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 JUNE 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 August 9, 1996.
Common Stock $0.01 Par Value 5,555,713
Class Number of Shares
Transitional Small Business Disclosure Format
Yes No X
Page 1 of 20 Pages
Exhibit Index Begins on Page 19
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PMC INTERNATIONAL, INC.
INDEX
PART I Financial Information Page No.
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
- June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income 5
- Three months ended June 30, 1996
and June 30, 1995; Six months ended
June 30, 1996 and June 30, 1995
Condensed Consolidated Statements of Cash Flow 6
- Six months ended June 30, 1996
and June 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 19
Signatures 20
Page 2 of 20 Pages
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PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Note 1)
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, December 31,
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 722,530 $ 313,885
Receivables
Investment management fees 63,560 39,733
Other receivables 754,645 63,210
TOTAL 1,540,735 416,828
FURNITURE AND EQUIPMENT, at cost,
net of accumulated depreciation of
$509,008 and $355,231 (Note 1) 760,740 688,233
SOFTWARE DEVELOPMENT, at cost,
net of accumulated depreciation of
$91,723 and $0 (Note 1) 507,776 419,617
PREPAID EXPENSES AND OTHER ASSETS 420,225 220,605
GOODWILL (net of amortization of $64,183
and $52,513) (Note 1) 285,817 297,487
LONG TERM NOTE RECEIVABLE (Note 2) 726,087 897,167
TOTAL ASSETS $ 4,241,380 $ 2,939,937
See notes to unaudited condensed consolidated financial statements
Page 3 of 20 Pages
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
June 30, December 31,
1996 1995
LIABILITIES
Accounts payable $ 792,949 $ 1,442,694
Accrued expenses 817,704 707,897
Other liabilities 577,792 571,389
Deferred revenue 509,355 411,347
Notes payable (Note 6) 4,518,515 1,647,470
Obligations under capital lease 135,732 75,490
(Note 7)
TOTAL LIABILITIES 7,352,047 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 (7,912,675) (6,718,358)
TOTAL SHAREHOLDERS' EQUITY (3,110,667) (1,916,350)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 4,241,380 $ 2,939,937
See notes to unaudited condensed consolidated financial statements.
Page 4 of 20 Pages
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
REVENUE:
1996 1995 1996 1995
Investment management fees $ 2,435,382 $ 2,080,085 $4,779,703 $4,117,853
Trading income 3,718 16,791 34,274 52,477
Other income 154,220 88,458 395,234 246,172
Total revenue 2,593,320 2,185,334 5,209,211 4,416,502
EXPENSES:
Investment manager and
other fees 1,426,344 1,193,269 2,833,399 2,351,005
Salaries and benefits 768,949 541,533 1,534,956 1,062,880
Clearing charges and user
fees 199,385 184,301 408,210 386,865
Advertising and promotion 151,521 178,700 330,378 277,621
General and administrative 131,916 88,579 259,727 192,045
Office supplies expense 58,063 42,777 121,140 86,213
Occupancy and equipment costs 164,362 113,288 291,644 219,000
Depreciation and amortization 136,335 30,835 257,170 57,670
Professional fees 139,008 145,825 250,318 195,887
Interest 71,957 20,741 116,587 35,019
Total expenses 3,247,840 2,539,848 6,403,529 4,864,205
NET LOSS BEFORE
INCOME TAXES $ (654,520) $ (354,514) $ (1,194,318)$ (447,703)
INCOME TAXES - - - -
NET LOSS $ (654,520) $ (354,514) $ (1,194,318)$ (447,703)
NET LOSS
PER COMMON SHARE $ (0.22) $ (0.07) $ (0.32) $ (0.09)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 5,555,713 5,540,501 5,555,713 5,540,501
See notes to unaudited condensed consolidated financial statements.
Page 5 of 20 Pages
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,194,318) $ (447,703)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accretion of discount on notes receivable (37,303) (40,998)
Depreciation and amortization 257,170 57,670
Changes in operating assets and liabilities
Investment management fees receivable (23,827) 43,375
Other receivables (72,604) (49,584)
Prepaid expenses and other assets (199,620) (4,579)
Accounts payable (649,745) (17,116)
Accrued expenses 109,807 (67,973)
Other liabilities 6,403 131,254
Deferred revenues 98,008 61,716
Net cash used in operating activities (1,706,029) (333,938)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment
and software development (323,158) (130,825)
Reduction of long-term note receivable 208,383 194,333
Net cash provided by (used in) 114,775 63,508
investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,256,169 305,000
Principal payments on notes payable (3,955)
Principal payments on obligations
under capital lease (22,765) _______
Net cash provided by financing 2,229,449 305,000
activities
NET INCREASE (DECREASE) IN CASH 408,645 34,570
CASH, at beginning of period 313,885 139,918
CASH, at end of period $ 722,530 $ 174,488
See notes to unaudited condensed consolidated financial statements.
Page 6 of 20 Pages
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Six Months Ended
June 30,
1996 1995
Cash paid for interest $ 26,013 $ 12,441
SUPPLEMENTAL DISCLOSURE OF INVESTING ACTIVITIES:
The Company incurred additional capital lease obligations
during the six months ended June 30, 1996 of $83,007 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 7 of 20 Pages
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PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 35%, 8% and 6% of the total customer assets in
PMC's managed account programs as of June 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") 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 8 of 20 Pages
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PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 and the accounts of
PMCI since September 30, 1993, 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 9 of 20 Pages
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PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 June 30, 1996
is $820,070 compared to its carrying amount of $726,087.
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 10 of 20 Pages
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PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 the date of this
report, 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 July 31,
1996, options and warrants to purchase common stock at various prices were
outstanding with expiration as follows:
Expiration Exercise
Date Options Warrants Price
September, 96 19,000 - $ 3.100
October, 96 1,000 - 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, 99 209,500 - 1.375
December, 2000 - 482,500 1.000
March, 2001 125,000 - 1.000
May, 2001 - 1,017,500 1.000
June, 2001 300,000 - 1.000
July, 2005 - 3,000,000 1.000
1,227,000 4,800,000
At July 31, 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.
Page 11 of 20 Pages
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PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 June 30, 1996, PBS had
net capital and net capital requirements of $261,883 and
$100,000, respectively. The Company's net capital ratio
(aggregate indebtedness to net capital) was .10 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 June 30, 1996.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
June 30, December 31,
8-1/2% note payable to shareholder, due July 1995 1996
26, 2000 interest payable monthly beginning
August 10, 1996, principal and all accrued $3,000,000 $1,200,000
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 in
monthly installments of $832 including
interest. 18,515 22,470
9% notes payable to employees and unrelated
individuals, due December 31, 1996, principal
and interest payable on or before maturity
date, secured by a second lien on Company
assets. 482,500 425,000
9% notes payable to employees and unrelated
individuals, due December 31, 1997, principal
and interest payable on or before maturity
date, secured by a second lien on Company
assets. 1,017,500 ---
$4,518,515 $1,647,470
Page 12 of 20 Pages
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PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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. This amount
is included in the Company's balance sheet as another receivable
and notes payable. 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 $ 484,548
1997 1,026,035
1998 7,932
1999 -
2000 3,000,000
$4,518,515
Page 13 of 20 Pages
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PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 $173,128 of equipment under capital leases at June
30, 1996 and accumulated depreciation relating to these leases of
approximately $21,025. Future minimum lease payments under
noncancelable leases as of June 30, 1996 are as follows:
Principal
Year ending due
December 31, Operating Capital Capital Lease
1996 $187,211 $ 50,901 $ 27,160
1997 343,847 70,006 54,382
1998 351,672 58,502 49,869
1999 298,658 4,462 4,321
2000 293,567 - -
Thereafter 24,000 - -
$1,498,955 $183,871 $ 135,732
Less amount
representing interest 48,139
Present value of net
minimum lease payments $135,732
The Company also leases certain equipment from a shareholder and
a prior shareholder on a month-to-month basis. During each of
the six month periods ended June 30, 1996 and June 30, 1995, PMC
paid $4,992 under this lease. Total rent expense for facilities
and equipment for the six months ended June 30, 1996 and 1995,
was $243,418 and $213,096 respectively.
On June 27, 1996 Portfolio Management Consultants, Inc. 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
prejudgement 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 14 of 20 Pages
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PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 June 30, 1996 of
approximately $1,300,000. 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 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 participant's contributions for the year
ended December 31, 1994. The Board did not approve a matching
contribution for the year ended December 31, 1995.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Financial Analysis
PMC International, Inc.'s ("PMCI" or "the Company") consolidated
revenues are generated through its subsidiaries Portfolio
Management Consultants, Inc. ("PMC"), Portfolio Brokerage
Services, Inc. ("PBS"), and Portfolio Technology Services, Inc.
("PTS"). Currently, the Company's revenues are primarily derived
from fees charged to clients 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 clients. PMC's
Investment Management Fees, which are collected as a percentage
of client assets under management, are determined by the net
assets under management. Fees are impacted by the extent to
which the Company attracts new, or loses existing Clients, 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 half of 1996, the Company's subsidiary PTS began
contributing revenues as two institutional clients entered into
agreements for Allocation Manager, the Company's new mutual
Page 15 of 20 Pages
<PAGE>
fund asset allocation program. Also during this period, the
Company's new performance reporting service, Managed Account
Reporting Services ("MARS"), began signing new clients and
generating revenue.
PMCI's revenues were generated primarily through its subsidiary
PMC. Investment Management Fees for the three months and the six
months ended June 30, 1996, increased by 17% and 16%,
respectively, over the three months and six months ended June 30,
1995. Total revenues for the three months and six months
increased by 18% over the same time periods in the previous year.
Increased revenues are primarily attributable to a 15% increase
in assets under management from June 30, 1995 to June 30, 1996.
Total expenses for the three months and six months ended June 30,
1996, on a consolidated basis, increased by 28% and 32%,
respectively, over the same time periods in 1995. The largest
percentage increases were experienced in interest and
depreciation. These two line items account for approximately 6%
of total expenses and 31% of total loss for the three months and
the six months ended June 30, 1996. For the three months ended
June 30, 1995 those expenses accounted for only 2% of total
expenses and 15% of total loss. For the six months ended June
30, 1995 the percentages were 2% and 21%.
Analysis of the losses reveal that as a result of the Company's
financing activities and it's increase in capital lease payments,
interest expense increased from $35,019 during the first six
months of 1995 to $116,587 for the same period in 1996. Cash
outlays for interest payments for the six months ended June 30,
1995 and June 30, 1996 were $12,441 and $26,013, respectively.
(See Notes 6 and 7 to the accompanying unaudited financial
statements.)
Depreciation on the previously capitalized costs of developing
the Company's new software products and other fixed assets, and
amortization of goodwill for the three months and six months
ended June 30, 1996 was $136,335 and $257,170, respectively.
Depreciation and amortization for the comparable periods in 1995
was $30,835 and $57,670. (See Note 1 to the accompanying
unaudited financial statements.)
Increased staffing and costs associated with the development,
release and support of the Company's new products resulted in
higher overall expense in the areas of salaries, advertising,
general and administrative costs and supplies. At June 30, 1996
the Company employed 45 full time employees and 4 part time
employees. At June 30, 1995 the Company employed 31 full time
employees. Included in general and administrative expense for
the six months ended June 30, 1996 is approximately $20,000 of
external cost related to the financing activities more fully
described elsewhere in this discussion. Other areas of
substantially increased expenses were telephone, printing and
reference materials and publications.
Occupancy and equipment costs rose by 33% for the six months
ended June 30, 1996 over the same time period in the previous
year. Approximately half of the increase was due to the
addition of non-capitalized hardware and software. Also, cost
relating to repairs and/or maintenance of existing equipment
increased. The balance of the increase is primarily due to
increased equipment rentals and an annual adjustment to the
Company's office lease for common operating costs.
Page 16 of 20 Pages
<PAGE>
Although the legal fees related to the Company's defense and
final settlement with the SEC of an investigation that began in
April of 1994 decreased during the first six months of 1996, other
consulting fees, primarily related to the development of
new marketing materials, internal systems, and regulatory
compliance associated with new products, resulted in an overall
increase to professional fees of 28% over the first six months of
1995.
Liquidity and Capital Resources
Through the first two quarters of 1996, the Company raised
$1,075,000 through private offerings of securities and an
additional $1,181,169 through the exercise by Bedford Capital
Financial Corporation of its outstanding option to loan funds to
the Company. Also, on June 30, 1996 Bedford exercised the balance
of its loan option with funds to be paid to the Company in July.
The Company received the balance of the funds from Bedford's loan
commitment in the amount of $618,831 on July 9, 1996. All of
such funding was in the form of debt whereby the Company issued
promissory notes to the investors and the investors received a
warrant to purchase a share of the Company's common stock for each
dollar lent to the Company. (See Note 3 to the accompanying unaudited
financial statements.) The private offering financing resulted
in the issuance of subordinated debt due in December 1996 or 1997, with
interest payable quarterly at the rate of 9%. The Bedford debt
(which totals $3,000,000 since July 1995) is due in full on July 26,
2000, with monthly interest only payments at the rate of 8 1/2% commencing
in August 1996. Management believes these funding efforts will
allow the Company to meet its liquidity and cash flow
requirements until its new and existing products begin generating
sufficient revenues to compensate for the increased costs
discussed above, or until such time as the Company can raise
additional equity capital; however, there is no assurance that
the funds currently available to the Company will be sufficient
to meet its needs or that the rollout of the Company's new
products will be successful.
To meet the Company's future capital requirements, Management
with the support of the PMCI Board of Directors, is investigating
the engagement of investment banking firms for the purpose of
further capitalizing the Company. Management's intention is to
raise additional equity capital to 1) finance losses to the
extent they may continue, 2) strengthen the Company's balance
sheet with the goal of obtaining the relisting of the Company's
common stock on NASDAQ, and 3) provide adequate working capital
to meet the Company's long term needs.
There can be no assurance the Company will be successful in
connection with these efforts, that the working capital, if
found, would come in as equity or that such capitalization will
allow the Company to meet its goals or will otherwise be
sufficient to meet the Company's needs. Although the Company
does not anticipate generating losses of this magnitude in the
future as its existing and new products begin selling into the
many new relationships and channels being established, there can
be no assurance that the Company's operations will become
profitable. There is no guarantee that internal or external
sources of liquidity will be available to meet the Company's
requirements. In the absence of such funds, PMCI's product
development, marketing and sales efforts will be hindered with an
anticipated adverse impact on the Company and its prospects for
profitability.
Management Discussion
The second quarter of 1996 was important for PMC International,
Inc. First, the Company's subsidiary, Portfolio Management
Consultants, Inc. ("PMC"), settled a two and one half year old
investigation with the SEC. The settlement is discussed under
Legal Proceeding and specifics
Page 17 of 20 Pages
<PAGE>
are available in an 8-K filing dated June 27, 1996. The
resolution of this matter is a very welcome event at PMC. A long
and painful process, the investigation diverted much of the
Company's resources and interfered with PMC's ability to attract
new clients for a significant period of time. With the matter
settled, PMC can concentrate on new business development without
the "over-hang" or stigma of an active regulatory investigation.
As evidence of PMC's energized focus on new business, two
significant new business relationships were entered into during
the second quarter. First, PMC entered into an agreement with
Schwab Institutional, the custodial and brokerage division of
Charles Schwab & Co., Inc., that focuses on providing services to
independent Registered Investment Advisors ("RIA"). Under the
terms of the agreement, both firms will work to jointly identify
advisors interested in utilizing PMC's Private Wealth Management
("PWM") program. The private management segment of the financial
services industry is estimated by industry sources to now exceed
$100 billion.
Schwab Institutional will provide brokerage, custody and
securities clearing services while PMC will provide asset
allocation, money manager due diligence, monthly and quarterly
reporting, sales support and training. This agreement teams PMC
with what Management believes to be one of the most powerful and
dynamic marketing organizations in the US and Management
considers it to be a very important strategic relationship. PMC
and Schwab are just beginning to market the program and marketing
materials are still being created and produced. Currently,
Schwab Institutional services more than 4,500 independent RIAs
nationwide.
Also during the second quarter, PMC entered into an agreement
with Investment Centers of America ("ICA") to market Allocation
Manager ("AM"), PMC's new mutual fund asset allocation program.
ICA has relationships with approximately 250 banks, primarily in
the mid- west, pursuant to which it provides investment
management and related services to the clients of those banks.
It is expected that ICA will begin marketing AM during the third
quarter.
In the first two quarters of 1996, the Company raised a total of
$2,256,000 through private placements of subordinated debt
securities and through the exercise by Bedford of its option to
loan funds to the Company. See, "Liquidity and Capital
Resources." In addition, the Company received the balance of the
funds from Bedford's loan commitment in the amount of $618,831 in
July. Management believes that Bedford's completion of its debt
financing of the Company is an indication of Bedford's commitment
to and confidence in PMCI.
The loss incurred in the first quarter persisted during the
second quarter. To support the Company's new products and
relationships, staffing is required in the areas of software
programming, systems management, operations, customer service and
marketing. Employees now number approximately 50, up from 31 a
year ago. As a result, the increased costs are across most every
expense area of the Company's financials including salaries,
general administrative, occupancy and equipment.
The complexity of the Company's products and the staffing
requirements of new relationships dictate that the Company expand
its infrastructure in a proactive manner in order to successfully
support those products and relationships. Management believes in
the future success of the Company's products in the market place
and industry response to the products has been strongly positive.
The Company is building aggressively for the future and
Management believes that the current losses, although
troublesome, are a necessary part of the Company's re-energized
commitment to growth and new products.
Page 18 of 20 Pages
<PAGE>
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 July 15,
1996, cumulative dividends in arrears totaled $583,576.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. Number Exhibit Page Number
(27) Financial Data Schedule 21
B. An 8-K Report dated May 31, 1996 was filed on June 19, 1996
in which the Company reported that it had obtained certain
funding during the second quarter of 1996. Additionally, the
Company reported the selection of Schwab Institutional as
custodian for a new Private Wealth Management program.
An 8-K Report dated June 27, 1996 was filed on July 2,
1996 regarding the settlement of a proceeding brought by
the Securities and Exchange Commission in April of 1994
concerning PMC's former trading/disclosure practices.
Page 19 of 20
<PAGE>
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: /S/ Kenneth S. Phillips
Kenneth S. Phillips
President, Chief Executive Officer
Date: /S/ Vali Nasr
Vali Nasr
Chief Financial Officer
Page 20 of 20
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