
Class Number of Shares
Transitional Small Business Disclosure Format Yes . No X.
<PAGE>
PMC INTERNATIONAL, INC.
INDEX
PART I Financial Information Page No.
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
_ September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income 5
_ Three months ended September 30, 1996
and September 30, 1995; Nine months ended
September 30, 1996 and September 30, 1995
Condensed Consolidated Statements of Cash Flow 6
_ Nine months ended September 30, 1996
and September 30, 1995
Notes to Unaudited Condensed Consolidated Financial 8
Statements
Item 2 Management's Discussion and Analysis of 16
Financial Condition and Results of
Operations
PART II Other Information
Item 1 Legal Proceedings 19
Item 3 Defaults Upon Senior Securities 19
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Note 1)
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30, December 31,
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 701,160 $ 313,885
Receivables
Investment management fees (34,441) 39,733
Other receivables 114,860 63,210
TOTAL 781,579 416,828
FURNITURE AND EQUIPMENT, at cost,
net of accumulated depreciation of
$586,368 and $355,231 (Note 1) 818,829 688,233
SOFTWARE DEVELOPMENT, at cost,
net of accumulated depreciation of
$144,863 and $0 (Note 1) 529,616 419,617
PREPAID EXPENSES AND OTHER ASSETS 421,914 220,605
GOODWILL (net of amortization of $70,018
and $52,513) (Note 1) 279,982 297,487
LONG TERM NOTE RECEIVABLE (Note 2) 649,356 897,167
TOTAL ASSETS $ 3,481,276 $ 2,939,937
See notes to unaudited condensed consolidated financial statements
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
September 30, December 31,
1996 1995
LIABILITIES
Accounts payable $ 958,350 $ 1,442,694
Accrued expenses 791,106 707,897
Other liabilities 581,518 571,389
Deferred revenue 510,717 411,347
Notes payable (Note 6) 4,516,697 1,647,470
Obligations under capital lease (Note 7) 170,570 75,490
TOTAL LIABILITIES 7,528,958 4,856,287
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 3)
Preferred stock, no par value - authorized
5,000,000 shares; issued and outstanding,
349,017 shares and 349,017 shares 872,543 872,543
Common stock, $.01 par value - authorized
50,000,000 shares; issued and outstanding,
5,555,713 shares and 5,555,713 shares 276,716 276,716
Additional paid-in capital 3,652,749 3,652,749
Accumulated deficit (8,849,690) (6,718,358)
TOTAL SHAREHOLDERS' EQUITY (4,047,682) (1,916,350)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,481,276 $ 2,939,937
See notes to unaudited condensed consolidated financial statements.
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
REVENUE:
1996 1995 1996 1995
Investment management fees $2,299,855 $2,217,663 $7,079,558 $6,335,516
Trading income (995) 25,041 33,279 77,518
Other income 184,347 107,914 579,580 354,086
Total revenue 2,483,207 2,350,618 7,692,417 6,767,120
EXPENSES:
Investment manager and
other fees 1,394,763 1,342,520 4,228,162 3,693,525
Salaries and benefits 807,531 599,012 2,342,487 1,661,892
Clearing charges and user
fees 191,308 188,198 599,518 575,063
Advertising and promotion 195,059 164,783 525,436 442,404
General and administrative 149,979 289,844 409,707 481,887
Office supplies expense 61,871 41,997 183,011 128,211
Occupancy and equipment costs 141,217 125,068 432,860 344,069
Depreciation and amortization 136,335 38,835 393,505 96,505
Professional fees 226,217 167,987 476,535 363,873
Interest 115,941 27,541 232,528 62,560
Total expenses 3,420,221 2,985,785 9,823,749 7,849,989
NET LOSS BEFORE
INCOME TAXES $(937,014) $(635,167) $(2,131,332) $(1,082,869)
INCOME TAXES - - - -
NET LOSS $(937,014) $(635,167) $(2,131,332) $(1,082,869)
NET LOSS
PER COMMON SHARE $ (0.27) $ (0.12) $ (0.49) $ (0.21)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 5,555,713 5,549,595 5,555,713 5,543,902
See notes to unaudited condensed consolidated financial statements.
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,131,332) $(1,082,869)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accretion of discount on notes receivable (52,507) (63,968)
Depreciation and amortization 393,505 96,505
Changes in operating assets and liabilities
Investment management fees receivable 74,174 49,066
Other receivables (51,650) (79,668)
Prepaid expenses and other assets (201,308) (47,881)
Accounts payable (484,344) 128,167
Accrued expenses 83,209 78,469
Other liabilities 10,129 (18,635)
Deferred revenues 99,370 17,443
Net cash used in operating activities (2,260,754) (923,371)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment
and software development (479,456) (471,511)
Reduction of long-term note receivable 300,318 286,076
Net cash provided by (used in) investing activities (179,138) (185,435)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,875,000 1,200,000
Principal payments on notes payable (5,773) (21,415)
Principal payments on obligations
under capital lease (42,060) -
Net cash provided by financing activities 2,827,167 1,178,585
NET INCREASE (DECREASE) IN CASH 387,275 69,779
CASH, at beginning of period 313,885 139,918
CASH, at end of period $ 701,160 $ 209,697
See notes to unaudited condensed consolidated financial statements.
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Nine Months Ended
September 30,
1996 1995
Cash paid for interest $ 67,990 $ 44,310
SUPPLEMENTAL DISCLOSURE OF INVESTING ACTIVITIES:
The Company incurred additional capital lease obligations during the nine
months ended September 30, 1996 of $137,139 for computer equipment.
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
On June 30, 1996 a firm commitment was received from Bedford Capital
Corporation to loan the Company additional funds in connection with a prior
financing. On July 9 the Company received funds in the amount of $618,831
from Bedford.
See notes to unaudited condensed consolidated financial statements.
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
On September 23, 1993, the shareholders of Schield Management Company
("Schield") approved an exchange of common stock of Schield for all of the
outstanding common stock of Portfolio Management Consultants, Inc. ("PMC")
and a name change from Schield to PMC International, Inc. ("PMCI"). The
stock exchange was completed on September 30, 1993 and as a result of this
transaction, PMC is a wholly owned subsidiary of PMCI. The stock exchange
between Schield and PMC has been considered a reverse acquisition and
accounted for under the purchase method of accounting. Under reverse
acquisition accounting, PMC was considered the acquiror for accounting and
financial reporting purposes, and acquired the assets and assumed the
liabilities of Schield. The Schield assets acquired and liabilities
assumed were recorded at their fair values. The cost of the acquisition of
Schield of $1,741,018 was based on the NASDAQ publicly traded price of the
outstanding Schield common stock prior to the announcement of the
transaction. The excess of the cost of the acquisition over the fair value
of the assets acquired and liabilities assumed was recorded as goodwill.
PMC was organized in 1986 and its principal business activity is the
administration of private and institutional managed account programs with
its customers located substantially in the United States. Its services
include investment suitability analysis, portfolio modeling and asset
allocation, money manager selection, portfolio accounting and performance
reporting. PMC's revenues are primarily derived from a percentage of the
assets under management. Assets under management are impacted by both the
extent to which PMC attracts new, or loses existing clients and the
appreciation or depreciation of the U.S. and international equity and fixed
income markets. Assets of customers of three unrelated organizations
constitute approximately 23%, 9% and 8% of the total customer assets in
PMC's managed account programs as of September 30, 1996. PMC is registered
as an investment advisor under the Investment Advisors Act of 1940.
In June, 1994, Portfolio Brokerage Services, Inc. ("PBS") was capitalized
through a series of transactions with PMCI and PMC, whereby PBS became a
wholly owned - subsidiary of PMCI by issuing 1,000 shares of its common
stock in exchange for certain assets and liabilities with a book value of
$1,532,332. PBS is engaged in business as a securities broker-dealer. As
a broker-dealer it executes security transactions for PMC's privately
managed account programs, on behalf of its customers through the customer's
custodian bank on a delivery vs. payment basis.
Portfolio Technology Services, Inc. ("PTS"), another wholly-owned
subsidiary of PMCI, was organized in June, 1994 but had no operations until
1995. PTS was formed for the purpose of developing proprietary software
for use in the financial services industry.
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
The accompanying unaudited condensed consolidated financial statements
include the historical accounts of PMC for all periods, the accounts of
PMCI since September 30, 1993, and PBS and PTS since inception, and have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB
and Regulation S-B. In the opinion of management, all adjustments
(consisting of normal accruals and elimination of intercompany accounts and
transactions) considered necessary for a fair presentation have been
included. The unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB
for the year ended December 31, 1995.
Significant Accounting Policies
Revenue from investment management services is recorded as such revenues
accrue under the terms of the related investment management contracts.
Securities transactions and related commission income are recorded on a
trade date basis. In the normal course of business, PBS executes, as
agent, transactions on behalf of customers. If the agency transactions do
not settle because of failure to perform by either the customer or the
counter-party, PBS may be obligated to discharge the obligation of the non-
performing party and, as a result, may incur a loss if the market value of
the security is different from the contract amount of the transactions.
The majority of costs incurred to establish the technological feasibility
of the Company's software products intended to be sold or otherwise
marketed were borne by unrelated individuals prior to the products being
introduced to the Company. The Company incurred approximately $50,000 in
research and development costs after receiving the products from the
unrelated individuals. These costs were expensed in 1995. All subsequent
costs incurred after technological feasibility was achieved were
capitalized and are being amortized over three years.
The Company provides for depreciation of furniture and equipment on the
straight line and declining balance methods based on estimated lives of
three to seven years.
Cash and cash equivalents for purposes of the statement of cash flows
includes highly liquid investments with a maturity of three months or less
at date of acquisition.
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Net loss per share of common stock is based on the weighted average number
of shares of common stock outstanding, giving affect to the reverse stock
split discussed in Note 3 and preferred dividend requirements. Common
stock equivalents are not included in the weighted average calculation
since their effect would be anti-dillutive.
Goodwill is amortized using the straight line method over 15 years.
NOTE 2 - LONG TERM NOTE RECEIVABLE
In connection with the Schield reverse acquisition, the Company acquired a
long term note receivable related to the sale of Schield's market timing
operations to an entity controlled by a founder of Schield. The note is
payable in monthly installments of $32,000, including interest, through
August, 1998. The note was recorded at its estimated fair value as of
September 30, 1993. The discount from the face amount of the note
receivable is accreted to interest income over the life of the note using
the interest method. The principal balance of the note as of September 30,
1996 is $728,133 compared to its carrying amount of $649,356.
NOTE 3 - SHAREHOLDERS' EQUITY
Reverse Stock Split
All shares and per share amounts in the accompanying financial statements
have been restated to give effect to a one for five reverse stock split of
the Company's common stock which was effective November 12, 1993.
Preferred Stock
Holders of preferred stock are entitled to receive dividends at a rate of
$0.325 per share per annum (equal to 13% of the purchase price per share
attributable to the preferred stock). Dividends are payable semi-annually
on January 15 and July 15 in each year. Dividends accrue from the date of
the preferred stock issuance and are cumulative. Upon liquidation or
dissolution of the Company, holders of preferred stock are entitled to a
preference over the holders of common stock in an amount per share equal to
the original purchase price attributed to a share of preferred stock
($2.50) plus all unpaid cumulative dividends. The preferred stock is non-
participating and the holders of preferred stock have no preemptive rights
and no voting rights except as may be required by Colorado law. At the
option of the Company, the preferred stock may be redeemed in whole, or in
part, at a price of $2.75.
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Continued)
NOTE 3 - SHAREHOLDERS' EQUITY (continued)
per share, plus unpaid cumulative dividends. Redemption can only occur if
certain conditions regarding the bid prices of the Company's Common Stock
and the Company's after-tax earnings are met. As of September 30, 1996,
cumulative dividends in arrears totaled $583,576.
Stock Options and Warrants
During 1994, the Company adopted a Stock Option Plan. Under this plan, the
Company may grant stock options to officers and employees. The Stock
Option Plan was intended as an Incentive Stock Option Plan, however
shareholder approval of the Plan was not sought or obtained within one year
of Board adoption and consequently options granted thereunder will not
receive incentive stock option treatment. Outside of this plan, the
Company has granted options to officers, employees, shareholders and
certain other individuals and entities which would allow them to purchase
common stock of the Company. In addition common stock warrants have been
issued in connection with certain private offerings of debt. At September
30, 1996, options and warrants to purchase common stock at various prices
were outstanding with expiration as follows:
Expiration Exercise
Date Options Warrants Price
November, 96 5,000 - $ 1.375
Nov., 96, Jan., 97 20,000 - 2.500
June, 97, Oct., 97 50,500 - 2.500
February, 98 52,000 - 3.100
February, 98 150,000 - 1.300
December, 98 - 300,000 1.620
September, 99 250,000 - 1.120
September, 99 50,000 - 1.370
December, 99 204,500 - 1.375
December, 2000 - 482,500 1.000
March, 2001 125,000 - 1.000
May, 2001 - 1,017,500 1.000
June, 2001 250,000 - 1.000
September, 2001 80,000 - 1.500
September, 2002 97,500 - 1.500
July, 2005 - 3,000,000 1.000
Other* 200,000 300,000 1.000
1,534,500 5,100,000
*At September 30, 1996 there were also 200,000 options granted but not
issued under an employment agreement, subject to performance and vesting
requirements, exercisable at $1.00. Also, there were 300,000 warrants
granted pursuant to an Investment Banking Agreement which became
exercisable at such time that Bedford exercises any portion of its
3,000,000 warrants in an amount in direct proportion to 10% of the
warrants exercised by Bedford at an exercise price of $1.00 for 4 years
from the date(s) of Bedford's exercise.
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Continued)
NOTE 4 - INCOME TAXES
The Company has an unused net operating loss carryforward of approximately
$3,000,000 for income tax purposes, $1,200,000 expiring in 2009 and the
remainder expiring in 2010. This net operating loss carryforward may
result in future income tax benefits; however, because realization is
uncertain at this time, a valuation reserve in the same amount has been
established. Temporary differences arise from the deduction of certain
accrued expenses for financial statement purposes and not for income tax
reporting purposes and the recording of depreciation.
NOTE 5 - REGULATORY REQUIREMENTS
PBS is subject to the Securities and Exchange Commission's Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital. At September 30, 1996, PBS had net capital and net capital
requirements of $158,220 and $100,000, respectively. The Company's net
capital ratio (aggregate indebtedness to net capital) was .77 to 1.
According to Rule 15c3-1, PBS's net capital ratio shall not exceed 15 to 1.
On a consolidated basis, as a result of the requirement, net assets of
$120,000 are unavailable for any purpose other than meeting PBS's net
capital requirements at September 30, 1996.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the September 30 December 31
following: 1996 1996
8-1/2% note payable to shareholder,
due July 26, 2000 interest payable $ 3,000,000 $1,200,000
monthly beginning August 10, 1996,
principal and all accrued and unpaid
interest is due at maturity, secured
by all assets of PMCI and its
subsidiaries (except PBS which
security interest is only to its
outstanding common stock owned by
PMCI).
11.5% note payable to shareholder(s),
unsecured, due August 1, 1998, payable 16,697 22,470
in monthly installments of $832
including interest.
9% notes payable to employees and
unrelated individuals, due December 482,500 425,000
31, 1996, principal and interest
payable on or before maturity date,
secured by a second lien on Company
assets.
9% notes payable to employees and
unrelated individuals, due December 1,017,500 __
31, 1997, principal and interest
payable on or before maturity date,
secured by a second lien on Company
assets.
$ 4,516,697 $1,647,470
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Continued)
NOTE 6 - NOTES PAYABLE (continued)
The above $3,000,000 shareholder note payable is related to a financing and
stock purchase agreement which encompasses a series of transactions. In
1995 the shareholder acquired 1,000,000 shares of the Company's common
stock in a private transaction with another individual and loaned the
Company $1,200,000. In connection with this loan, a warrant to purchase
1,200,000 shares of common stock (see Note 3) was also received. In
addition, the shareholder obtained an option to lend the Company an
additional $1,800,000 and received option rights similar to the initial
loan. In January 1996 the shareholder partially exercised its $1,800,000
option and loaned the Company $241,169, and received a warrant to purchase
241,169 shares of common stock at $1.00 per share. In April, 1996 the
Company accepted $440,000 from this shareholder as partial exercise of its
$1,800,000 option to fund the expected settlement costs with the Securities
and Exchange Commission as mentioned in Note 7. The shareholder received a
warrant to purchase 440,000 shares of common stock at $1.00 per share. In
May, 1996 the Company accepted $500,000 from this shareholder as a further
partial exercise of its loan option, and the shareholder received a warrant
to purchase 500,000 shares of common stock at $1.00 per share. On June 30,
1996 the Company received a firm commitment from the shareholder to
exercise the remainder of its option and loan the Company $618,831. The
funds were received by the Company on July 9, 1996 and Shareholder received
a warrant to purchase 618,831 shares of common stock at $1.00 per share.
On December 14, 1995 the Company commenced a private offering of units.
Each unit consists of a convertible promissory note with a principal amount
of $1,000 and a warrant to purchase 1,000 shares of common stock. Each
warrant entitles the holder to purchase one share of common stock at a per
share price equal to the greater of $1.00 or the market price on the
initial closing date of the offering. A total of 482.5 units were sold
pursuant to this offering. On May 7, 1996 the Company commenced a further
private offering of units of securities. Each unit consists of a
convertible promissory note with a principal amount of $1,000 and a warrant
to purchase 1,000 shares of common stock. Each warrant entitles the holder
to purchase one share of common stock at a per share price equal to the
greater of $1.00 or the market price on the initial closing date of the
offering. A total of 1,017.5 units were sold pursuant to this offering.
(See Note 3).
Maturities of notes payable are as follows:
Year ending
December 31,
1996 $ 482,730
1997 1,026,035
1998 7,932
1999 -
2000 3,000,000
$ 4,516,697
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Continued)
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company has leases for office space and equipment under various
operating and capital leases. Included in furniture and equipment is
$227,258 of equipment under capital leases at September 30, 1996 and
accumulated depreciation relating to these leases of approximately $37,862.
Future minimum lease payments under noncancelable leases as of September
30, 1996 are as follows:
Principal
Year ending due
December 31, Operating Capital Capital Lease
1996 $ 101,599 $ 23,454 $ 18,518
1997 375,824 88,456 74,364
1998 351,672 77,100 71,457
1999 298,658 6,232 5,958
2000 293,567 - -
Thereafter 24,000 - -
$ 1,445,320 $ 195,242 $ 170,297
Less amount
representing interest 24,945
Present value of net
minimum lease payments $ 170,297
The Company also leases certain equipment from a shareholder and a prior
shareholder on a month-to-month basis. During each of the nine month
periods ended September 30, 1996 and September 30, 1995, PMC paid $7,488
under this lease. Total rent expense for facilities and equipment for the
nine months ended September 30, 1996 and 1995, was $362,626 and $326,780
respectively.
On June 27, 1996 Portfolio Management Consultants, Inc. and its President
entered into a settlement with the Securities and Exchange Commission
concerning a previously announced SEC investigation primarily concerning
PMC's former trading/disclosure practices. Under the terms of the
settlement, without admitting or denying various findings of the SEC, PMC
agreed to disgorge certain net trading profits realized from principal
trading together with prejudgment interest thereon in an amount to be
determined by an independent accountant. The Company has preliminarily
estimated the amount of the net trading profits to be $465,000. This
amount is only an estimate and the actual amount of the disgorgement may
materially differ.
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Concluded)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
The Company has suffered significant losses from operations and has a
working capital deficiency as of September 30, 1996 of approximately
$2,231,000. The financial statements do not include any adjustments
relating to the recovery and classification of recorded asset amounts or
the amount and classification of liabilities that might be necessary should
the Company discontinue operations.
NOTE 8 - EMPLOYEE BENEFIT PLAN
Salary deferral "401(k)" plan
The plan allows employees, who have completed one year of employment and at
least 1,000 hours of service, to defer up to 15% of their salary. The
Company may match employee contributions by an amount determined annually
by the board of directors. Only contributions up to the first 6% of an
employee's salary will be considered for the match. On February 15, 1995
PMCI's Board of Directors approved the issuance of 15,212 shares of PMCI
common stock (valued at the market price at the date of grant of $1.00 per
share) to match participants' contributions for the year ended December 31,
1994. The Board did not approve a matching contribution for the year ended
December 31, 1995.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1996.
The following discussion relates to the Company's financial statements
included in this Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996. For information concerning the Company's financial
statements for the calendar years ended December 31, 1994 and 1995, please
refer to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
Results of Operations
The Company's consolidated revenues are generated through its three
operating subsidiaries PMC, PBS, and PTS. Currently, the Company's
revenues are primarily derived from fees charged to customers for certain
investment advisory, broker-dealer, portfolio administration and reporting
services ("Investment Management Fees") which generally are collected in
advance on a quarterly basis from each of its customers. PMC's Investment
Management Fees are determined and collected as a percentage of managed
assets. Those fees are affected by the extent to which the Company
attracts new, or loses existing customers, the appreciation or depreciation
of the U.S. and international equity and fixed income markets, and the type
and size of accounts and the corresponding difference in fee schedules.
During the first nine months of 1996, the Company's subsidiary PTS began
contributing revenues as institutional distribution channels began entering
into agreements for customized versions of Allocation Manager(TM), the
Company's new software based mutual fund asset allocation program. Also
during this period, the Company's new performance reporting service, MARS,
began signing new distribution channels and generating revenue. For the
nine months ended September 30, 1996 the above products generated $175,000
in revenues. These products represent a customer base of approximately
400, 900 and 1150 accounts for the periods ended March 31, June 30 and
September 30, 1996, respectively.
The Company's Investment Management Fees increased by 3.7% and 12%,
respectively, for the three months and nine months ended September 30,
1996, when compared with the three months and nine months ended September
30, 1995. Total revenues for the three and nine-month periods increased by
5.6% and 14%, respectively, over the same time periods in the previous
year. Increased revenues were primarily attributable to an increase in
managed assets which utilize the Company's products and services.
Total expenses for the three months and nine months ended September 30,
1996, on a consolidated basis, increased by 15% and 25%, respectively, over
the same time periods in 1995. The largest percentage increases were
experienced in salaries, interest and depreciation expenses. These three
line items, in aggregate, accounted for approximately 31% and 30% of total
expenses for the three months and nine months ended September 30, 1996, as
compared to 22% and 23% through the corresponding periods in 1995, and are
directly attributable to the costs and staffing requirements associated
with the development and start-up phase of the Company's new products and
services. Salaries, for example, were $807,531 during the third quarter of
1996, compared with $599,012 for the same period in 1995. For the first
nine months of 1996, salaries were $2,342,487, compared with $1,661,892 for
the same nine-month period in 1995. Similarly, the Company's financing
activities and its increase in capital lease payments and interest expense
were $115,941 and $232,528, respectively, for the three months and nine months
ended September 30, 1996, compared with $27,541 and $62,560 for the same
periods in 1995.
<PAGE>
Depreciation on the previously capitalized costs of developing the
Company's new software products, other fixed assets, and amortization of
goodwill for the three months and nine months ended September 30, 1996 were
$136,335 and $393,505, respectively. Depreciation and amortization for the
comparable periods in 1995 were $38,835 and $96,505.
Increased staffing and costs associated with the development, release and
support of the Company's new products and services have resulted in higher
overall costs across a number of expense categories. At September 30, 1996
the Company employed 50 full time employees as compared with 37 full time
employees at September 30, 1995. New staff has been added in the areas of
marketing, sales, software programming and systems support. Other areas of
substantially increased expense were telecommunications, printing,
reference materials and publications. Occupancy and equipment costs rose
by 13% and 26% for the three months and nine months ended September 30,
1996 over the same periods in the previous year, with approximately half of
this increase attributable to the addition of non-capitalized hardware and
software. For example, the Company recently completed the installation of
a proprietary, multi-currency portfolio accounting and reporting system
which will eliminate the Company's past reliance upon third party "service
bureau" providers who charge the Company on a "per-portfolio" basis for
data processing. The new in-house system will lower the Company's costs,
per customer, and improve margins as the Company continues to grow. The
Company's expenses also reflect increased equipment leases and an annual
adjustment to the Company's office lease for common operating costs.
The completion and release of the Company's new products, the development
of new sales and marketing agreements, and the regulatory and compliance
issues associated with these new products and relationships contributed to
an overall increase of professional fees by 35% and 31%, respectively, for
the three months and nine months ended September 30, 1996. Although the legal
fees related to the Company's defense and final settlement with the SEC
investigation have decreased, the Company continues to incur expenses in
connection with the implementation of the final settlement including the
cost of an independent accounting firm to determine net trading profits and
the cost of the defense of its former CEO. Legal expenses were also
incurred in connection with ensuring regulatory compliance by the
Allocation Manager(TM) mutual fund software program and in the establishment
of complex relationships with several new distribution channels.
Liquidity and Capital Resources
The Company's operating losses incurred over the last several years have
resulted in the need for substantial funding. During the first three
quarters of 1996, the Company borrowed an aggregate of $1.8 million from
Bedford and received an additional $1.0 million from the private placement
of debt securities. These financings were in addition to $1.2 million
borrowed by the Company from Bedford in July 1995 and $482,500 received by
the Company from the private placement of debt securities in late 1995 and
early 1996. The Bedford loans and the private placements each involved the
issuance of warrants to purchase the Company's Common Stock. The Bedford
loans are due in full on July 26, 2000, with monthly, interest only
payments at the rate of 8 1/2% per annum commencing in August 1996. The
private placements were structured as subordinated debt due in December
1997, with interest payable quarterly at the rate of 9% per annum. As of
September 30, 1996, the amount of accrued and unpaid interest due on the
Bedford loans and the subordinated debt totaled $208,092.
Substantial additional funding will be necessary to meet the Company's
existing liquidity and cash flow requirements until its new and existing
products and services can generate sufficient revenues to offset its costs.
Even if the Company is successful in raising additional capital, there can
be no assurance that the funds available to the Company at that time will
be sufficient to meet its needs or that the rollout of the Company's new
products and services will be successful. The Company's intention is to
raise additional equity capital to (i) finance any future operating losses
the Company may incur, (ii) strengthen the Company's balance sheet with the
goal of relisting of the Company's Common Stock on The NASDAQ Small Cap
Market, and (iii) provide
<PAGE>
adequate working capital to meet the Company's long term
requirements. If the Company is able to obtain equity funding, it is
expected that the indebtedness described above will be restructured. If
equity funding is not successful and it is to survive, the Company will be
forced to reduce staff and other overhead expenditures and abandon
development of its new products.
Management Discussion
During the third quarter of 1996, the Company made long awaited and
substantial advances in the final design and roll out of the new products
and services that will be emphasized over the next few years. In
connection with the Allocation Manager(TM) and Fund Counselor(SM) mutual fund
asset allocation and portfolio reporting products, (Fund Counselor(SM) is the
version of Allocation Manager(TM) that is private labeled for NFCS, a division
of Fidelity Management and Research), the Company began shipping completed
software. The software shipping schedule for the fourth quarter includes
highly customized versions for three major Institutional Clients, which
include a large international bank, a national insurance company and a
financial planner - broker/dealer. The release of these products will
permit late fourth quarter sales activity. These customized versions of
the Allocation Manager(TM) program were complicated and unexpectedly resource
intensive; however, as a result of the experience gained in releasing these
three customized products, management believes that future customized
releases will experience substantially shorter development and release
cycles.
In addition to the Allocation Manager(TM) releases described above, the
Company entered into new selling agreements with 14 broker/dealers and
investment advisors during the third quarter. Under the terms of these
agreements, these new broker/dealers and advisors will begin offering the
Company's products and services during the fourth quarter of 1996 and the
beginning of 1997. Although a selling agreement, in and of itself, is no
guarantee that the Company's sales efforts will be successful, the
agreements are necessary to expand the Company's distribution channels and
to achieve the goals set forth in its product marketing plan. Given the
competitive nature of the financial services industry, management considers
the Company's ability to obtain these agreements from a variety of
distribution channels to be a strong indication of the industry's positive
response to the Company's new products.
Examples of important new marketing agreements include the Company's
recently announced venture with Schwab Institutional. Pursuant to that
agreement, PMC and Schwab agreed to market jointly the Company's
traditional wrap program, offering the portfolio management services of
more than thirty institutional money managers, to the more than 4,700
independent investment advisors who utilize the custodial and brokerage
services of Schwab for their customers. During the third quarter,
significant progress was made in connection with the initial rollout of
this program as marketing collateral was developed, advertising was placed
in major trade magazines, marketing meetings were held with Schwab's
regional marketing representatives throughout the U.S., and additional
staff was hired by PMC to support the Company's business development
efforts. Although the Company can provide no assurances in connection
with its joint efforts with Schwab, management believes the relationship is
off to a strong start and that the agreement offers very meaningful
business opportunities for the Company. Under the terms of the agreement,
Schwab will provide brokerage, custody and securities clearing services
while PMC will provide wrap account program administration including asset
allocation, money manager due diligence, monthly and quarterly reporting,
sales support and training.
In addition to the new relationship described above, the Company's well
established relationship with NFCS also experienced substantial progress
during the third quarter. PMC has worked with NFCS since 1992 and has
three products now being jointly marketed to its more than 225
broker/dealer clients throughout the U.S. PMC's relationship with NFCS can
best be described as a Value Added Reseller agreement. In the case of the
Company's Allocation Manager(TM) mutual fund software program, a private label
version called Fund
<PAGE>
Counselor(SM), is being marketed to NFCS clients. These clients include
large banks, insurance companies and financial planning firms which, in
some instances, employ numerous sales professionals who
potentially will have access to the Company's new and existing products.
During the third quarter, the Company entered into selling and licensing
agreements with four NFCS correspondent firms. Pursuant to these
agreements, Fund Counselor(SM) will be a recommended mutual fund wrap program
for the sales representatives of these firms. In addition to these newly
established relationships, the Company is also in negotiation with other
NFCS clients in connection with both customized and standard versions of
Fund Counselor(SM).
Also during the third quarter, the Company felt the effects of a
restructuring by Chase Manhattan Investment Services. Assets administered
within that program diminished by approximately 132,000,000, decreasing
gross revenues for the quarter by approximately $258,500.
As a result of the initial start-up and rollout costs associated with the
Company's new products and services, the Company continued to experience
substantial losses during the third quarter. Although the industry's
response to the Company's new products has been positive, the initial tasks
associated with delivering and supporting these new relationships has
dictated that the Company expand its infrastructure in a proactive manner
and in advance of revenues. The Company has been investing heavily for the
future and management believes that the current losses are a necessary part
of the Company's re-energized commitment to new products, growth and
profitability.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On June 27, 1996, Portfolio Management Consultants, Inc. entered into a
settlement with the Securities and Exchange Commission, without admitting
or denying the SEC's findings, concerning a previously announced SEC
investigation, which commenced in April 1994, primarily concerning PMC's
former trading/disclosure practices. In the Matter of Portfolio Management
Consultants, Inc. and Kenneth S. Phillips, Respondents; Securities Act
Release No. 7308, June 27, 1996; Securities Exchange Act of 1934 Release
No. 37376, June 27, 1996; Investment Advisers Act Release No. 1568, June
27, 1996; Administrative Proceeding File No. 3-9033. The Company filed an
8-K Report dated June 27, 1996 reporting the settlement, which Report is
incorporated herein by reference.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Holders of Preferred Stock are entitled to receive dividends at a rate of
$0.325 per share per annum (equal to 13% of the purchase price per share
attributable to the Preferred Stock). Dividends are payable semi-annually
on January 15 and July 15 in each year commencing July 15, 1991.
Dividends accrue from the date of the Preferred Stock issuance and are
cumulative. Upon liquidation or dissolution of the Company, holders of
Preferred Stock are entitled to a preference over the holders of Common
Stock in an amount per share equal to the original purchase price
attributed to a share of Preferred Stock ($2.50)
plus all unpaid cumulative dividends. The Preferred Stock is
non-participating and the holders of Preferred Stock have no
preemptive rights and no voting rights except as may be required
by Colorado law. At the option of the Company, the Preferred Stock
may be redeemed in whole, or in part, at a price of $2.75 per share,
plus unpaid cumulative dividends. Redemption can only occur if certain
conditions regarding the bid prices of the Company's Common Stock
and the Company's after-tax earnings are met. No preferred dividends have
been paid since July 15, 1991, and as of September 30, 1996, cumulative
dividends in arrears totaled $583,576.
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. Number Exhibit Page Number
(27) Financial Data Schedule 21
B. No Reports on Form 8-K were filed by the Company during the third
quarter.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PMC INTERNATIONAL, INC.
REGISTRANT
Date: November 12, 1996 /S/ Kenneth S. Phillips
Kenneth S. Phillips
President, Chief Executive Officer
Date: November 12, 1996 /S/ Vali Nasr
Vali Nasr
Chief Financial Officer
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