U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(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 from to
Commission File No. 0-14937
PMC INTERNATIONAL, INC.
(Name of Small Business Issuer in its Charter)
COLORADO 84-0627374
(State of Incorporation) (IRS Employer Identification No.)
555 17th Street, 14th Floor,
Denver, Colorado 80202
(Address of Principal Executive Offices) (Zip Code)
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 40 pages
Exhibit Index begins on page 19
<PAGE>
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1996
Table of Contents
Page
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
ITEM 7. FINANCIAL STATEMENTS 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 13
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE
EXCHANGE ACT 13
ITEM 10.EXECUTIVE COMPENSATION 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 21
<PAGE>
ITEM 1.DESCRIPTION OF BUSINESS
PMC International, Inc. (the "Company") develops, markets, and manages
sophisticated investment management products and services. Not a
money manager itself, the Company's products and services 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 fee sharing agreements for its products based on a
percentage of managed assets as well as consulting fees for certain
advisory services and licensing fees from its software products.
Background of the Company
Founded in 1986, the Company is an independent sponsor of privately
managed accounts and wrap programs targeted at the high network
markets. The majority of the Company's revenues are derived from its
individually managed wrap program, which the Company developed and has
administered since 1987. In addition to its traditional wrap program,
since 1994 the Company has invested in developing 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 advisers 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 that helps
increase sales productivity while ensuring compliance with the
Institutional Channels' corporate and regulatory policies.
The Company has a staff of approximately 60 people, including more
than 35 professionals, and conducts business in eight countries. The
Company owns three subsidiaries: (i) Portfolio Management Consultants,
Inc. ("PMC"), an investment advisory firm; (ii) Portfolio Brokerage
Services, Inc. ("PBS"), a broker/dealer; and (iii) Portfolio
Technology Services, Inc. ("PTS"), which specializes in developing
proprietary software for use in the financial services industry.
Unless the context otherwise requires, references herein to the
Company include subsidiaries and predecessors of the Company. The
Company's principal executive office is located at 555 17th Street,
14th Floor, Denver, Colorado 80202 and its telephone number is (303)
292-1177.
Products and Services
Portfolio Management Consultants, Inc.
PMC 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 , PMC's
individually managed account wrap program, (ii) Allocation Manager, 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
Private Wealth Management, 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 $1 million), Private Wealth Management assists
financial advisors in assembling a custom-selected
<PAGE>
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 program involves the basis of selection of these
money managers. PMC currently recommends a number of independent
money managers for its Private Wealth Management 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
correlations to benchmarked indices, supported by positive alpha and
positive excess returns 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 is marketed under both the PMC label
and private labels. Institutional Channels currently using private-
label versions of Private Wealth Management include Chase Investment
Services ("CIS"); National Financial Correspondent Services ("NFCS"),
the wholly owned brokerage and securities clearing subsidiary of
Fidelity Management and Research; and Israel Discount Bank of New
York. Additionally, PMC distributes Private Wealth Management under
its own name through thirty financial planning broker/dealers and
independent investment advisers. To support the sales process, the
Company employs a staff of marketing representatives. The Company has
a joint marketing agreement with Schwab Institutional Management, a
division of Charles Schwab & Co., Inc., pursuant to which a
specialized version of the Private Wealth Management program is
marketed to independent investment advisers who utilize the services
of Schwab. Currently, PMC is servicing Institutional Channels in the
U.S. and seven Latin American countries.
Allocation Manager
Allocation Manager, 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
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 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
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, called Fund CounselorSM, is being
marketed by NFCS who 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 platform within the Schwab Institutional Management
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 expertise and products and services
offered by the Company while expanding the distribution channels for
such products and services.
<PAGE>
Because the program also provides
educational tutorials, training modules and dynamic portfolio
modeling, Allocation Manager 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 tremendous 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 Institutional
Management system to the many investment advisers that use Schwab's
custodial services and to other financial institutions both
domestically and abroad.
Style Manager Asset Management Products
Style Manager is a family of discretionary asset management
products that 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 projected 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 securities
transactions for certain of PMC's privately managed account programs
on behalf of its customers 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 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
providing innovative software products to the financial services
industry. PTS leverages
<PAGE>
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 and advisory workstation
platforms used for Allocation Manager and communication interfaces to
multiple custodial systems. PTS licenses its technology and provides
customization services to its strategic partners.
Significant Relationships
Fees from the Company's private wealth investment advisory
programs generate most of the Company's gross revenues. 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 relationships with CMIS
accounted for approximately 18% of the Company's gross revenues at
year-end 1996. CIS has 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 programs will
not continue or, other than the restructuring of the CIS program
discussed above, that they will not continue to generate revenues for
the Company consistent with prior years, there can be no assurance
that such will be the case.
Pursuant to a joint marketing agreement between the Company and
Schwab Institutional Management, a specialized version of the Private
Wealth Management program is being marketed to independent investment
advisers who utilize the services of Schwab Institutional Management.
The Company's agreement with Schwab potentially represents one of the
Company's most significant new relationships. Schwab provides custody
and clearing services for independent registered investment advisers
("RIAs"). With respect to Schwab Institutional Management's RIA
customers who determine to use the Company's products and services,
Schwab Institutional Management will provide brokerage, custody and
securities clearing services while PMC will provide asset allocation,
money manager due diligence, quarterly reporting, sales support and
training.
The Company is continuing to target 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 and Farwest Advisory Services, Inc., the
investment advisory affiliate of Investment Centers of America. MONY
Securities Corporation will use Allocation Manager 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 Independent Channels, the
Company competes with other firms that offer wrap and managed account
program. The Company's customers in turn compete with banks,
insurance companies, large securities brokers and other financial
institutions that offer wrap 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. None the less, the Company believes its
pricing is competitive with industry standards. While a number of
firms each provide a portion of the services provided by the Company,
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 may have more financial resources and greater recognition in
the financial community than the Company. Competitors may reduce the
fees charged for wrap 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 the
programs that are being offered to the public, such as life cycle
funds, asset allocation funds, portfolio strategies and third party
asset allocations services, and these services are competitive with
those offered by the Company. As financial institutions continue to
grow and build in-house asset administration services 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
<PAGE>
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.
Government Regulation
The Company's business falls entirely within the securities
industry, an industry that is heavily regulated by the federal and
state governments. The Company is subject to regulatory changes which
could adversely affect its business. For example, in the event the
federal government imposes a tax onsecurities transactions, as has been
proposed from time to time by the executive branch of the federal
government. The increased cost associated therewith could have a
material adverse effect on the business of the Company. In addition,
as an investment adviser and a broker/dealer, the Company's
subsidiaries are subject to regulation by the Securities and Exchange
Commission ("SEC"), the National Association of Securities Dealers,
Inc. ("NASD") and state regulatory agencies. Consequently, the
Company could become subject to restrictions or sanctions from the
SEC, 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.
ITEM 2.DESCRIPTION OF PROPERTY.
The Company leases approximately 20,000 square feet of office space
for its corporate headquarters in the Anaconda Tower at 555 17th
Street, Denver, Colorado, pursuant to a lease that expires in 2001.
The Company pays approximately $20,000 per month for this office
space. The Company also leases approximately 1800 square feet of
office space in Boulder, Colorado, primarily for its subsidiary PTS.
The Company pays approximately $2,500 per month for this office space.
The lease for the Company's Boulder office expires in 1998.
ITEM 3. LEGAL PROCEEDINGS.
During November 1993, representatives of the staff of the SEC 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, who subsequently terminated his association
with the Company and its subsidiaries in July 1995. The
recommendation alleged that PMC and such officers had violated anti-
fraud provisions of the Securities 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 $456,788.25 and the total amount
to be refunded is approximately $620,000, plus interest at 9% per
annum from January 1, 1997, until the date of payment. The Company
reserved $465,000 in the fourth quarter of 1995 and the balance was
expensed in 1996. The Company anticipates that the refund process
will be completed by May 1997. In addition, Mr. Phillips agreed to a
censure and payment of a $25,000 fine.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the vote of security holders during 1996.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Prior to February 1995, the Company's Common Stock was traded on the
NASDAQ Small Cap Market. The Company's Common Stock (symbol: PMCI)
currently trades in the over-the-counter market in the National
Quotation Bureau's Listing, also known as the Bulletin Board. The
following table shows the high and low bid prices of the Company's
Common Stock for the periods indicated. These quotations reflect
inter-dealer prices without retail markup, markdown, or commissions
and may not represent actual transactions.
High Bid Low Bid
1995
First Quarter $1.25 $0.6875
Second Quarter $0.6875 $0.50
Third Quarter $1.3125 $0.5625
Fourth Quarter $1.625 $0.75
1996
First Quarter $1.00 $0.625
Second Quarter $1.8125 $0.9375
Third Quarter $2.0625 $1.375
Fourth Quarter $2.00 $1.375
1997
First Quarter $2.50 $2.00
(through March 25)
As of March 25, 1997, the Company had approximately 392 record holders
of its Common Stock.
The Company currently has outstanding a total of 138,183 shares of
Series A Preferred Stock. As of January 31, 1997, the Company was in
default in the payment of dividends on the Series A Preferred Stock in
the amount of $322,700. No dividends may be paid on the Common Stock
if dividends payable on the Series A Preferred Stock are in arrears.
The Company has never paid dividends on its Common Stock and currently
intends to retain all earnings for the continued growth and
development of its business and has no plans to pay cash dividends in
the future. Any change in the Company's dividend policy will be made
in the discretion of the Company's Board of Directors in light of the
Company's future earnings, financial condition and capital
requirements and of general business conditions and other factors that
cannot now be predicted.
The Company sold the following securities without registration under
the Securities Act of 1933, as amended, that relate to the period
covered by this Form 10-KSB.
Bedford Loans
In July 1995, the Company entered into a transaction with Bedford
Capital Financial Corporation ("Bedford") pursuant to which Bedford
and certain related persons 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. Between July 1995 and July 1996, the Company obtained the
full $3.0 million
<PAGE>
financing from Bedford and such related persons.
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.
December 1995 and June 1996 Private Placements
In December 1995 and January 1996, the Company issued a total of 482.5
units through a private placement, 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 placement under substantially
the same terms. The purchasers of these units were primarily
employees, business associates and affiliates of the Company. Each
purchaser received registration rights with respect to the shares of
Common Stock underlying the warrants.
November 1996 Bridge Loan
In November 1996, the Company borrowed $250,000 to fund its working
capital requirements pending closing of a private placement of Common Stock in
December, 1996. Fifty percent of the loan was provided by Keefe, Bruyette &
Woods, Inc., the Placement Agent in the December 1996 private placement, and
the balance equally by certain members of management of the Company, Bedford,
and certain affiliates of Bedford. The lenders received five-year warrants to
purchase an aggregate of 25,000 shares of the 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.
December 1996 Private Placement
On December 24, 1996, the Company completed a private placement of
5,177,000 shares of Common Stock at a price of $2.125 per share. For
which Keefe, Bruyette and Woods, Inc. ("KBW") acted as sales placement agent.
The purchases of the Shares were all accredited investors introduced
to the Company by KBW.
December 1996 Restructuring
On December 24, 1996, the Company completed a restructuring of its
debt. The restructuring involved the repayment of interest owing
under the notes issued in connection with the December 1996/January
1996 and May/June 1996 private placements and the Bedford loans. In
connection with the restructuring, as more fully explained in the
Liquidity and Capital Resources section, below, Bedford exercised warrants to
purchase a total of 1,023,750 shares of Common Stock, canceled
existing warrants, received repayment of debt, and received new
warrants to purchase 150,000 shares of Common Stock at an exercise
price of $2.125 per share. The holders of warrants issued in
connection with the December 1995 and June 1996 private placements
exercised warrants to purchase an aggregate of 1,500,000 shares of
Common Stock, and received, pro rata, new warrants to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of
$2.125 per share.
In each of the cases listed above, the Company claimed an exemption
from the registration requirements of the Securities Act under Section
4(2) of the Securities Act and Regualtion D thereunder.
Preferred Stock Conversion
On December 24, 1996, the Company also effected a voluntary conversion
of 173,170 shares of the Company's Series A Preferred Stock into
238,043 shares of Common Stock. The Company claimed an exemption from
registration under Section 3(a)(9) of the Securities Act as an
exchange of securities of the Company satisfying the requirements of
that section.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information set forth below contains "forward looking statements"
within the meaning of the federal securities
<PAGE>
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 actual results to differ materially form those expressed in the
statements.
General
PMC International, Inc. (the "Company") develops, markets, and manages
sophisticated investment management products and services. Not a
money manager itself, the Company's products and services 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 the
investor. 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 fee sharing agreements for its products
based on a percentage of managed assets as well as consulting fees for
certain advisory services and licensing fees from its software
products.
The Company's consolidated revenues are generated through its three
operating subsidiaries Portfolio Management Consultants, Inc. (`PMC"),
Portfolio Brokerage Services, Inc. ("PBS"), and Portfolio Technology
Services, Inc. ("PTS"). Currently, the Company's revenues are
primarily derived from fees charged to customers for certain
investment advisory, portfolio administration and reporting services
("Investment Management Fees") which generally are collected in
advance on a quarterly basis from each of its customers. PMC's
Investment Management Fees are determined and collected as a
percentage of managed assets. Those fees are affected by the extent
to which the Company attracts new or loses existing customers, the
appreciation or depreciation of the U.S. and international equity and
fixed income markets, and the type and size of accounts and the
corresponding difference in fee schedules.
Selected Financial Data
The selected financial data presented below has been derived from the
Company's financial statements. This financial information should be
read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein.
Balance Sheet Data
Year Ended December 31,
1996 1995
Total Assets $9,438,000 $ 2,940,000
Total Liabilities $2,893,000 $ 4,856,000
Shareholders' Equity $6,545,000 $(1,916,000)
<PAGE>
Statement of Operations Data
1996 1995
Consolidated Capital Expenditures 876,000 917,000
Consolidated Depreciation 538,000 148,000
Consolidated Cash Flow from (4,600,000) (1,189,000)
Operations & Investing Activities
Consolidated Cash Flow from 10,785,000 1,363,000
Financing Activities
REVENUES
% change 1996 1995
Investment Management Fees +11.5% $9,635,000 $8,633,000
Other Revenue - -1.5% $ 452,000 $ 539,000
Total Revenue +10.0% $10,087,000 $9,172,000
EXPENSES
% change 1996 1995
Investment Management & Custodial +8.5% $ 5,580,000 $5,140,000
Fees Paid
Operating Expenses +32.0% $ 8,532,000 $6,476,000
Totals +21.0% $14,112,000 $11,616,000
Net Income (Loss) + 65% ($4,025,000) ($2,444,000)
During 1996, PMC settled the SEC investigation that had begun in late
1993. As a result the Company has agreed to disgorge the principal
profits of $456,788.25 earned in 1993 and 1994, together with
prejudgment interest of approximately $164,000 to clients which were
affected by the Company's principal trading activities.
The Company incurred $291,167 in interest expense that was paid to
note holders of the bridge financings and the subordinate note from
Bedford Capital (see Liquidity and Capital Resources below). As of
year-end 1996, all these notes were paid or converted to capital stock.
Operating expenses increased by approximately $2,000,000 for the year
ended December 31, 1996, vs. the same period in 1995 due to:
1.Increase in compensation and consulting expense by approximately
$1,000,000 in 1996 vs. the same period in 1995. This increase was
caused by the addition of staff to the Company's marketing and sales
team as well as its technology group and operations. Headcount during
1996 increased from 43 to 53. These additions were necessary in order
to continue the Company's systems enhancements and maintenance due to
a change from outsourcing such activities to in-house operations. The
Company began strengthening its marketing and sales group to provide a
better market presence for its products and services in 1997.
2.Increase of occupancy costs, which include furniture and equipment,
by approximately $500,000 in 1996 vs. the same period in 1995. This
increase was primarily due to additional depreciation expenses caused
by computer purchases and software development in late 1995 and during
1996.
3.Increase in marketing seminars and conventions. The Company
incurred approximately $306,000 in such expenses during 1996 vs.
$113,000 during the same period in 1995. The majority of these
seminars and conventions took place during the second half of 1996 and
were intended to increase the Company's visibility during introduction
of its new products to the market.
4.Increase in interest expense by approximately $235,000 vs. the same
period last year. This increase was caused by additional financing
and borrowing to fund the Company's cash requirements for 1996.
<PAGE>
5.Increase of other expenses such as data processing, supplies,
equipment repair and so forth by approximately $300,000 in 1996 vs.
the same period in 1995. The increase was primarily due to business
expansion and new product development and introduction.
Significant changes in PMC's balance sheet that impacted PMCI's cash
flow requirements included the capitalization of approximately
$300,000 in connection with the development of the Allocation Manager
software program and approximately $576,000 of newly acquired fixed
assets in connection with hardware and software requirements for PTS
and PMC's operations department.
PMCI's cash position was enhanced significantly due to fund raising
activities through a private placement in December 1996
(see Finacial Statements).
Liabilities decreased substantially by $1,964,000 as of December 31,
1996 vs. the same period in 1995. The reduction was primarily due to
repayment of bridge notes and part of the subordinated debt as well as
conversion of the remaining part of the subordinated debt. These
activities are explained in more detail in the Financial Statements.
Accounts payable was reduced by approximately $600,000
during the same period. These reductions were possible due to the
funding as the result of the private placement that occurred in
December 1996.
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 (see "Business -
Corporate History"). The Bedford loans, the private placements, and
the bridge financing each involved the issuance of warrants to
purchase Common Stock.
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 preferred stock. The restructuring
involved (i) the payment of all outstanding interest on the Bedford
loans, the repayment of 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 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 exercise of
warrants to purchase 1,500,000 shares of Common Stock 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
outstanding interest due and owning on such notes as of the exercise
date, and the issuance of new warrants to purchase an aggregate of
150,000 shares of Common Stock to such investors; (iii) the repayment
of the November 1996 bridge loan and (iv) the conversion of 173,170
shares of the Company's 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 January 31, 1997. A portion of
the conversion of shares of the Company's Preferred Stock into Common
Stock was effected in January 1997.
The Company believes that the proceeds of the December 1996 offering
and restructuring have resulted in
<PAGE>
sufficient capital resources to
meet the Company's substantial additional funding requirements until
its new and existing products and services can generate sufficient
revenues to offset its costs. The Company's intention is to use the
additional equity capital to (i) finance any future operating losses
the Company may incur, (ii) strengthen the Company's balance sheet
with the goal of relisting of the Common Stock on the NASDAQ Small Cap
Market, and (iii) provide adequate working capital to meet the
Company's long term requirements.
ITEM 7. FINANCIAL STATEMENTS.
See the financial statements attached to this report which starts at
page F1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9 .DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE
ACT
Kenneth S. Phillips. President and CEO, Director, Mr. Phillips
founded PMC in 1986 and serves as the President and Chief Executive
Officer of the Company. Mr. Phillips is responsible for corporate
direction, product development and strategic planning. He was a co-
founding participant in the Wilshire Cooperative in 1986 (associated
with the institutional consulting firm Wilshire Associates). He
served as the Chairman of the Publications Committee of the Investment
Management Consultants Association ("IMCA") in 1994 and 1995, as a
member of IMCA's officer and director Nominating Committee in 1994 and
1996, and has recently been elected to serve as a member of IMCA's
Advisory Council. IMCA is the investment consulting industry's
principal professional organization with more than 1200 members
representing virtually all the major national, regional and
independent consulting firms. Additionally, Mr. Phillips has been a
guest speaker for the International Association of Financial Planners,
the Investment Management Institute and the Institute for
International Research. Mr. Phillips received his education at
Colorado State University and holds numerous NASD license
designations.
David L. Andrus. Executive Vice President, Director, Mr. Andrus
joined PMCI in September 1995, as a Director and Executive Vice
President of the Company and as President of PTS, the Company's
technology and software applications development subsidiary. For the
twelve years prior to joining PMC, Mr. Andrus was Chairman of Netwise,
Inc., an international software firm that featured distributed
processing products for local area networks. Netwise's clients
included Fortune 500 international firms which sought to exploit
enterprise-wide processing systems seamlessly, through the integration
of PC based technology with legacy systems. At Netwise, Inc., Mr.
Andrus was responsible for all business development, strategic
relationships, international sales channels and for establishing the
general technical direction of the firm and its products. Netwise was
sold to Microsoft Corp. in 1995. With more than 17 years of experience
in product development, computer engineering and consulting, Mr.
Andrus served as Director of Systems Architecture of the Advanced
Systems Group at Burroughs Corporation. He was responsible for the
design of a state-of-the-art distributed processing system consisting
of integrated voice and data, distributed databases, printer servers
and communication servers on high-speed fiber optic LANs. Mr. Andrus
also served as Manager of the Advanced Development Group at NBI, Inc.
where he was responsible for systems and software development and
testing. Mr. Andrus holds a B.S. in Electrical Engineering from the
University of Colorado.
Vali Nasr. Chief Financial Officer, Treasurer, Mr. Nasr joined PMC in
1992 as the Company's Chief Financial Officer, financial Principal and
Treasurer. Since September 1995, Mr. Nasr has been President of
Portfolio Brokerage Services Inc., the Company's wholly owned
subsidiary. Prior to joining the Company, Mr. Nasr was Vice President
of Finance for a large, retail broker/dealer. Prior to holding this
position for four years, Mr. Nasr
<PAGE>
spent four years as Vice President
of Accounting with Sutro & Company, Inc. in San Francisco. Prior to
joining Sutro, Mr. Nasr spent four years with Charles Schwab and
Company as Accounting Manager. Mr. Nasr began his career with Merrill
Lynch in their accounting department. He received his B.A. in
Accounting from the University of California, Berkeley and his M.B.A.
in Finance from Golden Gate University.
J.W. Nevil Thomas. Chairman of the Board of Directors, Mr. Thomas has
been a Director of the Company since July 1995. Since 1970 Mr. Thomas
has served as President of Nevcorp, Inc., an investment and a
financial and management consulting firm.. In addition, Mr. Thomas is
a Director of Bedford Capital Financial Corporation ("Bedford") and is
Chairman of Bedford Capital Corporation, a subsidiary of Bedford,
whose principal business is merchant banking. In addition to being a
Director of the Company, Mr. Thomas is a Director of
the Gan COmpany of Canada, Ltd., Reliable Life Insurance Company, Pet
Valu Inc., French Fragrances, Inc. Old Republic Insurance and several
other private Canadian and American companies. Mr. Thomas holds a Bachelor of
Commerce from the University of Toronto, a M.A. in
Economics from Queens University, a M.B.A from York University, and is
a Chartered Financial Analyst.
D. Porter Bibb. Director, Mr. Bibb became a Director of the Company
in September 1995. Mr. Bibb is a Principal and Co-Director of
Corporate Finance of Ladenburg, Thalmann & Co., Inc., an investment-
banking firm. Prior to joining Ladenburg in 1984, Mr. Bibb was a
Managing Director of Bankers Trust Company, involved in the start-up
of their investment banking operations. Prior to that time, he was
Director of Corporate Development for the New York Times. Mr. Bibb
has a B.A. in History, Economics and Political Science from Yale
University and engaged in graduate studies at New York University,
London School of Economics and Harvard Business School.
Emmett J. Daly. Director, Mr. Daly became a Director of the Company
on February 27, 1997. Mr. Daly is currently Senior Vice President of
Corporate Finance of Keefe, Bruyette & Woods, Inc., an investment
banking firm that Mr. Daly joined in 1987 as an Associate in the
Corporate Finance Department. Prior to that time he spent two years
as Credit Analyst followed by one year as an Assistant Treasurer of
Manufacturers Hanover Trust Company. Mr. Daly received a B.A. in
Economics from College of the Holy Cross and his M.B.A from the Kenan
Flager School of Business at University of North Carolina, Chapel
Hill.
The Bylaws of the Company were amended in December 1996 to set the
number of members of the Board of Directors at seven. Under
subscription agreements with investors in the December 1996 Offering,
those investors are entitled to designate one director, and one
additional director is to be mutually acceptable to the Company and
such investors. The mutually acceptable director is Emmett J. Daly.
Two seats are yet to be filled, one seat to be designated by PMCI
management and the other by the aforementioned investors.
Under a Shareholders Agreement among Bedford, the Company, Mr.
Phillips, Mr. Andrus, and KP3 LLC, (i) Bedford is entitled to
designate one director, and one additional director is to be
reasonably acceptable to Bedford and Messrs. Phillips and Andrus, and
(ii) Messrs. Phillips and Andrus are entitled to designate three
directors, including one member of senior management designated after
the date of the agreement. Mr. Thomas is currently the director
designated by Bedford, and Messrs. Phillips and Andrus are two of the
three directors they are entitled to designate. The remaining two
positions entitled to be designated under the agreement are currently
vacant.
The Company believes that during fiscal year 1996, the following
officers, directors or 10% holders of its Common Stock filed late
reports, failed to report transactions on a timely basis or failed to
file a form required under Section 16 of the Securities Exchange Act
of 1934, as amended:
* Phillips & Andrus, LLC - late filing of 1 required report
* Bedford Capital Financial Corporation - late filing of 1 required
report
* William L. Atkinson - late filing of 1 required report
<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 executive officer at the end of
1996.
Summary Compensation Table
Other Options
Fis Annual Granted All
Name and cal Salary Compen (1) Other
Principal Year -sation Compens
Position ation
Kenneth S. Phillips 1996 $252,000 $13,329 50,000
President, Chief 1995 $228,124 $8,396
Executive
Officer 1994 $241,774 $8,047
David L. Andrus(2) 1996 $240,000 1,050,000
Executive Vice 1995 $ 40,000
President
Vali Nasr 1996 $159,515 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.
(2) Mr. Andrus joined the Company in 1995.
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
Number of Percentage of Exercise Expiration
Shares Total Options Price Date
Underlying Granted to
Options Employees in
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 expire 24 months after Mr. Andrus leaves the employ of
the Company.
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year
End Option/SAR Values
Number of Value of
Securities Unexercised
Shares Value Underlying Money Options at
Acquired on Realized Unexercised FY End
Exercise Options at FY
End Exercisable/Unex
Exercisable/Unex ercisable
ercisable
Kenneth S. 0 0 20,000/30,000 $22,500/$33,750
Phillips
David L. 0 0 295,000/755,000 $168,830/$513,750
Andrus
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table and related notes contain information concerning
beneficial ownership of the Company's Common Stock as of March 25,
1997, by (i) each person known by the Company to own beneficially more
than five percent of the Common Stock, (ii) each director of the
Company, (iii) each executive officer of the Company named in the
Summary Compensation Table, and (iv) all directors and executive
officers of the Company as a group. The share amounts in this table
reflect shares of Common Stock issuable upon the exercise of options
and warrants exercisable within the next 60 days. All parties listed
below are also Selling Shareholders. See "Selling Shareholders."
<PAGE>
Name and Address Number of Percent of
Shares Class
Kenneth S. Phillips(1) 3,074,767(8)(9) 21.1%
David L. Andrus(1) 687,000 (10) 4.5
J.W. Nevil Thomas(2) 20,000(8)(11) *
D. Porter Bibb(3) 20,000(8)(12) *
Emmett J. Daly(4) 16,000(15) 1.1
Vali Nasr(1) 120,497(13) *
Bedford Capital 2,971,250(14) 20.3
Financial Corporation(5)
KP3, LLC(1) 1,643,845(15) 11.3
Wheatley Partners, 941,000 6.5
L.P. (6)
Bay Pond Partners, 1,082,000 7.5
LP (7)
Bay Pond Investors, 941,000 6.5
(Bermuda), Ltd. (7)
All Officers and 4,082,264 26.5
Directors as a group
(6persons)
* less than 1%.
(1) The address of Mr. Phillips, Mr. Andrus, Mr. Nasr, and KP3,
LLC is 555 Seventeenth Street, Suite 1400, Denver, Colorado
80202
(2) The address of Mr. Thomas is Scotia Plaza, Suite 4712, 40
King Street West, Toronto, Ontario M5H 3Y2.
(3) The address of Mr. Bibb is 590 Madison Avenue, New York, New York
10022.
(4) The address of Mr. Daly is Two World Trade Center, 85th Floor,
New York, New York 10048
(5) The address of Bedford is 2nd Floor, Charlotte Hs., Shirly
Street, Box N964, Nassau, Bahamas.
(6) The address of Wheatley Partners, L.P., is 80 Cutter Mill
Road, Suite 311, Great Neck, New York 11021.
(7) The address for Bay Pond Partners, L.P. and Bay Pond Investors
(Bermuda), Ltd., is c/o Wellington Management Company, L.L.P.,
75 State Street, Boston, MA 02109
(8) Includes 1,643,845 shares owned by KP3, of which Mr.
Phillips is the managing member and has the controlling
ownership interest; also includes 5,500 shares underlying
presently exercisable warrants.
(9) Includes 20,000 shares underlying presently exercisable
options.
(10) Includes 567,000 shares underlying presently exercisable
options
(11) Does not include shares owned by Bedford of which Mr.
Thomas is a director and a 5.77% shareholder.
(12) Does not include 200,000 shares underlying presently
exercisable options granted to Ladenburg, Thalmann & Co.,
Inc., of which Mr. Bibb is a managing director.
(13) Includes 50,000 shares underlying presently exercisable
options.
(14) Includes 136,250 shares underlying presently exercisable
options or warrants issued by the Company and 235,000 shares owned by
KP3 and included in the beneficial ownership of Mr. Phillips that
Bedford may acquire pursuant to a presently exercisable option.
(15) Shares beneficially owned by KP3 are also included in shares
beneficially owned by Mr. Phillips and 235,000 of such shares also
have been included in the beneficial ownership of Bedford.
(16) Includes 135,000 shares underlying presently exercisable options or
warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
<PAGE>
The Company entered into an agreement with Ladenburg, Thalmann & Co.
Inc., investment bankers, in January 1995, pursuant to which Ladenburg
would assist the Company in financing efforts. Ladenburg was involved
in the Company's transactions with Bedford. Mr. Porter Bibb, a
principal of Ladenburg, was named to the Company's Board of Directors
in September 1995.
In July 1995, the Company borrowed $1.2 million from Bedford. As a
result of this transaction and a simultaneous transaction wherein
Bedford purchased 1 million shares of outstanding Common Stock of the
Company from a former principal of the Company, Bedford became a
greater than 10% shareholder of the Company, with the right to acquire
in excess of 50% of the Company's stock. Those rights were terminated
as a result of the restructuring described herein. Mr. J.W. Nevil
Thomas and another affiliate of Bedford were appointed to the
Company's Board of Directors in connection with that transaction.
Also in July 1995, the Company's then Chief Executive Officer and a
director, Marc Geman, resigned. In connection with his resignation,
Mr. Geman was entitled to severance payments totaling $180,000, due in
monthly payments of $15,000. As of December 31, 1996, Mr. Geman had
received all of the severance payments to which he was entitled. The
Company also entered into an Indemnification Agreement with Mr. Geman
whereby the Company agreed to hold him harmless, in an amount not to
exceed $100,000, for expenses incurred in defense of the pending
investigation by the Commission. As of December 31, 1996, the Company
had made a total of $50,786 in indemnification payments under that
agreement.
David L. Andrus, Executive Vice President of the Company, participated
in the June 1996 offering of debt securities and warrants. Mr. Andrus
purchased $100,000 shares of Common Stock. In addition, certain
employees of PMC participated in the offering, purchasing a total of
$162,500 of subordinated debt and receiving warrants to purchase 162,
500 shares of Common Stock. Mr. Andrus and the other Company
employees participated in the offering on the same terms as all other
investors.
In November 1996 the Company borrowed $250,000 (the "November Bridge
Loan") to fund working capital requirements pending the closing of a
private placement of Common Stock in December 1996. The lenders
included Mr. Phillips and Mr. Andrus, the Company's President and CEO
and Executive Vice President, respectively, and certain other
employees of the Company. Bedford, a shareholder and affiliate of the
Company, and Keefe, Bruyette & Woods, Inc., the placement agent for
the December 1996 Offering, were also lenders. The loans were
evidenced by 12% notes to be repaid on the earlier of the closing of
the December 1996 Offering or March 31, 1997. The lenders also
received warrants to purchase a total of 25,000 shares of Common Stock
at a price of $1.625 per share and registration rights with respect to
the shares of Common Stock underlying the warrants.
In December 1996, the Company completed a restructuring of its
outstanding debt. As part of the restructuring, Bedford and certain
of its assignees were repaid certain of the subordinated debt held by
it, exercised certain of the warrants held by it, was issued certain
shares of Common Stock by the Company in cancellation of its other
warrants and was issued new five-year warrants to purchase 150,000
shares of the Common Stock with an exercise price equal to the price to
investors in the Offering in consideration of the cancellation of
certain options and rights. As a result of these transactions, all $3
million in outstanding debt previously owed by the Company to Bedford
and it assignees has been eliminated and Bedford now beneficially owns
Common Stock representing approximately 20.5% of the outstanding
Common Stock. Bedford has also relinquished certain rights held by it
and its right to elect directors of the Company has been modified such
that Bedford now has the right to designate one director so long as it
holds at least 10% of the outstanding Common Stock. In addition, at
least one additional director must be acceptable to Bedford and the
Company so long as Bedford owns at least 5% of the outstanding Common
Stock. Bedford also retained demand and piggyback registration rights
with respect to restricted securities acquired by it from the Company.
In connection with the restructuring, the Company's consulting
agreement with Nevcorp, Inc., was terminated.
<PAGE>
In connection with the December 1996 restructuring, the investors in
the December 1995 and June 1996 Offerings exercised their warrants to
purchase an aggregate of 1,500,000 shares of Common Stock and
surrendered canceled promissory notes in the aggregate principal
amount of $1,500,000 in satisfaction of the exercise price for the
warrants. In connection with the exercise of warrants and
cancellation of debt, the investors also received, pro rata, five-year
warrants to purchase an aggregate of 150,000 shares of Common Stock at
an exercise price of $2.125 per share. Mr. Andrus, Executive Vice
President of the Company, the brother and father of Mr. Phillips, the
Company's President and Chief Executive Officer, and certain other
employees of the Company, participated in the restructuring on the
same terms as the other parties.
In January 1997, the Company provided assistance to Mr. Phillips, the
Company's President and Chief Executive Officer, by providing
collateral in the amount of $1,890,000 to a bank in connection with
the bank's loan to KP3 LLC, a company owned and controlled by Mr.
Phillips. The loan was for the purpose of refinancing loans against
1,643,845 shares of PMCI Common Stock owned by the LLC (the "LLC
Shares") which were purchased from a former officer of the Company at
the time of his departure. The Company has agreed to provide the
collateral for up to two years and also agreed to lend funds to the
LLC to service the interest payments on the loan. The total amount of
assistance to the LLC is the form of collateral pledges and/or loans
will not exceed $2.0 million. Mr. Phillips pledged the LLC Shares to
the Company as security for the Company's contingent obligations to
the bank.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of 1996.
Exhibits Description
3.1 Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company
10.1 Employment Agreement between the Company and Kenneth S. Phillips
dated as of July 26, 1995
10.2 Amended and Restated Employment Agreement between the
Company and David L. Andrus dated as of December 17, 1996 (3)
10.3 Form of Subscription Agreement between the Company and each
of the lenders in the November 1996 bridge financing (3)
10.4 Form of warrant issued to each of the lenders in the
November 1996 bridge financial. (3)
10.5 Form of Registration Rights Agreement between the Company,
each of the lenders in the November 1996 bridge financing, each
of the investors in the December 1996 private placement, and the
placement agent in the December 1996 private placement (3)
10.6 Form of Subscription Agreement between the Company and each
of the investors in the December 1996 private placement (3)
10.7 Warrant dated December 24, 1996, issued to Keefe, Bruyette
& Woods, Inc. (3)
10.8 Form of warrant issued to investors in connection with the
December 1996 restructuring (3)
10.9 Restructuring Agreement dated as of December 24, 1996,
among the Company, Bedford Capital Financial Corporation
("Bedford"), Portfolio Management Consultants, Inc. ("PMC"),
Portfolio Brokerage Services, Inc. ("PBS"), and Portfolio
Technology Services, Inc. ("PTS") (3)
<PAGE>
10.10 Amended and Restated Registration Rights Agreement dated as
of December 24, 1996, among the Company and Bedford (3)
10.11 Shareholders Agreement dated as of December 24, 1996, among
the Company, Bedford, Kenneth S. Phillips, David L. Andrus, and
Phillips & Andrus LLC (3)
10.12 Form of Warrant dated December 24, 1996, issued to Bedford
and certain of its associates (3)
10.13 Advisory Agreement effective as of July 26, 1995, between
Nevcorp Inc. and the Company (3)
10.14 Termination of Nevcorp Consulting Agreement (3)
10.15 Stock Option Plan of the Company (3)
10.16 Reimbursement and Pledge Agreement dated January 8, 1997,
among the Company, KP3 LLC, and Kenneth S. Phillips (3)
10.17 Term Loan Agreement dated as of January 8, 1997, among the
Company, KP3 LLC and Norwest Bank of Colorado N.A. (3)
10.18 Investment Agreement dated as of July 26, 1995, among the
Company, PMC, PBS, PTS, and Bedford (2)
21.1 List of Subsidiaries (2)
23.1 Consent of Spicer Jeffries & Co., Certified Public
Accountants
24.1 Powers of Attorney
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 33-37800) dated November 15, 1990.
(2) Incorporated by reference from the Company's Annual Report on
Form 10-KSB (File No. 0-14937) for the year ended December 31, 1994.
(3) Incorporated by reference fromt he Compnay's registration statement on
Form SB-2 (File No. 33-21335) dated February 7, 1997.
<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 report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PMC INTERNATIONAL, INC.
By: /s/ Kenneth S. Phillips
Kenneth S. Phillips
President, Chief Executive Officer
By: /s/ Vali Nasr
Vali Nasr, Treasurer, Principal
Financial and Accounting Officer
Date: March 28, 1997
In accordance with the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/ Kenneth S. Phillips President, Chief March 30, 1997
Kenneth S. Phillips Executive Officer,
Director
/s/ David L. Andrus Executive Vice March 31, 1997
David L. Andrus President,
Director
/s/ J.W. Nevil Thomas Director March 31, 1997
J.W. Nevil Thomas
/s/ Porter Bibb Director March 27, 1997
Porter Bibb
/s/ Emmett J. Daly Director March 31, 1997
Emmett J. Daly
<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 511 123 419 617
accumulated amortization of $203,526 in 1996
(Note 1)
PREPAID EXPENSES AND OTHER ASSETS 340 006 220 605
LONG TERM NOTE RECEIVABLE (Note 2) 570 494 897 167
GOODWILL (NET OF AMORTIZATION OF $75,853 274 147 297 487
and $52,513)
$ 9 437 591 $ 2 939 937
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, issues and outstanding,
14,471,756 and 5,555,713 365 876 276 716
Additional paid-in capital 16 482 256 3 652 749
Deficit (10 743 190) (6 718 358)
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 6 544 684 (1 916 350)
$ 9 437 591 $ 2 939 937
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 1 200 115 918 001
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 14 111 713 11 616 034
NET LOSS $ (4 024 832) $ (2 443 555)
NET LOSS PER COMMON SHARE (Note 1) $ (.72) $ (.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
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, 1996 AND 1995
* Total
* * * * * Share-
* Additional* * * * holders'
Common Stock * Paid-In * Stock * * * Equity
Shares* Amount* Capital * Shares* Amount * Deficit *(Deficit)
* * * * * *
BALANCES, 12/31/94 * * * * *
5 540 501*$276 564*$ 3 637 689*349 017* $872 543*$(4 274 803)*$511 993
* * * * * *
* * * * * *
Issue 15 212* 152* 15 060* * * * 15 212
of stock * * * * * *
to 401k Plan * * * * * *
* * * * * *
Net loss * * * * *(2 443 555) *(2 443 555)
* * * * * *
BALANCES, 12/31/95
5 555 713* 276 716* 3 652 749*349 017* 872 543* (6 718 358)*(1 916 350)
* * * * * *
* * * * * *
* * * * * *
Stock 1 000* 10* 1 365* * * * 1 375
options * * * * * *
exercised * * * * * *
* * * * * *
Notes 3 500 000* 34 999* 2 488 751* * * * 2 523 750
payable converted * * * * *
* * * * * *
Pref 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 * *(1 040 384)* * * * (1 040 384)
stock issuance * * * * *
costs * * * * * *
Net loss * * * * (4 024 832)* (4 024 832)
* * * * * *
BALANCES December 31, 1996 * * * *
14 471 756* $365 876*$16 482 256* 175 897* $439 742*$(10 743 190)*$6 544 684
<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 $ (4 024 832) $ (2 443 555)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 560 862 171 907
Accretion of discount onnote receivable (67 181) (69 053)
Stock issued as compensation under 401K plan - 15 212
Investment management fees receivable (105 981) 32 085
Other receivables (97 273) 22 196
Prepaid expenses (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 (295 022) (419 617)
Net cash in investing activities (277 742) (262 482)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds form 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 subordi- - (225 000)
nated note payable
Sale of common stock, less offering costs 9 960 741 -
Proceeds from exercise of stock options 1 375 -
Net cash provided by financing 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 $ 205 433 $ 90 199
obligation
Conversion of preferred stock to common $ 432 801 $ -
stock
Loans payable to common stock $ 1 500 000 $ -
Conversion of note 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.
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 advisor under the Investment Advisors
Act of 1940.
In June, 1994, Portfolio Brokerage Services, Inc. ("PBS") was
capitalized through a series of transactions with PMCI and PMC,
whereby PBS became a wholly owned subsidiary of PMCI by issuing
1,000 shares of its common stock in exchange for certain assets
and liabilities with a book value of $1,532,332. PBS is engaged
in business as a securities broker-dealer. As a broker-dealer it
executes security transactions for PMC's privately managed
account programs, on behalf of its customers through the
customer's custodian bank on a delivery vs. payment basis.
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 Portfolio Technology
Services, Inc. ("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
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 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 have been added back to the net
loss in computing the net loss per share.
The Company reviews its long-lived assets and goodwill for
impairment to determine if the carrying amount of the asset is
recoverable. The goodwill arising from the transaction in Note 1
is being amortized using the straight-line method over 15 years.
In complying with the provisions of SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, the Company has determined the fair value of
goodwill to be based on the cost of becoming publicly traded for
an entity in similar circumstances.
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 $697,129 compared to its carrying amount of
$570,494.
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 anounts 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 (2 812 300) (1 324 500)
assets
$ - $ _
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 $ - $ 1 200 000
assets of PMCI and its subsidiaries (except
PBS which security
11.5% note payable to shareholder(s), 14 694 22 470
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.
9% notes payable to employees and unrelated
individuals, due December 29, 1996, principal - 425 000
and interest payable on or before maturity
date, secured by a second lien on Company
assets.
14 964 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.
<PAGE>
F-12 of 18: Financial Statements Section
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,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. 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 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 prejudgment 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 - -
Thereafte - - -
$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 stock and 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 > 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 > 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 Contractual
Exercise prices of Options Exercise Price 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 $(5 135 022) $(2 541 606)
Net loss per share $ (.91) $ (.48)
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
The following methods and assumptions were used to estimate the
fair value of financial instruments:
The carrying amount of cash and cash equivalents reported in the
balance sheet approximates fair value.
The carrying amount of receivables, accounts payable, accrued
expenses and other liabilities in the balance sheet approximates
fair value.
The long-term note receivable was discounted at inception (see
Note 2) and accordingly its carrying amount approximates fair
value.
The carrying amount of the obligations under capital leases
approximates fair value.
F-18 of 18: Financial Statements Section
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> 614,153
<PP&E> 2,340,110
<DEPRECIATION> (892,753)
<TOTAL-ASSETS> 9,437,591
<CURRENT-LIABILITIES> 2,892,907
<BONDS> 0
0
439,742
<COMMON> 365,876
<OTHER-SE> 5,739,066
<TOTAL-LIABILITY-AND-EQUITY> 9,437,591
<SALES> 10,086,881
<TOTAL-REVENUES> 10,086,881
<CGS> 5,580,846
<TOTAL-COSTS> 5,580,846
<OTHER-EXPENSES> 8,199,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,008
<INCOME-PRETAX> (4,024,832)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,024,832)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,024,832)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
