U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14937
PMC INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 84-0627374
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
555 17th Street, 14th Floor, Denver, Colorado 80202
(Address of principal executive offices)
(303) 292-1177
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 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 .
State the number of shares outstanding of each of the issuer's classes
of common equity,
as of November 10, 1997.
Common Stock $0.01 Par Value 19,431,610
Class Number of Shares
Transitional Small Business Disclosure Format
Yes No X
Page 1 of 18
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I Financial Information
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
- September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income 5
- Three months ended September 30, 1997
and September 30, 1996; Nine months ended
September 30, 1997 and September 30, 1996
Condensed Consolidated Statements of Cash Flows 6
- Nine months ended September 30, 1997
and September 30, 1996
Pro Forma Consolidated Statements of Income 7
- Three months ended September 30, 1997 and
September 30, 1996
Notes to Unaudited Condensed Consolidated 9
Financial Statements
Item 2 Management's Discussion and Analysis of 12
Financial Condition and Results of
Operations
PART II Other Information
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Defaults upon Senior Securities 16
Item 4 Submission of Matter to a Vote of Security 16
Holders
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
Page 2 of 18
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Note 1)
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30, December 31,
1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents (Note 2) $ 3,465,269 $ 6,499,390
Receivables
Investment management fees 1,580,769 145,714
Other receivables 124,141 160,483
------------ ------------
TOTAL CURRENT ASSETS 5,170,179 6,805,587
FURNITURE AND EQUIPMENT, at cost,
net of accumulated depreciation of
$1,600,779 and $689,227 (Note 1) 1,389,662 936,234
PRODUCT DEVELOPMENT, at cost,
net of accumulated amortization of
$411,524 and $203,526 (Note 1) 1,101,042 511,123
GOODWILL, net of amortization of $10,498 5,388,659 -
(Note 1)
PREPAID EXPENSES AND OTHER ASSETS 1,428,493 340,006
LONG TERM NOTE RECEIVABLE (Note 2) 545,811 570,494
------------ ------------
TOTAL ASSETS 15,023,846 9,163,444
============ ============
See notes to unaudited condensed consolidated financial statements
Page 3 of 18
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
September 30, December 31,
1997 1996
---- ----
CURRENT LIABILITIES
Accounts payable $ 1,163,851 $ 839,095
Accrued expenses 612,386 535,520
Other liabilities 136,948 730,909
Deferred revenue 1,391,999 552,868
Notes payable - current (Note 3) 168,423 14,694
Obligations under capital lease - current 186,542 103,119
Income tax payable 2,152 -
------------ ------------
TOTAL CURRENT LIABILITIES 3,662,301 2,776,205
------------ ------------
LONG-TERM LIABILITIES
Obligations under capital lease - long term 196,113 116,702
Notes payable - long term (Note 3) 200,000 -
------------ ------------
TOTAL LONG-TERM LIABILITIES 396,113 116,702
------------ ------------
TOTAL LIABILITIES 4,058,414 2,892,907
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (Note 4)
Preferred stock, no par value - authorized
5,000,000 shares; issued and outstanding,
138,182 shares and 175,897 shares 345,455 439,742
Common stock, $.01 par value - authorized
50,000,000 shares; issued and outstanding,
19,431,610 shares and 14,471,756 shares 415,475 365,876
Additional paid-in capital 22,704,222 16,132,256
Accumulated deficit (12,499,720) (10,667,337)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 10,965,432 6,270,537
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 15,023,846 9,163,444
============ ============
See notes to unaudited condensed consolidated financial statements
Page 4 of 18
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<TABLE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
REVENUE
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
Investment management fees $ 3,382,199 $ 2,401,602 $ 9,001,181 $ 7,322,124
Other income 72,168 81,605 304,392 370,293
------------ ------------ ------------ ------------
Total revenue 3,454,367 2,483,207 9,305,573 7,692,417
------------ ------------ ------------ ------------
DIRECT EXPENSES
Investment manager and other fees 1,702,820 1,392,901 4,437,494 4,225,107
------------ ------------ ------------ ------------
GROSS PROFIT MARGIN $ 1,751,547 $ 1,090,306 $ 4,868,079 $ 3,467,310
------------ ------------ ------------ ------------
OPERATING EXPENSES
Salaries and benefits 888,843 794,905 3,027,800 2,309,941
Clearing charges and user fees 160,453 201,175 438,107 630,555
Advertising and promotion 245,014 195,059 661,743 525,436
General and administrative 296,989 214,686 882,038 593,093
Product development costs 60,597 36,036 146,279 76,916
Occupancy costs 97,654 66,822 247,140 209,922
Equipment costs 134,368 76,180 282,135 227,126
Professional fees 10,744 190,181 311,452 399,620
Interest 9,895 115,941 26,019 232,528
Depreciation and amortization 313,251 130,500 623,751 376,000
Goodwill amortization 10,498 - 10,498 -
Severance pay 43,500 - 43,500 -
------------ ------------ ------------ ------------
Total operating expense 2,271,806 2,021,485 6,700,462 5,581,137
NET LOSS BEFORE
INCOME TAXES $ (520,259) $ (931,179) $ (1,832,383) $ (2,113,827)
INCOME TAXES - - - -
------------ ------------ ------------ ------------
NET LOSS $ (520,259) $ (931,179) $ (1,832,383) $ (2,113,827)
============ ============ ============ ============
NET LOSS PER COMMON SHARE $ (0.04) $ (0.18) $ (0.13) $ (0.40)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING 14,867,070 5,555,713 14,639,096 5,555,713
============ ============ ============ ============
<FN>
See notes to unaudited condensed consolidated financial statements
</FN>
</TABLE>
Page 5 of 18
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,832,383) $ (2,113,827)
Adjustments to reconcile net loss to
net cash used in operating activities
Accretion of discount on notes receivable (43,777) (52,507)
Depreciation and amortization 634,249 376,000
Changes in operating assets and liabilities
Investment management
fees receivable (1,435,055) 74,174
Other receivables 36,342 (51,650)
Prepaid expenses and other assets (1,088,487) (201,308)
Accounts payable 324,756 (484,344)
Accrued expenses 76,866 83,209
Other liabilities 11,630 10,129
Income taxes payable 2,152 -
SEC settlement distribution (605,591) -
Deferred revenues 839,131 99,370
------------ ------------
Net cash used in operating activities (3,080,167) (2,260,754)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture & equipment (869,180) (479,456)
Cost of product development (797,918) -
Decrease of long term note receivable 68,460 300,318
Goodwill recognized on ADAM purchase (5,399,157) -
------------ ------------
Net cash provided by (used in)
investing activities (6,997,795) (179,138)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from notes payable 353,729 2,869,227
Increase in obligations under capital lease 162,834 (42,060)
Net proceeds from issuance of common stock 6,527,278 -
------------ ------------
Net cash provided by financing activities 7,043,841 2,827,167
------------ ------------
NET INCREASE (DECREASE) IN CASH (3,034,121) 387,275
CASH, at beginning of period 6,499,390 313,885
------------ ------------
CASH, at end of period $ 3,465,269 $ 701,160
============ ============
See notes to unaudited condensed consolidated financial statements
Page 6 of 18
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<TABLE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
<CAPTION>
Pro Forma PMCI/ADAM
PMCI ADAM Adjustments Combined
REVENUE
<S> <C> <C> <C> <C>
Investment management fees $3,169,117 $2,795,019 $ - $5,964,136
Other income 68,787 36,161 - 104,948
--------- --------- -------- ---------
Total revenue 3,237,904 2,831,180 - 6,069,084
--------- --------- -------- ---------
DIRECT EXPENSES
Investment manager and other fees 1,552,986 1,966,063 - 3,519,049
--------- --------- -------- ---------
GROSS PROFIT MARGIN $1,684,918 $ 865,117 $ - $2,550,035
--------- --------- -------- ---------
OPERATING EXPENSES
Salaries and benefits 845,212 623,503 - 1,468,715
Clearing charges and user fees 160,453 - - 160,453
Advertising and promotion 238,546 124,896 - 363,442
General and administrative 291,814 37,382 - 329,196
Product development costs 60,597 - - 60,597
Occupancy and equipment costs 219,072 160,766 - 379,838
Professional fees 7,435 59,725 - 67,160
Interest 9,405 6,300 - 15,705
Depreciation and amortization 311,908 17,613 - 329,521
Goodwill amortization - Optima - 13,525 (13,525) -
Goodwill amortization - ADAM - - 134,146 (1) 134,146
Severance pay 43,500 - - 43,500
--------- --------- -------- ---------
Total operating expense 2,187,942 1,043,710 120,621 3,352,273
NET LOSS BEFORE INCOME TAXES $ (503,024) $ (178,593) $(120,621) $ (802,238)
========= ========= ======== =========
NET LOSS PER COMMON SHARE $(0.04) $ (231.04) $(0.04)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,548,614 773 19,431,610
--------- --------- ---------
- ---------
<FN>
(1) The adjustment of $134,146 reflects three months of amortization cost of the
ADAM goodwill ($5,365,825 amortized over 120 months).
</FN>
</TABLE>
Page 7 of 18
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<TABLE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
<CAPTION>
Pro Forma PMCI/ADAM
PMCI ADAM Adjustments Combined
REVENUE
<S> <C> <C> <C> <C>
Investment management fees $2,401,602 $3,872,240 $ - $6,273,842
Other income 81,605 47,938 - 129,543
--------- --------- -------- ---------
Total revenue 2,483,207 3,920,178 - 6,403,385
--------- --------- -------- ---------
DIRECT EXPENSES
Investment manager and other fees 1,392,901 2,849,746 - 4,242,647
--------- --------- -------- ---------
GROSS PROFIT MARGIN $1,090,306 $1,070,432 $ - $2,160,738
--------- --------- -------- ---------
OPERATING EXPENSES
Salaries and benefits 794,905 618,596 - 1,413,501
Clearing charges and user fees 201,175 - - 201,175
Advertising and promotion 195,059 56,447 - 251,506
General and administrative 214,686 93,388 - 308,074
Product development costs 36,036 - - 36,036
Occupancy and equipment costs 143,002 132,774 - 275,776
Professional fees 190,181 103,549 - 293,730
Interest 115,941 13,068 - 129,009
Depreciation and amortization 130,500 20,400 - 150,900
Goodwill amortization - Optima - 13,467 (13,467) -
Goodwill amortization - ADAM - - 123,782 (1) 123,782
Severance pay - - - -
--------- --------- -------- ---------
Total operating expense 2,021,485 1,051,689 110,315 3,183,489
NET LOSS BEFORE INCOME TAXES $ (931,179) $ 18,743 $(110,315) $ (1,022,751)
========= ========= ======== =========
NET LOSS PER COMMON SHARE $(0.18) $ 24.25 $(0.10)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,555,713 773 10,438,709
--------- --------- ---------
- -------
<FN>
(1) The adjustment of $123,782 reflects three months of amortization cost of the
ADAM goodwill ($4,591,275 amortized over 120 months).
</FN>
</TABLE>
Page 8 of 18
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
On September 24, 1997, PMC International, Inc. ("PMCI" or the
"Company") completed its acquisition (the "Acquisition") of ADAM
Investment Services, Inc. ("ADAM"), a Delaware corporation, and its
wholly owned subsidiary, Optima Funds, Inc., ("Optima") a Georgia
corporation, pursuant to a Stock Purchase Agreement dated July 25, 1997
("the Agreement") among the Company, ADAM and ADAM's shareholders.
PMCI acquired all of the issued and outstanding shares of common stock
of ADAM from its shareholders in consideration for payment of $5
million at closing and two earn-out payments on the first and second
anniversary dates of the closing. The first earn-out payment will
equal 1.0% of ADAM's standard fee assets under management in excess of
$500 million, determined on the one-year anniversary of the closing of
the Acquisition, not to exceed $2.0 million, plus interest thereon at a
rate of 8.75%. The second earn-out payment will equal 1.0% of ADAM's
standard fee assets under management in excess of $700 million,
determined on the two-year anniversary of the closing of the
Acquisition, not to exceed $2.0 million. The Acquisition was accounted
for using the purchase method of accounting. The excess of the cost of
the Acquisition over the fair value of the assets acquired and
liabilities assumed was recorded as goodwill. The Acquisition was
funded from the proceeds of a private placement of PMCI common stock
which also closed on September 24, 1997. The Company raised
approximately $6.6 million by selling 4,882,996 shares of PMCI common
stock at $1.50 per share.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the historical accounts of Portfolio Management Consultants,
Inc. for all periods, the accounts of PMCI since September 30, 1993,
the accounts of Portfolio Brokerage Services, Inc., and Portfolio
Technology Services, Inc. since inception, and ADAM since September 24,
1997. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal accruals and
elimination of intercompany accounts and transactions) considered
necessary for a fair presentation have been included. The unaudited
condensed financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB, as amended, for the year ended
December 31, 1996, as amended.
Page 9 of 18
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
Product Development
Product development costs consist of salary and benefits, outside
services and other direct costs relating to customization of products
for institutional client relationships. These costs are capitalized
and amortized straight line over the terms of the related contracts.
During the three months ended September 30, 1997, $594,000 of product
development costs were capitalized. These costs are being amortized
over periods ranging from 36 to 60 months.
NOTE 2 - LONG TERM NOTE RECEIVABLE
In January 1997, KP3, LLC ("KP3") a limited liability company owned and
controlled by the Company's president and chief executive officer,
borrowed $1,750,000 from a bank with a due date of December 31, 1997.
The purpose of the loan was to finance payment of the deferred portion
of the purchase price of 1,643,845 shares of the Company's common stock
owned by KP3 that were purchased from a former officer of the Company
at the time of his departure. In connection with this borrowing, the
Company agreed to collateralize the loan on behalf of KP3.
Accordingly, $1,890,000 of cash included in cash and cash equivalents
(representing the initial principal balance plus interest) became
restricted for this purpose. During 1997, the Company has loaned KP3
approximately $96,000 specifically designated to pay the interest on
the bank loan. KP3 has agreed to reimburse the Company for all amounts
paid by the Company toward the loan or for collateral applied to the
loan, including interest at an annual rate of 9% and has granted the
Company a security interest in its 1,643,845 shares of the Company's
common stock. Such loan was restructured through a different bank on
October 1, 1997. In connection therewith, the collateral pledge by the
Company in connection with the loan was reduced to $1,400,000 and the
Company released 350,000 shares of the common stock in the Company
which it held as collateral. The new loan is due December 31, 1998.
During January 1997, the Company authorized collateralized financing of
154,690 shares of the Company's common stock which had been purchased
and owned by a number of PMC employees as part of a private sale of
stock by a shareholder of the Company in 1993. This purchase was
originally financed through a bank loan which came due on December 31,
1996. The balloon amount due at the expiration of the loan was
$142,093. The Company is receiving monthly installments in the amount
of $3,435 collected through payroll deductions. These notes will
mature on December 31, 1999, with balloon payments of $38,826 due from
employees.
NOTE 3 - NOTES PAYABLE
Note payable to a former stockholder of ADAM consists of $360,000 of
which $160,000 is current and $200,000 is long term. The note requires
annual principal and interest payments and bears interest at the rate
of 5% per annum and matures February 9, 1999.
Page 10 of 18
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 4 - SHAREHOLDERS' EQUITY
Common Stock/Preferred Stock
On September 24, 1997, the Company raised approximately $6.6 million
(net of approximately $700,000 in offering expenses) by selling
4,882,996 shares of PMCI common stock at $1.50 per share.
During January 1997, certain shareholders voluntarily exchanged 37,715
shares of the Company's Series A Preferred Stock and all accumulated
dividends thereon for 51,858 shares of common stock. At September 30,
1997, there were 138,182 shares of preferred stock outstanding and
cumulative dividends in arrears thereon of $275,964.
Options
On February 26, 1997, the Board of Directors granted options to
purchase a total of 70,000 shares of the Company's common stock to
employees at an exercise price of $2.50 per share and which expire in
six years. The options vest 20% on the first anniversary of each
employees date of hire with the balance vesting in equal successive
quarterly installments over the following four years, provided,
however, each employee must be employed by the Company at the time any
vesting would occur. The Board of Directors also granted options to
purchase 50,000 shares of common stock to Mr. Emmett Daly in connection
with his appointment as a director of the Company on February 27,
1997. The options vest at the rate of 20% at each such time as the
average of the bid and asked price of the common stock equals $2.50,
$3.50, $4.50, $5.50 and $6.50 respectively, for 20 consecutive trading
days. Mr. Daly's options are exercisable at $2.50 per share and expire
in five years.
The Board of Directors granted options to purchase 50,000 shares of
common stock to Mr. Richard C. Hyde in connection with his appointment
as a director of the Company on July 9, 1997. The options vest at the
rate of 20% at each such time as the average of the bid and asked price
of the common stock equals $1.968, $2.968, $3.968, $4.968, and $5.968,
respectively, for 20 consecutive trading days. Mr. Hyde's options are
exercisable at $1.968 per share and expire in five years.
The Board granted options to purchase 250,000 shares of
common stock to Mr. Scott MacKillop and a total of 165,000 shares of
common stock to a total of 6 other employees of ADAM in connection with
the Acquisition. The options vest as follows: 20% of each employee's
options vest on the first anniversary of the Company's Acquisition of
ADAM and the balance in equal successive quarterly installments over the
following four year period, provided, however, that the employee must be
employed or engaged by PMCI or one of its affiliates as either an employee or
consultant on the date any vesting would occur. The exercise price of
options are $1.625 per common share and the options expire six years from
the date of grant unless employment or engagement is terminated prior to
that time, in which case the options shall expire 90 days after termination.
The Board also granted options to purchase 50,000 shares of common
stock to Mr. Scott MacKillop in connection with his appointment as a
director of the Company on October 27, 1997. The options vest at the
rate of 20% at each such time as the average of the bid and asked price
of the common stock equals $1.625, $2.625, $3.625, $4.625, $5.625,
respectively, for 20 consecutive trading days. Mr. MacKillop's options
are exercisable at $1.625 per share and expire in five years.
In May 1997, a total of 25,000 stock options were exercised to purchase
25,000 shares of common stock at the exercise price of $1.00 per share
on 20,000 options and $1.375 per share on 5,000 options.
Page 11 of 18
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PMC INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
PMC International, Inc., together with its subsidiaries ("PMCI" or 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 fees
charged to clients based on a percentage of managed assets and to a
lesser extent on consulting fees for certain advisory services and
licensing fees from its software products. At the present time, the
principal factors affecting the Company's revenues are whether the
Company adds or loses customers for its investment management services,
the performance of equity and fixed income markets, and the type and
size of accounts managed by the Company and related differences in fees
charged.
The following discussion relates to the Company's financial statements
included in this Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997. This report should be read in conjunction with the
Company's financial statements and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-KSB, as amended, for the year ended
December 31, 1996 (the "10-KSB"), and the Form 8-K dated October 8,
1997 (the "8-K"), as filed with the Securities and Exchange Commission
(the "Commission"). Statements which are not historical facts
contained in this Form 10-QSB are forward looking statements that
involve risks and uncertainties that could cause actual results to
differ from projected results. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "intends," and
similar expressions are intended to identify forward-looking
statements. Factors that could cause actual results to differ
materially include the addition or loss of a substantial customer for
the Company's investment management and consulting services, general
economic (specifically market) conditions, and other factors detailed
in Forms 10-KSB, as amended, and 8-K.
ADAM Acquisition
On September 24, 1997, the Company acquired ADAM Investment Services,
Inc. ("ADAM") and its wholly owned subsidiary Optima Funds, Inc. (See
Note 2 to the Financial Statements, above.) ADAM is a registered
investment adviser with approximately $1.2 billion in assets under
advisement. As the transaction was completed just six days prior to
the end of the third quarter, the impact of the acquisition on the
Company's statements of income is nominal, but is fully reflected in
the September 30, 1997 balance sheet. Beginning with the fourth
quarter, ADAM's operations will be fully reflected in the Company's
financial statements.
Page 12 of 18
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
Results of Operations
Three Months Ended September 30, 1997, Compared to Three Months Ended
September 30, 1996 and
Nine Months Ended September 30, 1997, Compared to Nine Months Ended
September 30, 1996
Revenues were $3,454,000 for the quarter ended September 30,
1997, compared to $2,483,000 for the corresponding quarter in 1996, an
increase of 39%. Revenues were $9,306,000 for the nine months ended
September 30, 1997, compared to $7,692,000 for the corresponding nine
months in 1996, an increase of 21%. The increase was attributable
primarily to investment management fees generated from new
institutional client relations. In addition, asset based fees
increased in direct proportion to increases in the stock market.
Revenues related to these new relationships are based upon a percentage
of assets under management using the Company's products and services.
Much of the new business is from distribution channels that pay the
Company only its net portion of the fees, and does not include the fees
for third parties (i.e., portfolio managers, solicitors, brokerage or
custody). Historically, fees paid to the Company through its primary
distribution channels included fees payable for these other services.
When the Company acts in the capacity of vendor, consultant or
sub-advisor to another entity that is either a registered investment
advisor or exempt under the law, the Company is likely to be paid only
its portion of the total client fee. When the Company acts in the
capacity of investment advisor, it is more likely to collect the gross
fee paid by the client and then pay investment manager and other third
party fees.
Direct Expenses Investment manager and other third party fees
were $1,703,000 for the quarter ended September 30, 1997, compared to
$1,393,000 for the corresponding quarter in 1996, an increase of 22%.
Investment manager and other third party fees were $4,437,000 for the
nine months ended September 30, 1997, compared to $4,225,000 for the
corresponding nine months in 1996, an increase of 5%. Direct expenses
increased as a result of new business and the need to allocate
additional resources to service such new business. However, as
discussed above, direct expenses did not increase in proportion to
revenues as certain of these revenues are recognized on a net basis to
the Company. In addition, asset based direct expenses increased in
direct proportion to increases in the stock market.
Gross Profit Margin was $1,752,000 for the quarter ended
September 30, 1997, compared to $1,090,000 for the corresponding
quarter in 1996, an increase of 61%. Gross Profit Margin was $4,868,000
for the nine months ended September 30, 1997, compared to $3,467,000
for the corresponding quarter in 1996, an increase of 40%. These
increases are explained above under Revenues and Direct Expenses.
Operating Expenses were $2,272,000 for the quarter ended
September 30, 1997, compared to $2,021,000 for the corresponding
quarter in 1996, an increase of 12%. Operating expenses were
$6,700,000 for the nine months ended September 30, 1997, compared to
$5,581,000 for the corresponding nine months in 1996, an increase of
20%. These increases were due primarily to an increase in salaries and
benefits which increased 31% for the nine month period, and general and
administrative costs which increased 49% for the nine month period.
Personnel and the related operating costs increased to support the
expansion of the Company's products and services, the development of
internal systems and the servicing of several new distribution channels
and customers.
Page 13 of 18
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
The total number of Company employees at September 30, 1997 was 84
including employees transferred from ADAM, as compared to 50 at
September 30, 1996. Clearing charges and user fees decreased by 30%
for the nine month period as a result of the implementation of a new
in-house trading system and termination of outside service bureau.
Advertising and promotion increased by 26% for the nine month period as
a result of development and support of new distribution channels.
Product development costs increased by 90% for the nine month period as
a result of implementation on a new portfolio accounting system and
maintenance of proprietary software. Interest costs for the nine month
period decreased by 89% as a result of the repayment of a note
payable. Depreciation and amortization increased by 66% for the nine
month period as a result of a general increase in the level of fixed
assets. The Company believes continued expansion of its operations is
essential. As a consequence, the Company intends to continue to
increase operating expenditures.
Income Taxes Based on current estimates of operating results,
the Company expects its effective tax rate to be -0- for 1997.
Net Loss The Company recorded a net loss of $520,000 for the
quarter ended September 30, 1997 as compared to $931,000 for the same
period in 1996, a decrease of 44%. The net loss was $1,832,000 for the
nine months ended September 30, 1997, compared to $2,114,000 for the
corresponding nine months in 1996, a decrease of 13%. The Company
recorded a net loss of $520,000 for the quarter ended September 30,
1997 as compared to $734,000 for the quarter ended June 30, 1997, a
decrease of 29%. For the quarter ended September 30, 1997, the net
loss before interest, taxes, depreciation and amortization was $197,000
as compared to $685,000 for the corresponding quarter in 1996, an
improvement of 71%.
The improvement in earnings was the result of revenues growing at a
faster pace than direct and operating expenses. Also, certain product
development costs amounting to $594,000 were capitalized during the
quarter ended September 30, 1997. (See Note 1.) The decisions by
management to capitalize certain costs directly impact the earnings of
the Company. However, revenues from new business continue to be less
than operating expenses resulting in a net loss in the current period
ended September 30, 1997.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash of $3,465,000, a
substantial portion of which was held in short-term interest bearing
accounts, including restricted cash of $1,890,000. (See Note 2.)
For the nine month period ended September 30, 1997:
Cash used in operating activities was $3,080,000. This was due
primarily to a net operating losses sustained. Also, as a result of
the ADAM acquisition, accounts receivable, prepaid expenses, accounts
payable, accrued expenses and deferred income increased. In addition,
accounts receivable and deferred revenues increased as a result of new
business.
Page 14 of 18
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
Cash used in investing activities was $6,997,000. Cash used in
investing activities was the result of goodwill generated from the ADAM
acquisition and capital expenditures incurred as a result of business
expansion.
Cash provided by financing activities of $7,044,000 was primarily
related to the private placement of common stock.
The Company anticipates that it will continue to experience operating
losses until such time, if ever, as investment management fees from
managed assets and consulting and license fees increase sufficiently to
cover the Company's increasing operating expenses. While the Company
believes that it has sufficient capital resources to meet its ongoing
funding requirements, until it products and services can generate
sufficient revenues to offset costs, there can be no assurance that the
Company's products and services will be successful, that they will
generate adequate revenue to meet the Company's capital needs or that
the Company will become profitable in the future.
Page 15 of 18
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In early June 1997, the Company received a letter from an attorney
representing a former employee which threatened litigation relating to
a dispute over such former employee's remuneration by the Company
unless the Company agreed to settle with him by a specified date. The
former employee alleged damages totaling $645,000. The Company has
responded to the letter and stated its position that no amounts are
owed. Subsequently, the Company was advised by the former employee's
attorney that the matter would be submitted to the NASD for
arbitration. The Company has not been served or otherwise been made
subject to litigation in connection with the matter. The Company
believes that the claims described in the letter are without basis and
intends to defend the matter vigorously if any proceeding is commenced.
ITEM 2 CHANGES IN SECURITIES
On September 24, 1997, the Company sold 4,882,996 shares of PMCI common
stock at $1.50 per share. Keefe, Bruyette & Woods, Inc. acted as the
placement agent and received a fee of $564,000.
In January 1997, certain holders of the Company's Series A Preferred
Stock voluntarily exchanged a total of 37,715 preferred shares and all
accumulated dividends thereon for a total of 51,858 shares of
restricted common stock. The shareholders received registration rights
in connection with the restricted common stock received. In connection
with the transactions, the Company claimed an exemption from the
registration requirements of the Securities Act under Section 3(a)(9)
of the Securities Act.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Holders of Preferred Stock are entitled to receive dividends at a rate
of $0.325 per share per annum (equal to 13% of the purchase price per
share attributable to the Preferred Stock). Dividends are payable
semi-annually on January 15 and July 15 in each year commencing July
15, 1991. Preferred dividends became payable on January 15, 1997 and
July 15, 1997, which was not declared or paid. As of September 30,
1997, cumulative dividends in arrears were $275,964.
ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
Page 16 of 18
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. Number Exhibit Page Number
10.1 Stock Purchase Agreement among PMC
International, Inc., Michael T.
Wilkinson, Scott A. MacKillop, Gary A
Miller, Michael J. Flinn, Jared Shope,
Graham Guy, John W. Burgin, and ADAM
Investment Services, Inc., dated as of
July 25, 1997 (1)
10.2 Non-Compete Agreement between ADAM
Investment Services, Inc., and Michael
T. Wilkinson (1)
10.3 Employment Agreement between ADAM
Investment Services, Inc., and Scott A.
MacKillop (1)
27 Financial Data Schedule 19
- -------
(1) Incorporated by reference from the Company's Current Report on
Form 8-K (Commission File No. 0-14937), filed October 8, 1997.
B. Form 8-K was filed by the Company on October 8, 1997, disclosing
the Acquisition of ADAM Investment Services, Inc. and its wholly owned
subsidiary, Optima Funds, Inc. pursuant to a stock purchase agreement.
Page 17 of 18
<PAGE>
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PMC INTERNATIONAL, INC.
REGISTRANT
Date: November 14, 1997 /S/ Kenneth S. Phillips
Kenneth S. Phillips
President, Chief Executive Officer
Date: November 14, 1997 /S/ Vali Nasr
Vali Nasr
Chief Financial Officer
Page 18 of 18
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<ARTICLE> 5
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,465,269
<SECURITIES> 0
<RECEIVABLES> 2,250,721
<ALLOWANCES> 0
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<CURRENT-ASSETS> 6,817,152
<PP&E> 4,503,007
<DEPRECIATION> (2,012,303)
<TOTAL-ASSETS> 15,023,846
<CURRENT-LIABILITIES> 4,058,414
<BONDS> 0
0
345,455
<COMMON> 415,475
<OTHER-SE> 10,204,502
<TOTAL-LIABILITY-AND-EQUITY> 15,023,846
<SALES> 9,305,573
<TOTAL-REVENUES> 9,305,573
<CGS> 4,437,494
<TOTAL-COSTS> 4,437,494
<OTHER-EXPENSES> 6,674,445
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<INCOME-PRETAX> (1,832,383)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,832,383)
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<EXTRAORDINARY> 0
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<NET-INCOME> (1,832,383)
<EPS-PRIMARY> (.13)
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