U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB\A
(Mark One)
[X] Annual Report under Section 13 or 15(d) of The Securities
Exchange Act of 1934
for the Fiscal Year Ended December 31, 1996
[ ] Transition Report under Section 13 or 15(d) of The
Securities Exchange Act of 1934
for the Transition Period fromto
PMC INTERNATIONAL, INC.
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(Name of Small Business Issuer in its Charter)
COLORADO 84-0627374
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(State of Incorporation) (IRS Employer Identification No.)
555 17th Street, 14th Floor, 80202
Denver, Colorado
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(Address of Principal Executive (Zip Code)
Offices)
Issuer's telephone number: (303) 292-1177
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
--------------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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
[ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the most recent fiscal year were
$10,086,881.
The aggregate market value of the voting stock held by
non-affiliates of the registrant, 8,687,787 shares based upon the
average bid and asked prices of the Registrant's Common Stock on
March 25, 1997, as quoted in the National Quotation Bureau was
$21,176,480.81.
As of March 25, 1997, the Registrant had 14,522,614 shares of
common stock issued and outstanding.
Documents Incorporated by Reference: NONE
Transitional Small Business Disclosure Format: Yes No [X]
Page 1 of 42 pages
Exhibit Index begins on page 21
<PAGE>
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1996
Introduction
PMC International, Inc. (the "Company" or the "Registrant")
hereby amends its Annual Report on Form 10-KSB for the year ended
December 31, 1996 by deleting its responses to Items 1, 6, 7, and
10 contained in its original filing and replacing such sections
with the following:
ITEM 1: BUSINESS
Industry Overview
The financial services industry has been one of the fastest
growing sectors in recent years. As the industry has grown, a
substantial shift from commission and transaction-based products
to advisory and fee-based products has occurred. Evidenced most
clearly in the popularity of mutual funds, consumer demand for
investment advice and services in connection with managed asset
products has increased enormously over the past 10 years. The
mutual fund industry has grown from 1,528 funds encompassing $495
billion of assets in 1985 to 5,761 funds encompassing $2.8
trillion of assets in 1995. Increasingly, investors are looking
for expertise to assist them in understanding the range of
investment products that are currently marketed. As such,
managed account programs, such as asset allocation and wrap
accounts which assist investors in developing and implementing
appropriate investment strategies, have grown significantly to
service this segment of the marketplace. Wrap programs, which
offer a highly-personalized, fee-based (as opposed to
commission-based) platform for financial management, have grown
to more than $100 billion in assets at year-end 1995.
In recent years, there have been two principal objectives in the
development and marketing of asset allocation and wrap programs.
First, to improve customer service, programs were developed
offering asset allocation and professional money management
services that would better position a customer's investment
portfolio. Asset allocation is a significant determinant of
successful long-term investment performance. In addition, by
consolidating the numerous investment services, costs of
portfolio management can often be reduced as compared to
purchasing individual services in traditional a la carte
fashion. The second reason for developing these programs was to
shift customer assets from dormant custody accounts, which traded
periodically and without predictability, into predictable revenue
producing assets for the sponsoring firm. In developing a "trust
building" product, wrap program sponsors provide the following
four basic functions for a customer in addition to money
management, brokerage and custody services: (i) customer
evaluation, (ii) asset allocation and investment policy
development, (iii) investment management evaluation and
selection, and (iv) quarterly monitoring and reporting services.
As wrap programs have grown in size and popularity, investment
portfolio managers (those that manage individual accounts
consisting of stocks and bonds) and mutual fund distributors are
increasing their involvement within these programs. These
programs give money managers and mutual funds the ability to
market themselves and participate in distribution channels of
financial planners, which in turn provide them with the
opportunity to increase their assets under management. With
attention rapidly shifting to long-term asset allocation
strategies, consultant wrap assets, assets managed by
professional money managers, have grown from $60 billion in 1993
to $80 billion in 1994 to $110 billion in 1995, while mutual fund
wrap assets have grown from $8 billion in 1993 to $12 billion in
1994 to $19 billion in 1995. In 1988, assets in these wrap
programs were estimated at less than $2 billion.
Background of the Company
Founded in 1986, the Company is an independent sponsor of
privately managed accounts and asset allocation and wrap
programs. The majority of the Company's revenues are derived
from its individually managed wrap program, which the Company
created and has administered since 1987. In addition to its
traditional wrap program, since 1994 the Company has invested in
developing a range of related technology-based services and has
added staff to develop and support the Company's new products.
The Company's products and services are designed to assist
professional financial consultants in their efforts to market
high quality, fully diversified portfolio management products.
Through the use of technology, the Company assists third-party
financial advisors such as banks, insurance companies and
brokerage firms (collectively, "Institutional Channels") and
independent financial planners ("Independent Channels") in
allocating and diversifying a customer's investment portfolio
across multiple asset classes and investments. In respect to
Institutional Channels, the Company's products allow for a
repeatable sales process which helps increase sales productivity
while ensuring compliance with the Institutional Channels'
corporate and regulatory policies.
The Company has a staff of approximately 73 people, including
more than 30 professionals, and conducts business in a number of
countries. The Company owns three subsidiaries: (i) Portfolio
Management Consultants, Inc., an investment advisory firm that is
registered with the Commission and is registered or exempt from
such registration in all U.S. jurisdictions; (ii) Portfolio
Brokerage Services, Inc., a broker/dealer registered with the
NASD and all U.S. jurisdictions; and (iii) Portfolio Technology
Services, Inc., which specializes in developing proprietary
software for use in the financial services industry.
Products and Services
Portfolio Management Consultants, Inc.
Portfolio Management Consultants, Inc. ("PMC"), a wholly owned
subsidiary of the Company, currently has four discrete but
vertically integrated product lines. Each product offered by PMC
is designed to assist professional financial consultants in
various aspects of their business. The four services are (i)
Private Wealth Management(TM), PMC's individually managed asset and
wrap account program, (ii) Allocation Manager(TM), a mutual fund
asset allocation program available both on paper and through the
Company's proprietary software that provides comprehensive and
detailed investment suitability analysis, recommended allocation
of assets, portfolio modeling and rebalancing, and comprehensive
portfolio performance reporting, (iii) Managed Account Reporting
Services, a portfolio accounting and reporting service that
operates as a service bureau, and (iv) Style Manager, a
discretionary money management program, using style index funds
and mutual funds, that offers equity style rotation. In
addition, PMC provides consulting services to Institutional
Channels and high net worth customers.
Private Wealth Management(TM)
Private Wealth Management(TM), PMC's multi-manager institutional
wrap program, has historically been PMC's largest revenue
producer. Targeted toward customers with high net worth
(typically having a portfolio larger than one million dollars),
Private Wealth Management(TM) assists financial planners in
assembling a custom-selected team of professional money managers
which precisely matches an individual investor's personal
investment goals, risk tolerance, and objectives.
Each portion of an individual's portfolio (allocated into asset
classes such as equity, fixed income and cash, and asset
sub-classes such as value, growth, large cap, small cap, and
emerging markets) is managed by a carefully selected
institutional money management firm that has been chosen from
PMC's list of recommended managers as best suited to match an
investor's investment philosophy within a specific discipline.
An important and proprietary component of the Private Wealth
Management(TM) program involves the basis of selection of these
money managers. PMC currently recommends a number of independent
money managers for its Private Wealth Management(TM) multi-manager
program, representing a diverse range of philosophies and
styles. These managers are chosen based largely on quantitative
analysis emphasizing return-based, multi-factor style
benchmarking. High correlation to benchmark indices, supported
by positive alpha, are necessary to meet the "Preferred" standard
for manager recommendations. Also considered in manager
evaluations are historical performance, investment philosophy and
style, disciplines, employee turnover, rate of growth, accounts
gained or lost, and industry reputation. To help a customer
choose and understand investment options, PMC provides detailed
profiles on money managers in the context of style and
methodology to achieve maximum investment diversification.
Additionally, PMC will provide guidance on the termination of
existing managers and the rebalancing of the customer's assets.
The Company considers periodic portfolio rebalancing decisions to
be an extremely important determinant of long-term performance.
Thus, several rebalancing options are offered within PMC's
private account programs.
Private Wealth Management(TM) is marketed under both the PMC label
and private labels. Institutional Channels currently using
private-label versions of Private Wealth Management(TM) include
Chase Investment Services Corp ("CISC"), National Financial
Correspondent Services ("NFCS"), the wholly-owned brokerage and
securities clearing subsidiary of Fidelity Management and
Research, Israel Discount Bank of New York and Republic Bank
of New York. Additionally, PMC distributes Private Wealth
Management(TM) under its own name through thirty financial planning
broker-dealers and investment advisors representing more than
10,000 registered sales professionals. To support the sales
process, the Company employs a staff of marketing
representatives. The Company has a joint marketing agreement
with Schwab Institutional Management ("Schwab"), pursuant to
which a specialized version of the Private Wealth Management(TM)
program is marketed to independent investment advisors who utilize
the services of Schwab. Currently, PMC is servicing Institutional
Channels in the United States, Canada and seven Latin American
countries with many institutional money managers participating
in the Company's wrap programs.
Allocation Manager(TM)
Allocation Manager(TM), introduced in late 1995 and as an operating
product during the third quarter of 1996, is a Windows-based
software program. The program is designed to aid in the
solicitation, sale, and servicing of mutual funds, variable
annuities, offshore investments and other selected financial
products. A highly-flexible program based upon theories of mass
customization, Allocation Manager(TM) has the capability of being
tailored for use by specific financial distribution channels
having their own proprietary product mix. This product assists
in guiding a wide range of investors through the complex process
of choosing an appropriate combination of mutual funds.
Allocation Manager(TM) was built with the intention of being
customized by PMC's existing and prospective clients, many of
whom have proprietary families of mutual funds. As a result,
Allocation Manager(TM) supports a broad range of financial products
and programs, both domestically and globally, and can be
customized to the individual requirements of Institutional
Channels.
A version of Allocation Manager(TM), called Fund Counselor, is
being marketed by NFCS. Under the Fund Counselor program, NFCS
will provide brokerage, clearing and custodial services and will
make the program available to its more than 225 bank, insurance
and financial planning broker/dealers. In addition, PMC is
currently pursuing similar relationships with other substantial
distributors and securities clearing firms and will market the
Allocation Manager(TM) platform within the Schwab system.
Based upon (i) the substantial growth in the mutual funds
industry over the last 15 years, (ii) investor trends in mutual
fund investment and (iii) industry expectations, management
believes PMC's existing expertise and operations will permit a
smooth integration of this new program with existing products and
services offered by the Company while expanding and diversifying
the distribution channels for such products and services.
Because the program also provides educational tutorials, training
modules and dynamic portfolio modeling, Allocation Manager(TM) is
much more than simply a "front-end" sales tool. It can be
positioned as a technology sale with licensing revenues to PTS or
it can be positioned, subject to applicable regulatory guidelines
and restrictions, as an investment management tool, allowing PMC
to receive asset-based pricing.
Managed Account Reporting Services
Management believes that as a result of the growth within the
fee-based financial advisory segment of the industry over the
past ten years, many institutions have been seeking ways to
improve their reporting capabilities. The Company's Managed
Account Reporting Service ("MARS") is used by financial
professionals in providing customers with the increasingly
important value-added services of portfolio performance reporting
and cost-based tax accounting. Essentially a service bureau/data
processing service, MARS leverages a PMC core competency,
allowing PMC to sell, on a stand alone basis, its attractive
monthly and quarterly reports.
MARS provides detailed statements that include comprehensive
management reporting, account reconciliation and cost-based
accounting on a full-accrual basis. In addition, PMC provides
full color, quarterly performance reports detailing the
investor's objectives and performance of each investment
strategy, money manager or mutual fund, as well as the entire
portfolio.
During 1996 PMC entered into an agreement with National Financial
Services Corporation, an affiliate of Fidelity Management and
Research ("NFSC"), to manage NFSC's newly created performance
reporting service called MAPS Tool Box ("MAPS"). MAPS provides
NFSC's correspondents with access to high quality, quarterly
performance reports and tax lot, cost basis and fully accrued
account statements. This service is targeted at high net worth
investors managed by financial planners and financial consultants
who use the securities clearing services of NFSC. MARS is also
being marketed within the Schwab system to the many investment
advisors that use Schwab's custodial services.
Style Manager Asset Management Products
Style Manager is a family of discretionary asset management
products which recommend strategies for the periodic rebalancing
of both institutional and retail investor portfolios. Through
the use of Style Manager , clients portfolios are periodically
rebalanced through the rotation of U.S. equity styles (i.e.,
growth and value companies and large, mid and small
capitalization companies), with the intention of capturing
superior performance that results from taking advantage of
certain cyclical sector inefficiencies in the U.S. equity
markets. Recommended shifts in equity allocations are designed
to move assets away from under-performing sectors into those
likely to perform best. Although Style Manager recommends
shifts within the U.S. equity markets, it does not recommend
shifts between macro asset classes such as stocks, bonds and
cash, thus the program is not a market timing program as the term
is generally used. Currently, three Style Manager versions have
been developed.
Portfolio Brokerage Services, Inc.
Portfolio Brokerage Services, Inc. ("PBS"), a wholly owned
subsidiary of the Company, is registered as a broker/dealer with
the NASD and in all U.S. jurisdictions. PBS executes security
transactions for certain of PMC's privately managed account
programs on behalf of its customers through the customer's
custodian bank on a delivery vs. payment basis. A self-clearing
broker/dealer, substantially all trading activity of PBS is
unsolicited and initiated by the independent money managers used
in PMC's Private Wealth Management(TM) program. Managers make all
buy and sell decisions and place most orders with PBS for
execution. PBS executes substantially all trades through
third-party market makers. All transactions are effected on an
agency basis.
Portfolio Technology Services, Inc.
Portfolio Technology Services, Inc. ("PTS"), a wholly owned
subsidiary of the Company, is a technology company dedicated to
assisting the Company in providing innovative products to the
financial services industry. PTS leverages the product knowledge
of PMC to design and build integrated product solutions to meet
the challenge of consolidating products and pricing in multiple
segments of the financial services industry. As its primary
contribution to the Company, PTS has developed the sales
workstation platform used for Allocation Manager(TM) and
communication interfaces to multiple custodial systems. PTS
licenses its technology and provides customization services in
support of the Company's relationship with its Institutional
Channels. The Company estimates that it has spent approximately
$520,000 for research and development activities in its last two
fiscal years. Customers bear the cost of such activities
directly when software is customized for their particular
requirements. Payments by customers for this purpose during the
last two fiscal years approximated $90,000.
<PAGE>
Significant Relationships
Most of the Company's gross revenues are generated by fees from
the Company's Private Wealth Management(TM) investment advisory
programs. The programs are marketed and sold by Institutional
Channels and Independent Channels either under the Company's name
or under the "private label" of such channel. The Company's
private-label relationship with CISC accounted for approximately
18% of the Company's gross revenues during 1996. CISC recently
restructured its business, which restructuring has materially and
adversely affected the gross revenues derived from that
relationship during 1996. While the Company has no reason to
believe that its current investment advisory relationships will
not continue to generate revenues for the Company consistent with
prior years, other than that with CISC as discussed above, there
can be no assurance that such will be the case. Assets under
management for CISC and related revenues have remained stable
since completion of the CISC restructuring.
Pursuant to a joint marketing agreement between the Company and
Schwab, a specialized version of the Private Wealth Management(TM)
program is being marketed as an optional additional service to
independent registered investment advisors ("RIAs") who utilize
the services of Schwab. Schwab provides custody and clearing
services for independent RIAs. With respect to Schwab
Institutional Management's RIA customers who determine to use the
Company's products and services, Schwab 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.
The Company targets other means of distribution, and has executed
selling agreements with new Institutional Channels for its
products. Examples of the new relationships include MONY
Securities Corporation ("MONY") and Farwest Advisory Services,
Inc., the investment advisory affiliate of Investment Centers of
America ("Farwest"). MONY will use Allocation Manager(TM) to sell
its proprietary fund family, The Enterprise Funds, while Farwest
will market PMC's "off-the-shelf" program to sell mutual funds
selected by PMC.
Competition
In offering services through its Institutional and Independent
Channels, the Company competes with other firms that offer wrap
and managed account programs. These distribution channels in
turn compete with banks, insurance companies, large securities
brokers and other financial institutions which offer wrap or
managed account programs to the public. The Company believes
that firms compete in this market primarily on the basis of
service, since the wrap fees charged by others are similar to
those charged by the Company. While a number of firms each
provide a portion of the services provided by the Company through
its Institutional Channels, the Company believes it is one of a
few firms offering integrated services to customers. Firms that
compete with the Company in providing services to its Independent
Channels and Institutional Channels have more financial resources
and greater recognition in the financial community than the
Company. Competitors may reduce the fees charged for wrap or
managed account programs or pursue other competitive strategies
that could have an adverse impact on the Company.
The Company's success is in large part a function of the
Independent Channels and Institutional Channels through which its
services are offered to others. There are many alternatives to
wrap programs that are being offered to the public, such as life
cycle funds, asset allocation funds, portfolio strategies and
third-party asset allocation services, and these services are
competitive with those offered by the Company. As financial
institutions continue to grow and build in-house asset
administration service capabilities, some will be able to provide
these services internally rather than using outsourcing
providers. Competitors may succeed in developing products and
services that are more effective than those that have been or may
be developed by the Company and may also prove to be more
successful than the Company in developing these products and
marketing these services to third-party asset managers. The
Company does not offer its products online because its does not
believe the nature of its products and services are compatible
with that method of distribution.
Government Regulation
The Company's business falls entirely within the securities
industry, an industry which is heavily regulated by the federal
and state governments. New regulatory changes affecting the
securities industry could adversely affect the Company's
business. In addition, as an investment adviser and a
broker/dealer, the Company's subsidiaries are subject to
regulation by the Commission, the NASD and state regulatory
agencies. Consequently, the Company could become subject to
restrictions or sanctions from the Commission, the NASD or such
state regulatory agencies. It is impossible to predict the
direction future regulations will take or the effect of such
regulations on the Company's business.
Corporate History
Acquisition of Schield Management Company
In September 1993 Portfolio Management Consultants, Inc. ("PMC")
merged with Schield Management Company ("Schield"), a publicly
traded market timing firm, in a share exchange. In that
transaction, all operating assets of Schield were divested prior
to the merger and it was treated as a reverse acquisition of
Schield by PMC. Schield's name was changed to PMC International,
Inc. and PMC became a wholly owned subsidiary of the Company,
with PMC's shareholders receiving shares in the publicly held
company.
SEC Investigation and Settlement
During November 1993, the staff of the Commission began an
examination of PMC and in January 1994, the Commission issued a
"Formal Order of Investigation." In April 1994, the staff of the
Commission made a formal enforcement recommendation against PMC,
its President Mr. Kenneth S. Phillips and its former Chief
Executive Officer, Mr. Marc Geman. Mr. Geman terminated his
association with the Company to pursue other interests at the
closing of the initial Bedford Loan (as hereinafter defined) in
July 1995. The recommendation alleged that PMC and such officers
had violated anti-fraud provisions of the Securities Act, the
Exchange Act and the Investment Adviser's Act of 1940, and the
record keeping requirements of the Exchange Act.
Over the course of the following two years the Company committed
significant resources to its defense and the defense of its
officers. The case addressed issues associated with disclosures
and standards of "best execution" in advisory and wrap programs.
The investigation adversely affected the Company's new business
development activities during the period, as very few firms were
willing to develop relationships with the Company while an
enforcement recommendation was pending.
On June 27, 1996, PMC and Mr. Phillips announced that they had
reached a settlement agreement with the Commission. Pursuant to
the settlement agreement, PMC and Mr. Phillips, without admitting
or denying the Commission's allegations, consented to an Order
whereby PMC agreed to engage a compliance executive and to refund
net principal trading profits together with prejudgment interest
thereon, in an amount to be determined by an independent
accountant. The net trading profits were determined to be
$457,000, plus $146,000 of interest through the date of payment.
The refund process was completed in May 1997. In addition, Mr.
Phillips agreed to a censure and payment of a $25,000 fine.
On June 27, 1996, administrative proceedings were instituted
against Mr. Geman, as an individual, by the Commission in
connection with the above described investigation. A hearing was
held before an administrative law judge on November 5 and 6,
1996. As of March 15, 1997, the Company was not aware of any
ruling in the matter.
Bedford
In July 1995, the Company entered into a transaction with Bedford
pursuant to which Bedford loaned $1.2 million to the Company and
received an option to loan up to an additional $1.8 million to
the Company for a specified period of time and pursuant to
certain call provisions. Each dollar loaned carried a ten-year
warrant to purchase one share of the Common Stock at an exercise
price of $1.00 per share. In connection with this funding and
the related shareholder and investment agreements, Bedford
received certain rights including, but not limited to, the right
to elect two of the Company's five directors, the right to
receive options that mirrored certain issuances or option grants
by the Company, and a security interest in all assets of the
Company and its subsidiaries. Contemporaneously with the closing
of the July 1995 transaction with the Company, Bedford also
purchased 1.0 million shares of Common Stock from Mr. Geman, the
former chief executive officer of the Company who was a subject
of the investigation by the staff of the Commission. Between
July 1995 and July 1996, the Company obtained the full $3.0
million financing from Bedford and certain assignees of Bedford
(the "Bedford Loans").
In addition, the Company granted to Bedford certain other rights
in connection with future debt and equity financings which
included a right of first negotiation regarding future fundings,
a 30-day exclusive negotiation period, and a right of first
refusal to match unsolicited offers for financing. The Company
also agreed to pay a $100,000 annual monitoring fee to Nevcorp
Inc., which is owned by J.W. Nevil Thomas, who has been
designated by Bedford to serve on the Company's Board of
Directors.
The Company's relationship with Bedford was restructured in
December 1996. See "December 1996 Restructuring."
December 1995 and June 1996 Offerings
In December 1995 and January 1996, the Company issued a total of
482.5 units through a private offering (the "December 1995
Offering"), with each unit consisting of a convertible promissory
note with a principal amount of $1,000 and a warrant to purchase
1,000 shares of common stock at an exercise price of $1.00 per
share. During June 1996 the Company issued an additional 1,017.5
units through another private offering (the "June 1996 Offering")
under substantially the same terms. These private offerings were
issued primarily to employees, business associates and affiliates
of the Company or Bedford. The purchasers of units in the
December 1995 and June 1996 Offerings received registration
rights with respect to the shares of Common Stock underlying the
warrants.
Phillips & Andrus, LLC; KP3, LLC
Phillips & Andrus, LLC, a Colorado limited liability company
("P&A"), was formed in July 1995 to acquire 1,643,845 shares of
Common Stock from Mr. Geman in exchange for a promissory note
issued to Mr. Geman in the amount of $2,015,000. The promissory
note was secured by the Common Stock acquired. While Mr.
Phillips, President and Chief Executive Officer of the Company,
and David L. Andrus, Executive Vice President of the Company,
were the members of P&A, substantially all of the membership
interests in P&A were owned by Mr. Phillips. The Company and
Messrs. Phillips and Andrus believed that it would be in the
Company's interest that Mr. Geman's involvement with the Company
and direct ownership interest in Common Stock be eliminated. In
October 1996, affiliates of Bedford loaned P&A funds to make the
initial interest payments on the note owed to Mr. Geman. In
December 1996, after notifying its shareholders of the proposal
to do so, the Company loaned a total of $250,000 to P&A to repay
principal owed under the promissory note to Mr. Geman. These
loans permitted P&A to avoid defaults under the promissory note
owed to Mr. Geman.
In January 1997 P&A was liquidated and the assets of P&A,
consisting of the 1,643,945 shares of Common Stock, were
transferred, subject to certain liabilities, to KP3, LLC, a
Colorado limited company ("KP3"), the members of which are Mr.
Phillips and a custodian for Mr. Phillips' son. Mr. Phillips
owns substantially all of the membership interests in KP3.
Bedford and certain of its affiliates have an option, exercisable
through July 26, 2000, to acquire a total of 335,000 shares of
Common Stock currently owned by KP3 for an aggregate purchase
price of $410,637.85, increasing at a rate of 9% per annum
subsequent to July 27, 1995.
November 1996 Bridge Loan
In November 1996, the Company borrowed $250,000 (the "November
1996 Bridge Loan") to fund its working capital requirements
pending closing of the December 1996 Offering (as defined
below). Half of the loan was provided by Keefe, Bruyette &
Woods, Inc. ("KBW"), placement agent in the December 1996
Offering, and the balance by certain members of management of the
Company and a subsidiary of Bedford. The lenders received
five-year warrants to purchase an aggregate of 25,000 shares of
Common Stock. The warrants have an exercise price of $1.625 per
share. The lenders received registration rights with respect to
the Common Stock to be issued upon exercise of the warrants. The
November 1996 Bridge Loan was repaid in December 1996 from the
proceeds of the December-1996 Offering.
December 1996 Offering
In December 1996 the Company completed a private placement of
5,177,000-shares of Common Stock at a price of $2.125 per share
(the "December 1996 Offering"). A portion of the proceeds of the
December 1996 Offering were used (i) to repay interest due and
owing on the promissory notes issued in connection with the
December 1995 and June 1996 Offerings, including the notes held
by the father and brother of Mr. Phillips, the Company's Chief
Executive Officer, Mr. Andrus, the Company's Executive Vice
President, and certain employees of the Company, (ii) to repay
interest due and owing under the Bedford Loans, (iii) to repay a
portion of the principal on the Bedford Loans and (iv) to repay
the November 1996 Bridge Loan (including the notes held by Mr.
Phillips, Mr. Andrus and certain other members of the Company's
management).
December 1996 Restructuring
Simultaneous with the closing of the December 1996 Offering, the
Company completed a restructuring of its debt and a partial
restructuring of its outstanding Preferred Stock. The
restructuring involved (i) the payment of all outstanding
interest on the Bedford Loans, the repayment to Bedford and its
assignees of $1,976,250 of outstanding principal on the Bedford
Loans, the exercise by Bedford and its assignees of warrants to
purchase 1,023,750 shares of Common Stock and the delivery by
Bedford and its assignees of canceled promissory notes in the
amount of $1,023,750 in satisfaction of the exercise price of the
warrants, the cancellation of the remaining warrants to Bedford
and its assignees, and the issuance to Bedford and its assignees
of new warrants to purchase up to 150,000 shares of Common Stock
at an exercise price of $2.125 per share; (ii) the issuance of
1,500,000 shares of Common Stock upon the exercise of warrants
issued to investors in connection with the Company's private
placement of promissory notes and warrants in the December 1995
and June 1996 Offerings, the delivery of canceled promissory
notes in the aggregate principal amount of $1,500,000 in
satisfaction of the exercise price of such warrants, the payment
by the Company of all outstanding interest due and owing on such
notes as of the exercise date and the issuance to the holders of
such warrants of new warrants to purchase up to 150,000 shares of
Common Stock; (iii) the repayment of the November 1996 Bridge
Loan, and (iv) the conversion of 173,120 shares of Preferred
Stock into 238,043 shares of Common Stock, resulting in a
reduction in the Company's cumulative dividend obligation to the
holders of Preferred Stock from $583,576 as of September 30, 1996
to $322,700 as of December 31, 1996. The conversion of
additional shares of Preferred Stock into Common Stock was
effected in January 1997. The new warrants issued by the Company
to Bedford and others pursuant to clauses (i) and (ii) are
referred to hereafter as the "New Warrants."
The New Warrants are exercisable over a period of five years, at
an exercise price of $2.125 per share. Registration rights were
granted with respect to the Common Stock received upon the
exercise of the old warrants and the shares of Common Stock
underlying the New Warrants. The New Warrants contain adjustment
provisions relating to the exercise price per share and the
number of shares of Common Stock to be issued upon their exercise
in the event of issuances of additional shares of Common Stock
(including through the issuance of options, rights or warrants to
purchase Common Stock or securities convertible into Common
Stock) by the Company at a price below market price, certain
extraordinary dividends and distributions on the Common Stock,
stock splits or other reclassifications of the outstanding shares
of Common Stock, and any merger, consolidation or reorganization
involving the Company or a transfer by the Company of
substantially all of its assets or properties.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion provides information that the Company
believes is relevant to an assessment and understanding of its
results of operations. It should be read in conjunction with the
Financial Statements and Notes included elsewhere herein. This
discussion contains "forward looking statements" within the
meaning of the federal securities laws, including statements
regarding opportunities for growth from expanded use of existing
distribution channels and expanded use by existing distribution
channels of the Company's products and services and similar
expressions concerning matters that are not historical facts.
These statements are subject to risks and uncertainties that
could cause results to differ materially from those expressed in
the statements.
General
The Company develops, markets, and manages sophisticated
investment management products and services. Not a money manager
itself, the Company provides products and services to facilitate
the selection and/or monitoring of unaffiliated money managers or
mutual funds for customers of the Company's distribution channels
depending upon the size, sophistication and requirements of such
customers. The Company's products and services address
investment suitability and diversification, asset allocation
recommendations, portfolio modeling and rebalancing,
comprehensive accounting and portfolio performance reporting.
The Company's revenues are realized primarily from fees charged
to clients based on a percentage of managed assets and to a
lesser extent from consulting fees for certain advisory services
and licensing fees from its software products. Fees based upon
managed assets typically range from 20 to 250 basis points per
year, based upon a number of factors such as the size of account
and scope of services provided. At the present time, the
principal factors affecting the Company's revenues are whether
the Company adds or loses clients for its investment management
services, the performance of equity and fixed income markets, and
the type and size of accounts managed by the Company and related
differences in fees charged.
Results of Operations
1996 Compared to 1995
Revenues. Investment management fees for 1996 were $9.63
million, compared to $8.63 million in 1995. The increase of
$1 million or 12% for 1996 over 1995 was due primarily to an
increase in assets under management. Trading income for 1996
decreased approximately 52% from $94,948 in 1995 to $44,787 in
1996, primarily because the Company stopped receiving payments
for order flow in 1996. Other income (which consists primarily
of 12b-1 fees and interest income) decreased approximately 8%
from $444,643 in 1995 to $407,102 in 1996, primarily because the
principal balance of the Company's note receivable decreased and
a lower portion of managed assets were held as cash balances
(thereby resulting in lower 12b-1 fees).
Investment Manager and Other Fees
Investment manager and other fees increased $0.44 million or 9%
from $5.14 million in 1995 to $5.58 million in 1996. The
increase was due primarily to an increase in assets under
management.
Salaries and Benefits; General and Administrative
Salaries and benefits increased nearly $0.97 million to nearly
$3.49 million for 1996 from $2.52 million for 1995. The increase
was due primarily to the increased staffing requirements
associated with the development, release and support of the
Company's new products. At December 31, 1996 the Company
employed approximately 53 employees as compared with
approximately 43 employees at December 31, 1995. New staff was
added in the areas of marketing, sales, software programming and
systems support. General and administrative expense increased
$282,114 to $1,176,775 for 1996 from $894,661 for 1995. The
increase was due primarily to costs related to increased staffing.
Advertising and Promotion
Advertising and promotion expense increased $200,664 to $830,140
for 1996 from $629,476 for 1995. The increase was due primarily
to increased costs associated with the development, release and
support of the Company's new products, including increased costs
in such areas as telecommunications, printing, reference
materials and publications. The Company also increased its
expenses for marketing seminars and conventions, incurring
approximately $306,000 in such expenses during 1996 compared to
$113,000 during the same period in 1995.
Software Development Costs
Software development costs increased $75,592 to $132,392 for 1996
from $56,800 for 1995. These costs related primarily to the
Company's implementation of a portfolio accounting system and the
customization and maintenance of the Company's proprietary
software. The portfolio accounting system is not expected to be
fully operational until the third quarter of 1997. The Company
anticipates that costs paid to outside venders for portfolio
accounting services will decrease upon implementation of this
system and that costs for software development for this purpose
will decrease after this system has been implemented. The
Company will continue to incur software development costs for the
customization and maintenance of the Company's proprietary
products and in connection with the amortization of software
development costs previously capitalized by the Company.
Settlement Expense
Settlement expense (which represents the refund of principal
trading profits and related interest due in connection with the
settlement of an investigation of the Company by the Commission)
decreased $310,000 to $155,000 for 1996 from $465,000 for 1995.
The Company will not incur any settlement expense in 1997.
Other Expense
Occupancy and equipment costs increased $0.52 million to nearly
$1.15 million for 1996 from $0.63 million for 1995. The increase
was due primarily to the increased costs associated with the
implementation of a brokerage trading system, the purchase and
development of the portfolio accounting system referred to above
and the development, release and support of the Company's new
products, with approximately 55% of this increase attributable to
the addition of non-capitalized hardware and software. The
Company's expenses also reflect increased equipment leases and an
annual adjustment to the Company's office lease for common
operating costs. Clearing charges and user fees increased
$46,724 to $813,239 for 1996 from $766,515 for 1995. The
increase resulted from increased trading activity in the
Company's managed assets. Professional fees increased $278,226
to $763,086 for 1996 from $484,860 for 1995. The increase was
due primarily to 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. Legal and accounting fees were
also incurred in connection with settlement of the Commission's
investigation of the Company, ensuring regulatory compliance by
the Allocation Manager(TM) mutual fund software program and in the
establishment of complex relationships with several new clients.
The Company expects only minimal fees to be incurred in 1997 in
connection with the Commission's investigation of the Company.
Liquidity and Capital Resources
The Company's operating losses incurred over the last several
years resulted in the need for significant funding. During the
first three quarters of 1996, the Company borrowed an aggregate
of $1.8 million from Bedford Capital Financial Corporation
("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. In
November 1996, the Company borrowed an additional $250,000 as
bridge financing to fund working capital shortfalls through the
completion of a private placement of Common Stock. The loans
from Bedford, the private placements, and the bridge financing
each involved the issuance of warrants to purchase Common Stock.
Private Placement and Restructuring
In December 1996 the Company completed a private placement of
5,177,000 shares of Common Stock at a price of $2.125 per share.
Also in December 1996, the Company completed a restructuring of
its debt and a partial restructuring of its outstanding Preferred
Stock. The restructuring involved (i) the payment of all
outstanding interest on the Bedford loans, the repayment to
Bedford of $1,976,250 of outstanding principal on the Bedford
loans, the exercise by Bedford of warrants to purchase 1,023,750
shares of Common Stock and the delivery by Bedford of canceled
promissory notes in the amount of $1,023,750 in satisfaction of
the exercise price of the warrants, the cancellation of Bedford's
remaining warrants, and the issuance to Bedford of new warrants
to purchase up to 150,000 shares of Common Stock at an exercise
price of $2.125 per share; (ii) the issuance of 1,500,000 shares
of Common Stock upon the exercise of warrants issued to investors
in connection with the Company's private placement of promissory
notes and warrants in December 1995/January 1996 and May/June
1996 and the delivery of canceled promissory notes in the
aggregate principal amount of $1,500,000 in satisfaction of the
exercise price of such warrants, payment by the Company of all
interest accrued on such notes as of the exercise date, and the
issuance of new warrants to purchase an aggregate of up to
150,000 shares of Common Stock to such investors; (iii) the
repayment of the November 1996 bridge loan, and (iv) the
conversion of 173,120 shares of Preferred Stock into 238,043
shares of Common Stock, resulting in a reduction in the Company's
cumulative dividend obligation to the holders of Preferred Stock
from $583,576 as of September 30, 1996, to $322,700 as of
December 31, 1996. The conversion of additional shares of
Preferred Stock into Common Stock was effected in January 1997.
As a result of the private placement and restructuring, the
Company's shareholders' equity increased from a $3,773,535
deficit at September 30, 1996 to $6,270,537 at December 31, 1996
and cash increased from $701,160 at September 30, 1996 to
$6,499,000 at December 31, 1996. The Company anticipates that
the balance of the proceeds from the private placement will be
used for its working capital requirements for the first and
second quarters of 1997 and thereafter and for future capital
investments by the Company.
Most of the Company's ongoing losses and additional cash flow
requirements relate to its addition of staff and incurrence of
capital expenditures in anticipation of establishing new
distribution relationships. The Company recognizes that there
generally is a substantial delay between when costs such as these
are incurred and when the related revenues are recognized. While
there can be no assurance such will be the case, the Company
anticipates that its use of cash will increase marginally in the
second quarter before decreasing in the third and fourth quarters
of 1997 as cash is received from any new distribution
relationships that are established. Future cash needs will
depend largely upon the Company's success in developing new
customer relationships that result in increased assets managed
using the Company's products and services.
Uses of Cash
In January 1997, the Company assisted Kenneth S. Phillips, the
Company's President and Chief Executive Officer, by pledging cash
collateral in the amount of $1,890,000 to a bank in connection
with the bank's loan to KP3, LLC, a limited liability company
("KP3"), the members of which are Mr. Phillips and a custodian
for Mr. Phillips' son. The loan was made to KP3 for the purpose
of financing payment of the deferred portion of the purchase
price of 1,643,845 shares of the Company's Common Stock owned by
KP3 that were purchased from Mr. Marc Geman, a former officer of
the Company, at the time he terminated his association with the
Company. The Company agreed to provide collateral for the loan
for up to two years and to lend funds to KP3 to service interest
payments on the loan during that period. In March 1997, the
Company lent $32,000 to KP3 to service interest payments on the
loan. The total amount of loans and pledges of collateral
authorized may not exceed $2.0 million. The pledge by the
Company of collateral for the loan permitted the deferred portion
of the purchase price of the Company's Common Stock to be paid to
Mr. Geman, thereby eliminating the possibility that Mr. Geman
could reacquire a substantial stock ownership in the Company.
In January 1997, the Company also assisted certain of its
employees, including one of its officers, by making loans to such
employees to refinance certain loans originally obtained by such
employees to acquire Common Stock of the Company from a
stockholder in a private sale. The purchase was originally
financed through a bank loan which came due on December 31,
1996. The loans by the Company to its employees are
collateralized by the stock originally acquired. Of the $142,093
loaned, a total of $46,300 was made to an officer of the Company.
Capitalized Software Development Costs
The Company has incurred significant costs during the past
several years in developing internal operational systems and in
developing, marketing and supporting its proprietary Allocation
Manager(TM) investment advisory software for use by professional
financial consultants and expects to have continuing costs in
1997 relating to the enhancement of Allocation Manager(TM). Most of
the costs incurred to establish the technological feasibility of
Allocation Manager(TM) were borne by unrelated individuals prior to
the product being introduced to the Company. The Company
incurred approximately $50,000 in research and development costs
relating to Allocation Manager(TM) that were expensed in 1995. All
subsequent costs incurred that were directly related to the
development of the software were capitalized. The Company
currently intends to capitalize all similar costs incurred in the
future. Capitalized costs are amortized over the economic life
of the software, which in this case is three years. It is the
Company's policy to amortize and evaluate software for net
realizable value on a product-by-product basis. The software
became available for sale during 1996, and the Company plans to
generate revenues from this product primarily from a continuing
fee based upon assets under management of the end users of the
software and, to a lesser extent, license fees, customization
fees and annual maintenance fees. The capitalization of computer
software costs ceased when the product was available for general
release to customers. Subsequent cost incurred to enhance and
redesign existing software products are capitalized and such
capitalization ceases when the enhanced or redesigned products
are released. Costs of maintenance and customer support are
charged to expense when the related revenue is recognized, or
when those costs are incurred, whichever occurs first.
The Company has also capitalized the acquisition costs of
software acquired from third parties in connection with the
development of its internal systems. See "Results of
Operations 1996 Compared to 1995 Software Development Costs."
Other Matters
In seeking to capture greater market share, the Company has
introduced restructured and unbundled pricing which in some
instances results in lower pricing for some of its services in
certain of its distribution channels. The Company may make
additional adjustments in the future. As a result of the
restructured pricing, gross revenues as a percentage of assets
under management may decrease.
The Company anticipates that it will continue to experience
operating losses until such time, if ever, as investment
management fees from managed assets and consulting and license
fees increase sufficiently to cover the Company's increasing
operating expenses. While the Company believes that it has
sufficient capital resources to meet its ongoing funding
requirements, until its products and services can generate
sufficient revenues to offset costs, there can be no assurance
that the Company's products and services will be successful, that
they will generate adequate revenue to meet the Company's capital
needs or that the Company will become profitable in the future.
ITEM 7. FINANCIAL STATEMENTS.
See the financial statements attached to this report which starts
at page F1.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid by the Company and its subsidiaries to the
Company's Chief Executive Officer and to each of its other
executive officers at the end of 1996.
Summary Compensation Table
Annual Annual
Compensation Compensation
Options
Name and Principal Fiscal Salary Granted(1)
Position Year
Kenneth S. Phillips 1996 $252,000 50,000
President, Chief 1995 228,124
Executive Officer 1994 241,774
David L. Andrus 1996 $240,000 1,050,000
Executive Vice 1995 40,000
President
Vali Nasr 1996 $139,015 50,000
Chief Financial 1995 126,475
Officer & Treasurer 1994 128,262
(1) The shares of Common Stock to be received upon the
exercise of all stock options granted during the period
covered by the Table.
During the year ended December 31, 1996, the Company granted to
its Chief Executive Officer and the other executive officers listed
in the Summary Compensation Table options to acquire a total of
1,150,000 shares of Common Stock as set forth in the following table.
Option Grants in
Last Fiscal Year
Percentage
of Total
Number of Options
Shares Granted to
Name Underlying Employees Exercise Expiration
Options in Price Date
Granted Fiscal Year
Kenneth S. Phillips 50,000 4.2% $1.00 6/7/2001
David L. Andrus 800,000 87.5% $1.5625 (1)
200,000 $2.125 12/17/2002
50,000 $1.00 6/7/2001
Vali Nasr 50,000 4.2% $1.00 3/31/2001
_______________________
(1) Options will expire 24 months after Mr. Andrus leaves the
employ of the Company.
The following table sets forth certain information with respect
to options exercised during the year ended December 31, 1996 by
those officers listed in the Summary Compensation Table.
Aggregated
Option/SAR
Exercises in Last
Fiscal Year and
Fiscal Year End
Option/SAR Values
Number of
Securities Value of
Shares Underlying Unexercised
Name Acquired Value Unexercised Money
on Realized Options at FY Options at
Exercise End FY End
Exercisable Exercisable
/Unexercisable /Unexercisable
Kenneth S. Phillips 0 0 20,000/30,000 $22,500/$33,750
David L. Andrus 0 0 295,000/755,000 $168,830/$513,750
Vali Nasr 0 0 50,000/0 $56,250/$0
Compensation of Directors
During 1996, the Company did not pay its employee directors for
attending board meetings. Each of the three outside directors
received a $5,000 annual retainer and a $500 fee for each meeting
attended. The Company reimburses all of its directors for travel
and out-of-pocket expenses in connection with their attendance at
meetings of the Board of Directors. On June 7, 1996, each member
of the Board of Directors was granted options to purchase 50,000
shares of Common Stock at an exercise price of $1.00 per share.
Such options expire five years from the date of grant and vest
20% at such time as the average bid and offer price for the
Common Stock equals $1.00, $2.00, $3.00, $4.00 and $5.00,
respectively, for twenty consecutive trading days.
Employment Agreements
The Company has employment agreements with Mr. Phillips, its
President and Chief Executive Officer, and Mr. Andrus, its
Executive Vice President. The Agreement with Mr. Phillips is
dated July 26, 1995, and is for a three year-term. Either party
may terminate the agreement upon 90 days' prior notice. The
agreement provides for a minimum salary of $240,000 ($300,000 if
the Company has pre-tax profits of at least $1,000,000), 40% of
the annual bonus pool (equal to 10% of the Company's pre-tax
profits), a car allowance, and participation in the Company's
other benefit plans. If the Company terminates the agreement
without cause, it will be obligated to make severance payments to
Mr. Phillips in an amount equal to two-years' compensation. In
addition, the agreement provides that any option granted to Mr.
Phillips vest immediately upon his death or upon a change in
control of the Company.
The Agreement with Mr. Andrus is dated July 26, 1995, and was
amended in December 1996. It provides for a three year-term
ending November 1998. Either party may terminate the agreement
upon 90 days' prior notice. The agreement provides for a minimum
salary of $240,000, options to acquire 1,000,000 shares of Common
Stock, and participation in the Company's other benefit plans.
If the Company terminates the agreement without cause, it will be
obligated to make severance payments to Mr. Andrus in an amount
up to one-year's compensation. In addition, the agreement
provides that all options granted to Mr. Andrus vest immediately
upon a change in control of the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this amendment number 1 to Form 10-KSB to be signed on its behalf
by the undersigned, thereunto duly authorized.
PMC INTERNATIONAL, INC.
By: /s/____________________________
Kenneth S. Phillips
President, Chief Executive Officer
By: /s/____________________________
Vali Nasr, Treasurer, Principal
Financial and Accounting Officer
Date: October 31, 1997
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONTENTS
Financial statements for the years ended
December 31, 1996 and 1995
Independent Auditors'
Report F-2
Consolidated Balance
Sheets F-3
Consolidated Statements of
Operations F-4
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) F-5
Consolidated Statements of Cash
Flows F-6 - F-7
Notes to Consolidated Financial
Statements F-8 - F-18
F-1 of 18: Financial Statements Section
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
PMC International, Inc.
We have audited the accompanying consolidated balance sheets of PMC
International, Inc. and its subsidiaries (the "Company") as of December
31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
SPICER, JEFFRIES & CO.
Denver, Colorado
March 1, 1997
F-2 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
----- ------- --------
CASH AND CASH EQUIVALENTS (See Note 7) $6,499,390 $ 313,885
RECEIVABLES:
Investment management fees 145,714 39,733
Other receivables (See Note 7) 160,483 63,210
FURNITURE AND EQUIPMENT, at cost, net of
accumulated depreciation of $689,227 and 936,234 688,233
$355,231
SOFTWARE DEVELOPMENT COSTS, at cost, net of
accumulated amortization of $203,526 in 1996 511,123 419,617
(Note 1)
PREPAID EXPENSES AND OTHER ASSETS 340,006 220,605
LONG TERM NOTE RECEIVABLE (Note 2) 570,494 897,167
======= =======
$9,163,444 $2,642,450
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Accounts payable $ 839,095 $1,442,694
Accrued expenses 535,520 707,897
Other liabilities 730,909 571,389
deferred revenue 552,868 411,347
Notes payable (Note 6) 14,694 1 647,470
Obligations under capital leases (Note 7) 219,821 75,490
--------- --------
TOTAL LIABILITIES 2,892,907 4,856,287
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (DEFICIT) (Note 3):
Preferred stock - no par value - authorized
5,000,000 shares; issued and outstanding,
175,897 and 349,017 shares 439,742 872,543
Common stock, $.01 par value - authorized,
50,000,000 shares, issued and outstanding 365,876 276,716
Additional paid-in capital 16,132,256 3,302,749
Deficit (10,667,337) (6,665,843)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 6,270,537 (2,213,837)
----------- ----------
$9,163,444 $ 2,642,450
F-3 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1996 AND 1995
1996 1995
REVENUE:
Investment management fees (Note 1) $9,634,992 $8,632,888
Trading income 44,787 94,948
Other income 407,102 444,643
-------- --------
Total revenue 10,086,881 9,172,479
EXPENSES:
Investment manager and other fees 5,580,846 5,139,613
Salaries and benefits 3,487,811 2,524,936
Clearing charges and user fees 813,239 766,515
Advertising and promotion 830,140 629,476
General and administrative 1,176,775 894,661
Software development costs 132,392 56,800
Occupancy and equipment costs 1,149,084 630,833
Professional fees 763,086 484,860
Settlement expense 155,000 465,000
---------- ---------
Total expenses 14,088,373 11,592,694
NET LOSS $(4,001,492) $(2,420,215)
NET LOSS PER COMMON SHARE (Note 1) $ (.71) $ (.46)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (Note 1) 5,702,036 5,546,522
F-4 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, 1996 AND 1995
<CAPTION>
Additional Preferred Total
Common Stock Paid-In Stock Shareholders'
--------------- ------ Equity
Shares Amount Capital Shares Amount Deficit (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
------- ------ ------- ------ ------ -------- --------
BALANCES
December 31,
1994 as
previously
reported $5,540,501 $276,564 $3,637,689 $349,017 $872,543 $(4,274,803) $511,993
Adjustment for
the
cumulative
effect on
prior years
for the
correction of
an error - - (350,000) - - 29,173 -
(Note 1)
BALANCES
December 31,
1994 as
restated 5,540,501 276,564 3,287,689 349,017 872,543 (4,245,630) 191,166
Issuance of
stock to 401K
plan 15,212 152 15,060 - - - 15,212
Net loss - - - - - (2,420,215) (2,443,555)
------- ------ ------- ------ ------ -------- --------
BALANCES
December 31,
1995 5,555,713 276,716 3,302,749 349,017 872,543 (6,665,845) (2,213,837)
Stock options
exercised 1,000 10 1,365 - - - 1,375
Notes payable
converted to
common stock 3,500,000 34,999 2,488,751 - - - 2,523,750
Preferred stock
converted to
common stock 238,043 2,381 430,420 (173,120) (432,801) - -
Issuance of
stock 5,177,000 51,770 10,949,355 - - - 11,001,125
Less stock
issuance costs - - (1,040,384) - - - (1,040,384)
Net loss - - - - - (4,001,492) (4,001,492)
======= ====== ======= ====== ====== ======== ========
BALANCES
December 31,
1996 $14,471,756 $365,876 $16,132,256 $175,897 $439,742 $(10,667,337) $6,270,537
======= ====== ======= ====== ====== ======== ========
</TABLE>
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1996 AND 1995
INCREASE (DECREASE) IN CASH
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,001,492) $(2,420,215)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 537,522 148,567
Accretion of discount on note receivable (67,181) (69,053)
Stock issued as compensation under 401K plan - 15,212
Changes in operating assets and liabilities
Investment management fees receivable (105,981) 32,085
Other receivables (97,273) 22,196
Prepaid expenses and other assets (119,401) 9,509
Accrued expenses (172,377) 103,805
Accounts payable (597,029) 729,837
Other liabilities 159,520 464,399
Deferred revenue 141 521 37,346
--------- --------
net cash used in operating activities (4,322,171) (926,312)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (376,574) (405,932)
Reduction of long-term note receivable 393,854 338,067
Reduction of secured demand note - 225,000
Cost of software development (295,022) (419,617)
-------- --------
Net cash used in investing activities (277,742) (262,482)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 3,125,000 1,925,000
Principal payments on notes payable (2,234,026) (322,530)
Principal payments on obligations under
capital lease (67,672) (14,709)
Principal payments on subordinated note
payable - (225,000)
Sale of common stock, less offering costs 9,960,741 -
Proceeds from exercise of stock options 1,375 -
--------- -------
Net cash provided by financing activities 10,785,418 1,362,761
---------- ---------
NET INCREASE IN CASH 6,185,505 173,967
CASH, at beginning of year 313,885 139,918
---------- --------
CASH, at end of year $6,499,390 $ 313,885
F-6 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
DECEMBER 31, 1996 AND 1995
INCREASE (DECREASE) IN CASH
(Continued)
1996 1995
--------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 367,180 $ 96,969
========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment via capital lease obligation $ 205,433 $ 90,199
========== ==========
Conversion of preferred stock to common stock $ 432,801 $ -
========== ===========
Loans payable converted to common stock $1,500,000 $ -
========== ===========
Conversion of notes payable to common stock $2,523,750 $ -
========== ===========
F-7 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 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 share exchange was completed on September 30, 1993 and as
a result of this transaction, PMC is a wholly owned subsidiary of PMCI.
The share exchange between Schield and PMC was treated as 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.
Subsequently, it was determined that due to the nature of this
transaction, goodwill should not have been recorded. Accordingly, the
balances of the additional paid-in capital and deficit at December 31,
1995, have been restated from amounts previously reported to reflect a
retroactive charge of $350,000 to additional paid-in capital for the
original goodwill recorded and a credit of $52,513 to deficit for the
amortization of such goodwill to that date. Of the amount charged to the
deficit, $23,340 (negligible per share) is applicable to 1995 and has
been reflected as a reduction of general and administrative expenses for
that year, the balance being charged to the deficit at December 31,
1994. The effect on the 1996 statement of operations would be to reduce
the net loss by $23,340 (negligible per share).
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 is registered as an investment adviser 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 ("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.
The accompanying 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. All intercompany accounts and
transactions have been eliminated in consolidation.
F-8 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Significant Accounting Policies
Revenue from investment management services is recorded as such revenue
accrue under the terms of the related investment management contracts.
Revenue from software customizations is recorded as such revenue accrues
under the terms of the related agreements. Revenue from software
maintenance is recorded as such revenue accrues under the terms of the
maintenance contracts. Software products are used in generating
investment management revenues and therefore are 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 Company has developed a windows-based software program for sale to
financial product distribution entities. The product is designed to
guide clients of these entities through the process of choosing
appropriate combinations of mutual funds for their own portfolios. The
majority of costs incurred to establish the technological feasibility of
this product were borne by unrelated individuals prior to the product
being introduced to the Company. Prior to achieving technological
feasiblilty in 1995, the Company incurred approximately $50,000 in
research and development costs after receiving the products from the
unrelated individuals. These costs have been included in the statement
of operations for 1995. All subsequent costs incurred directly related
to the development of the software were capitalized. Capitalized costs
are being amortized over the economic life of the software, which in this
case is three years. It is the Company's policy to amortize and evaluate
software for net realizable value on a product-by-product basis. The
software became available for sale during 1996. The Company's plans to
generate revenues from this product are four fold; license fees,
customization fees, a continuing fee equal to a percentage of assets
under management of the end users purchasing such software, and annual
maintenance fees. Costs of maintenance and customer support are charged
to expense when the related revenue is recognized, or when those costs
are incurred, whichever occurs first. The Company's policy is to
capitalize all software costs incurred in developing computer software
products until such products are available for release to customers.
Subsequent cost incurred to enhance and redesign existing software
products are capitalized and such capitalizations ceases when the
enhanced or redesigned products are released.
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.
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.
F-9 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The Company follows the intrinsic value based method of accounting as
prescribed by APB 25,
Accounting for Stock Issued to Employees, for its stock-based
compensation. Under the Company's stock option plan, the exercise price
is equal to the fair value of the options at the grant date and no
compensation cost is recognized.
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 the date of acquisition.
Net loss per share of common stock is based on the weighted average
number of shares of common stock outstanding. Common stock equivalents
are not included in the weighted average calculation since their effect
would be anti-dilutive. Dividends on cumulative preferred stock of
$22,455; $56,715; $57,166; and $133,430 for the periods ended March 31,
1997 and 1996, and December 31, 1996 and 1995, respectively, have been
added back to the net loss in computing the net loss per share.
The Company adopted the provisions of SFAS 121, Accounting for the
Impairment of Long-Lived and for Long-Lived Assets to Be Disposed Of, in
its financial statement's for the year ended December 31, 1996. The
adoption of SFAS 121 had no material affect on the Company's financial
statements.
The Company reviews its long-lived assets for impairment to determine if
the carrying amount of the asset is recoverable.
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
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 a credit to interest income over the life of the note using
the interest method. The principal balance of the note as of December
31, 1996 is $634,578 compared to its carrying amount of $570,494. While the
original transaction involved a transfer of operations by the Company to a
former employee who had been responsible for managing the operations, the
transaction was handled on an arms length basis. The Company did not
provide any guarantee of the obligations of the buyer and had no further
involvement with the business after the sale. Payments on the note
receivable have been made on a timely fashion in all material respects.
NOTE 3 - SHAREHOLDERS' EQUITY
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
F-10 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
NOTE 3 - SHAREHOLDERS' EQUITY (continued)
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.
As of January 15, 1997, cumulative dividends in arrears totaled
$322,700.
Common Stock
During December, 1996, the Company issued 8,916,043 shares of its common
stock through several issuances. First, a private placement was
completed whereby 5,177,000 shares were issued for cash of $11,001,125
less offering costs of $1,040,384. Secondly, convertible promissory
notes issued in December, 1995 and the first half of 1996 in the amount
of $1,500,000 were repaid and the proceeds were used to exercise warrants
for 1,500,000 common shares and 150,000 new warrants were issued to the
noteholders in connection therewith (see Note 6). Thirdly, in
connection with the shareholder note payable as described in Note 6,
warrants to purchase 1,023,750 shares of common stock were exercised for
cash of $1,023,750 and warrants to purchase 1,976,250 shares of common
stock were exchanged for 976,250 shares of common and 150,000 new
warrants. Additionally, certain preferred shareholders exercised their
conversion rights and exchanged 173,120 preferred shares for 238,043
shares of common.
NOTE 4 - INCOME TAXES
The Company has an unused net operating loss carryforward of
approximately $7,000,000 for income tax purposes, $1,200,000 expiring in
2009, $1,800,000 in 2010 and the remainder expiring in 2011. This net
operating loss carryforward may result in future income tax benefits of
approximately $2,800,000; however, because realization is uncertain at
this time, a valuation reserve in the same amount has been established.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1996 and 1995 are as follows:
1996 1995
------------ ----------
Deferred tax liabilities $ - $ -
Deferred tax assets
Net operating loss carry forwards 2,579,000 1,149,500
Legal settlement 233,300 175,000
--------- ---------
Total deferred tax assets 2,812,300 1,324,500
Valuation allowance for deferred tax assets$ (2,812,300) $(1,324,500)
---------- ----------
- -
The valuation allowance for deferred tax assets was increased by
$1,487,800 and $855,300 during 1996 and 1995, respectively.
F-11 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
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 December 31, 1996, PBS had net capital and net capital
requirements of $233,288 and $100,000, respectively. The Company's net
capital ratio (aggregate indebtedness to net capital) was .53 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 December 31, 1996.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
1996 1995
----------- -----------
8-1/2% note payable to shareholder, due July
26, 2000 interest payable 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). $ - $1,200,000
11.5% note payable to shareholder(s),
unsecured, due August 1, 1998, payable in
monthly installments of $832 including
interest. In 1996 and 1995, principal of
$8,535 and $6,159 mature. 14,694 22,470
9% notes payable to employees and unrelated
individuals, due December 29, 1996, principal
and interest payable on or before maturity
date, secured by a second lien on Company
assets. - 425,000
-------- ---------
$ 14,694 $1,647,470
========= ==========
The above $1,200,000 shareholder note payable is related to a financing
and stock purchase agreement which encompasses a series of transactions,
none of which are considered binding until certain criteria are met. 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 at $1.00 per share (see note 3) was also
received. In addition, the shareholder obtained an option to lend the
Company an additional $1,800,000 and received warrants similar to those
issued in connection with the initial loan. Through July 9, 1996, this
shareholder fulfilled its option and loaned the Company an additional
$1,800,000 and received 1,800,000 warrants to purchase common shares. On
December 24, 1996, the shareholder and the Company entered into an
agreement whereby (1) the Company would remit $1,976,250 against the
principal amount of the loan, (2) the shareholder would exercise warrants
to purchase 1,023,750 common shares at $1.00 per share to be used against
the remaining principal balance, and (3) the shareholder would exchange
its remaining warrants for 976,250 shares of common stock and 150,000
warrants to purchase common stock at $2.125 per share.
F-12 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
NOTE 6 - NOTES PAYABLE (continued)
During March, 1995, through a private offering, PMCI issued $300,000 of
convertible promissory notes bearing 15% interest per annum. These notes
were repaid in July 1995. In addition, in November, 1996, the Company
borrowed $250,000 from unrelated persons on a short-term basis carrying
interest at 12%. In December, 1996 these amounts were repaid through the
proceeds of the private offering (see Note 3).
On December 14, 1995 the Company commenced a private offering of units.
Each unit consisted of a promissory note with limited conversion rights
in the principal amount of $1,000 and a warrant to purchase 1,000 shares
of common stock at a price per share equal to the greater of $1.00 or the
market price on the initial closing date of the offering. If the notes
were not paid by the due date, the notes, at the option of the holder,
became convertible into shares of the Company's common stock on the basis
of one share for each $1.00 of unpaid principal and interest. On May 7,
1996 a second private offering of units commenced with similar terms and
after completion $1,500,000 of promissory notes were outstanding from
both offerings. Prior to the due date of the notes, the Company asked
its noteholders to agree to apply their principal balance against the
exercise price of their warrants and, in addition, they would also
receive warrants to purchase 150,000 shares of the Company's stock at an
exercise price of $2.125 per share. Subsequently, the noteholders agreed
to this arrangement.
Interest expense for the years ended December 31, 1996 and 1995 was
$331,008 and $102,011 respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
In January 1997, KP3, LLC, a limited liability company owned and
controlled by the Company's president and chief executive officer (the
"LLC") borrowed $1,750,000 from a bank with a due date of December 31,
1997. The purpose of the loan was to finance payment of the deferred
portion of the purchase price of 1,643,845 shares of Common Stock owned
by the LLC that were purchased from a former officer of the Company at
the time of his departure. In connection with this borrowing, the
Company agreed to collateralize the loan on behalf of the LLC.
Accordingly, $1,890,000 of cash included in cash and cash equivalents
(representing the initial principal balance and in an interest reserve)
in the accompanying balance sheet became restricted for this purpose.
The Company has also agreed to loan the LLC amounts sufficient to pay
interest on the loan so long as the amount of loans made and bank
collateral provided would not exceed $2,000,000. The borrower (the
LLC) has agreed to reimburse the Company for any amounts paid by the Company
toward the loan or for collateral applied to the loan, including interest
at an annual rate of 9%, and have granted the Company a security interest
in 1,643,845 shares of the Company's common stock held by it.
PMC had been under a formal order of private investigation by the Securities
and Exchange Commission relating to certain aspects of PMC's former practice
of principal trading. PMC discontinued this practice in April 1994. In
1995, the Company submitted a settlement proposal to the Commission, without
admitting or denying liability, on behalf of PMC under a plan pursuant to
which PMC would disgorge its trading profits realized from principal trading
together with prejudgement interest in an amount estimated to be $465,000.
In 1996, the settlement was accepted by the Commission with the total amount
payable, including accrued interest approximating $620,000. These amounts
have been included in other liabilities in the accompanying financial
statements.
The Company has leases for office space and equipment under various
operating and capital leases. Included in furniture and equipment is
$295,552 of equipment under capital leases at December 31, 1996 and
accumulated depreciation relating to these leases of $30,184.
F-13 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
Future minimum lease payments under noncancelable leases as of December
31, 1996 are as follows:
Principal
Year ending due
December 31, Operating Capital Capital Lease
----------- ---------- ---------- -----------
1997 $ 375,824 $ 123,992 $ 103,119
1998 351,672 103,486 95,336
1999 298,658 22,178 21,366
2000 293,567 - -
2001 24,000 - -
Thereafter - - -
----------- ---------- -----------
$1,343,721 249,656 $ 219,821
=========== ===========
Less amount
representing interest 29,835
----------
Present value of net
minimum lease payments $ 219,821
==========
Total rent expense for facilities and equipment for the years ended
December 31, 1996 and 1995, was $471,339 and $410,263, respectively.
NOTE 8 - STOCK OPTIONS AND WARRANTS
The Company has no formal stock option plan, however it has granted
options to officers, employees, shareholders and certain other
individuals and entities allowing them to purchase common stock of the
Company generally at the market value of the stock at date of grant.
Options are generally for a five-year term however, in certain instances
the term is longer.
F-14 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
NOTE 8 - STOCK OPTIONS AND WARRANTS (continued)
In addition, common stock warrants have been issued in connection with
certain private offerings of debt. At December 31, 1996,
warrants to purchase common stock at various prices were outstanding
which expire as follows:
Expiration Exercise
Date Warrants Price
-------------- -------- ------
December, 1998 300,000 1.620
June, 2001 200,000 1.000
November, 2001 25,000 1.625
December, 2001 550,000 2.125
--------
1,075,000
=========
The following table describes certain information related to the
Company's compensatory stock option activity for the year ending December
31, 1996.
Number Weighted Average
of Options Exercise Prices
---------- --------
Outstanding, December 31, 1995 1,016,000 $1.42
Grants during year:
Exercise price = market price 1,352,500 1.40
Exercise price greater than market price 200,000 1.56
Exercised during year (1,000) 1.38
Forfeited during year (22,000) 1.13
Expired during year (35,000) 2.79
---------
Outstanding, December 31, 1996 2,510,500 1.45
=========
Exercisable, December 31, 1996 1,400,500 1.45
=========
F-15 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
NOTE 8 - STOCK OPTIONS AND WARRANTS (continued)
The weighted average grant date fair value of the options granted in 1996
was as follows:
Exercise price = market price $ .67
Exercise price greater than market price 1.03
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following assumptions: risk-free interest
rate of 5.88% to 6.50%; dividend yield of -0-%; expected lives of five to
six years; and volatility of 44.2%.
A summary of the Company's outstanding and exercisable stock options as
of December 31, 1996 are as follows:
Weighted Average
Range of Number Weighted Average Remaining
Exercise prices of Options Exercise Price Contractual Life
(months)
-------------- ---------- -------------- ----------------
$1.00 - $1.38
Outstanding 1,228,500 $1.14 31 (a)
Exercisable 728,500 1.17 39
$1.50 - $1.56
Outstanding 977,500 1.55 63 (b)
Exercisable 567,500 1.55 63 (c)
$2.13 - $2.50
Outstanding 252,500 2.20 58
Exercisable 52,500 2.50 6
$3.10
Outstanding 52,000 3.10 13
Exercisable 52,000 3.10 13
(a) Excludes 200,000 options which expire 12 months after employee
termination.
(b) Excludes 800,000 options which expire 12-24 months after employee
termination.
(c) Excludes 480,000 options which expire 12-24 months after employee
termination.
F-16 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
NOTE 8 - STOCK OPTIONS AND WARRANTS (continued)
As previously described, the Company applies APB 25 and related
Interpretations in accounting for its stock options. Accordingly, no
compensation cost has been recognized. Had compensation cost for the
Company's options been determined based on the fair value at the grant
dates for awards consistent with the method of SFAS 123, the Company's
net loss and loss per share would have increased to the pro-forma amounts
indicated below:
1996 1995
----------- -----------
Net loss $ (5,111,682) $ (2,518,266)
Net loss per share $ (.91) $ (.47)
NOTE 9 - 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 intends to 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.
NOTE 10 - RISKS AND UNCERTAINTIES
PMC's revenues are primarily derived from a percentage of the assets
under the management of its distribution channels. 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 an unrelated organization constitute approximately 16% of the total
customer assets in PMC's managed account programs as of December 31,
1996. A downturn in general economic conditions could cause investors to
cease using the products, including its proprietary software products,
and services of the Company or its distribution channels.
The Company has deposits in banks in excess of the FDIC insured amount of
$100,000. The amounts in excess of the $100,000 are subject to loss
should the banks cease business.
F-17 of 18: Financial Statements Section
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Concluded)
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 107 requires disclosure of the fair value of financial instruments,
both assets and liabilities recognized and not recognized in the
statement of financial position, for which it is practicable to estimate
fair value.
The following methods and assumptions were used to estimate the fair
value of financial instruments for which it is practicable to estimate
value:
The carrying amount of cash and cash equivalents reported in the balance
sheet approximates fair value because of the short maturity of those
instruments.
The carrying amount of receivables, accounts payable, accrued expenses
and other liabilities approximates fair value because of the collection
or payments on those instruments are expected in the short term.
The long-term note receivable was discounted at inception (see Note 2)
and at December 31, 1996, discounting the note at the current interest
rate at which similar loans would be made to borrowers with similar
credit ratings and for the same maturities yields a fair value which
approximates the carrying value.
Based on the borrowing rates currently available to the Company for loans
with similar terms and maturities, the carrying value of obligations
under capital leases approximate fair value.
The carrying amount of deferred revenue approximates fair value because
it is expected to be realized within ninety days.
F-18 of 18: Financial Statements Section
<PAGE>
Financial Data Schedule
as Filed Electronically with
The Securities and Exchange Commission
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,499,390
<SECURITIES> 0
<RECEIVABLES> 876,691
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 340,006
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0
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</TABLE>
