Page 1
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 JUNE 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 August 11, 1997.
Common Stock $0.01 Par Value 14,548,614
Class Number of Shares
Transitional Small Business Disclosure Format
Yes No X .
PMC INTERNATIONAL, INC.
INDEX
PART I Financial Information Page No.
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income 5
Three months ended June 30, 1997
and June 30, 1996; Six months ended
June 30, 1997 and June 30, 1996
Condensed Consolidated Statements of Cash Flow 6
Six months ended June 30, 1997
and June 30, 1996
Notes to Unaudited Condensed Consolidated Financial8
Statements
Item 2 Managements Discussion and Analysis of 10
Financial Condition and Results of
Operations
PART II Other Information
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 15
Item 3 Defaults upon Senior Securities 15
Item 4 Submission of Matter to a Vote of Security Holders15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Note 1)
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, December 31,
1997 1996
CURRENT ASSETS
Cash and cash equivalents (Note 2)$ 3,109,724 $ 6,499,390
Receivables
Investment management fees 970,554 145,714
Other receivables 140,494 160,483
TOTAL 4,220,772 6,805,587
FURNITURE AND EQUIPMENT, at cost,
net of accumulated depreciation of
$865,216 and $689,227 (Note 1) 1,252,174 936,234
SOFTWARE DEVELOPMENT, at cost,
net of accumulated depreciation of
$338,037 and $203,526 (Note 1) 493,872 511,123
PREPAID EXPENSES AND OTHER ASSETS 713,120 340,006
LONG TERM NOTE RECEIVABLE (Note 2) 564,946 570,494
TOTAL ASSETS $ 7,244,884 $ 9,163,444
See notes to unaudited condensed consolidated financial statements
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
(Unaudited)
June 30, December 31,
1997 1996
LIABILITIES
Accounts payable $ 754,693 $ 839,095
Accrued expenses 511,481 535,520
Other liabilities 106,193 730,909
Deferred revenue 551,489 552,868
Notes payable 10,619 14,694
Obligations under capital lease 369,682 219,821
TOTAL LIABILITIES 2,304,157 2,892,907
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS EQUITY (Note 3)
Preferred stock, no par value - authorized
5,000,000 shares; issued and outstanding,
138,182 shares and 175,897 shares345,455 439,742
Common stock, $.01 par value - authorized
50,000,000 shares; issued and outstanding,
14,548,614 shares and 14,471,756 shares 366,664
365,876
Additional paid-in capital 16,208,069 16,132,256
Accumulated deficit (11,979,461) (10,667,337)
TOTAL SHAREHOLDERS EQUITY 4,940,727 6,270,537
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $ 7,244,884 $ 9,163,444
See notes to unaudited condensed consolidated financial statements.
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
REVENUE:
1997 1996 1997 1996
Investment managemen $ 2,874,166 $ 2,514,498 $ 5,618,982 $ 4,920,522
fees
Other income 115,919 78,822 232,224 288,689
Total revenue 2,990,085 2,593,320 5,851,206 5,209,211
EXPENSES:
Investment manager 1,343,952 1,425,152 2,734,674 2,832,207
and other fees
Salaries and benefits 1,202,355 757,300 2,138,957 1,515,035
Clearing charges 120,447 209,902 277,655 429,380
and user fees
Advertising and promotion 203,281 151,521 416,730 330,378
General and administrative 293,941 191,074 585,049 378,410
Software development costs 35,052 40,880 85,683 40,880
Occupancy and equipment 331,509 296,093 607,754 539,546
costs
Professional fees 185,228 98,126 300,708 209,436
Interest 8,197 71,957 16,121 116,587
Total expenses 3,723,962 3,242,005 7,163,331 6,391,859
NET LOSS BEFORE
INCOME TAXES $ (733,877) $ (648,685) $ (1,312,125)$ (1,182,648)
INCOME TAXES - -
- - - -
NET LOSS $ (733,877) $ (648,685) $ (1,312,125)$ (1,182,648)
NET LOSS
PER COMMON SHARE $ (0.05)$ (0.13) $ (0.09)$ (0.22)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 14,522,692
5,555,713 14,523,220 5,555,713
See notes to unaudited condensed consolidated financial statements.
PMC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,312,125)$ (1,182,648)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accretion of discount on notes receivable (32,610) (37,303)
Depreciation and amortization 310,500 245,500
Changes in operating assets and liabilities
Investment management fees receivable (824,840) (23,827)
Other receivables 19,989 (72,604)
Prepaid expenses and other assets (373,114) (199,620)
Accounts payable (84,402) (649,745)
Accrued expenses (24,039) 109,807
Other liabilities (21,625) 6,403
SEC Settlement Distribution (603,091) 0
Deferred revenues (1,379) 98,008
Net cash used in operating activities (2,946,736) (1,706,029)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture & equipment (335,274) (202,555)
Decrease of long-term note receivable 196,959 208,383
Long term notes receivable PMC employees (142,093) -
Long term note receivable KP3, LLC (31,689) -
Principle payment on note receivable 15,694 -
Cost of software (106,336) (120,603)
net cash provided by (used in) investing activities(402,739)
(114,775)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 0 2,256,169
Principal payments on notes payable (4,075) (3,955)
Principal payments on obligations under capital lease (62,991)
(22,765)
Proceeds from exercise of stock options 26,875 0
Net cash provided by financing activities (40,191) 2,229,449
NET INCREASE (DECREASE) IN CASH (3,389,666) 408,645
CASH, at beginning of period 6,499,390 313,885
CASH, at end of period $ 3,109,724 $ 722,530
See notes to unaudited condensed consolidated financial statements
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Six Months Ended
June 30
1997 1996
Cash paid for interest $ 14,702 $ 26,013
SUPPLEMENTAL DISCLOSURE OF INVESTING ACTIVITIES:
The Company incurred additional capital lease obligations
during the six months ended June 30, 1997, of $219,422 for
computer equipment.
See notes to unaudited condensed consolidated financial statements.
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
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" or the Company). The stock exchange was completed on September
30, 1993, and as a result of this transaction, PMC is a wholly owned
subsidiary of PMCI. The stock exchange between Schield and PMC has
been considered a reverse acquisition and accounted for under the
purchase method of accounting. Under reverse acquisition accounting,
PMC was considered the acquirer for accounting and financial reporting
purposes, and acquired the assets and assumed the liabilities of
Schield. The Schield assets acquired and liabilities assumed were
recorded at their fair values. The cost of the acquisition of Schield
of $1,741,018 was based on the NASDAQ publicly traded price of the
outstanding Schield common stock prior to the announcement of the
transaction. The excess of the cost of the acquisition over the fair
value of the assets acquired and liabilities assumed was recorded as
goodwill.
Subsequently, it was determined that due to the nature of this
transaction, goodwill should not have been recorded. Accordingly, the
balances of the additional paid-in capital and deficit at December 31,
1995, have been restated from amounts previously reported to reflect a
retroactive charge of $350,000 to additional paid-in capital for the
original goodwill recorded and a credit of $52,513 to deficit for the
amortization of such goodwill to that date. Of the amount charged to
the deficit, $23,340 (negligible per share) is applicable to 1995 and
has been reflected as a reduction of general and administrative
expenses for that year, the balance being charged to the deficit at
December 31, 1994. The effect on the 1996 statement of operations
would be to reduce the net loss by $23,340 (negligible per share).
Summary of Accounting Policy
The accompanying unaudited condensed consolidated financial statements
include the historical accounts of PMC for all periods, the accounts of
PMCI since September 30, 1993, and PBS and PTS since inception, and
have been prepared in accordance with generally accepted accounting
principles for interim financial information and 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 for the year ended December 31, 1996.
NOTE 2 - LONG TERM NOTE RECEIVABLE
In January 1997, KP3, LLC, a limited liability company owned and
controlled by the Company's president and chief executive officer (the
LLC), borrowed $1,750,000 from a bank with a due date of December 31,
1997. The purpose of the loan was to finance payment of the deferred
portion of the purchase price of 1,643,845 shares of the Companys
common stock owned by the LLC that were purchased from a former officer
of the Company at the time of his departure. In connection with this
borrowing, the Company agreed to collateralize the loan on behalf of
the LLC. Accordingly, $1,890,000 of cash included in cash and cash
equivalents (representing the initial principal balance and in an
interest reserve) in the accompanying balance sheet became restricted
for this purpose. Effective March 1997, the Company loaned the LLC
$31,689.11 specifically designated to pay the interest on the bank
loan. The borrower (KP3, LLC) 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
Companys common stock.
During January 1997, the Company authorized 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 $142,093.43. The
Company paid off the prior bank loan and financed this amount for its
employees as notes receivable, collateralized by the underlying stock.
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 $38,825.57 due from
employees.
NOTE 3 - SHAREHOLDERS' EQUITY
Common Stock/Preferred Stock
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 June 30, 1997,
there were 138,182 shares of preferred stock outstanding and cumulative
dividends in arrears thereon of $253,509.
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 becoming 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 also granted options to purchase 50,000 shares
of common stock to Mr. Richard C. Hyde in connection with his becoming
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.
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
as to 20,000 options and $1.375 per share as to $5,000 options.
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 Companys distribution channels depending upon the size,
sophistication and requirements of the investor. The Companys
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
June 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 for the year ended December 31,
1996 (the 1996 10-KSB) 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 the 1996 10-KSB.
During the second quarter of 1997, it was determined that the goodwill
recognized by the Company in September 1993 in connection with the
Schield Management Company - PMC exchange of stock, should not have
been recognized. The Company restated the balances of additional
paid-in capital and deficit at December 31, 1995, to reflect a
retroactive charge of $350,000 to additional paid-in capital for the
original recorded goodwill and a credit of $52,513 to deficit for the
prior amortization of the goodwill. See Note 1 to the Unaudited
Financial Statements.
Results of Operations
Three Months Ended June 30, 1997, Compared to Three Months Ended June
30, 1996
Gross revenues were $2,990,000 for the quarter ended June 30,
1997, compared to $2,593,000 for the corresponding quarter in 1996, an
increase of 15%. Gross margin (Gross Revenues less direct expenses
which are Investment Manager and other fees of $1,343,952 and
$1,425,152, respectively), also referred to as gross profit, were
$1,646,048, compared with $1,167,848 for the same three month period in
1996. This difference represents growth of 31% over this same period.
The increase was attributable primarily to investment management fees
for start up and conversion services received from new relations with
institutional channels established by the Company during the first
quarter. Future revenues related to these new relationships are
expected to be based upon a percentage of assets under management using
the Company's products and services. For accounting purposes, total
revenue includes direct costs incurred by the Company such as payment
of independent money managers and solicitors. The greater growth of
gross profit, relative to revenue is primarily a result of the
Investment management fees recognized by the Company in connection with
the new business relationships discussed above. This new business is
from distribution channels that pay the Company only its net portion of
the fees, and does not include the fees for portfolio managers,
solicitors, brokerage or custody. Historically, the Investment
management 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 solicitor fees. The capacity of
the Company, in respect to a client relationship, may significantly
impact the way in which revenue is explained.
Expenses Investment manager and other fees (which are primarily
a function of the amount of assets managed) decreased marginally in
absolute dollars while decreasing relative to total investment
management fees (also a function of the amount of assets managed),
primarily because the revenues related to the new relationships with
institutional channels had no associated investment manager and other
fees during the quarter.
Operating expenses (total expenses less Investment manager and
other fees) were $2,380,000 for the quarter ended June 30, 1997,
compared to $1,817,000 for the corresponding quarter in 1996, an
increase of $563,000 or 31%. This increase was due primarily to an
increase in salaries and benefits of $445,000 as the Company added
staff to its marketing and sales teams and technology and operations
groups. The balance of the increase resulted primarily from increased
general and administrative expenses and advertising and promotion
expenses corresponding to the Company's increased staffing levels. The
increased staff was added to support the expansion of the Company's
products and services, the enhancements of its internal systems and the
servicing of several new distribution channels and customers. Total
Company employees at June 30, 1997, and 1996 were approximately 73 and
45, respectively. Salaries and benefits are expected to increase
throughout 1997 relative to 1996 because of increased staffing and
compensation levels.
Six Months Ended June 30, 1997, Compared to Six Months Ended June 30,
1996
Revenues Investment management fees for the six months ended
June 30, 1997, were $5,619,000 compared to $4,921,000 for the same
period in 1996. The increase of $698,000 or 15% was due primarily to
start up and conversion services received from new relationships with
institutional distribution channels established during the first
quarter of 1997. As discussed earlier, Gross Margin (gross revenues
less direct expenses which are Investment manager and other fees of
$2,734,674 and $2,832,207, respectively), were $2,884,326 and
$2,088,793. This increase represents 38% growth over the comparable
period. Other income for the six months ended June 30, 1997, decreased
approximately 20% from $288,689 in 1996 to $232,224 in 1997.
Expenses Investment manager and other fees for the six months
ended June 30, 1997, decreased 4% from $2,832,000 in 1996 to $2,735,000
in 1997, primarily due to the new relationships established with
Institutional Channels having no associated investment manager and
other fees.
General and administrative salaries and benefits increased
approximately $624,000 to nearly $2,139,000 for the six months ended
June 30, 1997, from $1,515,000 for the same period in 1996. The
increase was due primarily to the increased staffing requirements
associated with the development of several new and significant client
relationships. Total Company employees at June 30, 1997, and 1996 were
approximately 73 and 45, respectively. Salaries and benefits are
expected to increase throughout 1997 relative to 1996 because of
increased staffing and compensation levels. New staff was added in the
areas of operations, marketing, sales, software programming and systems
support. General and administrative expenses increased $206,639 to
$585,049 for the six months ended June 30, 1997, from $378,410 for the
same period in 1996. The increase was due primarily to cost related to
increased staffing.
Clearing charges and user fees decreased $151,725 to $277,655 for
the six months ended June 30, 1997, from $429,380 for the same period
in 1996. The decrease was due to the implementation of a new in-house
trading software system and termination of the service bureau trading
software previously used. This conversion resulted in cost savings of
approximately $150,000 for six months ended June 30, 1997.
Advertising and promotion expense increased $86,352 to $416,730
for the six months ended June 30, 1997, from $330,378 for the same
period in 1996. The increase was due primarily to increased cost
associated with the development and support of the Company's many new
distribution channels. Increases included telecommunications, printing,
reference materials and publications. The Company also increased its
expenses for marketing, seminars, and conventions, incurring
approximately $162,000 in such expenses during the six months ended
June 30, 1997, compared to approximately $67,000 during the same period
in 1996.
Software development costs increased $44,803 to $85,683 for six
month ended June 30, 1997, from $40,880 for the same period in 1996.
These costs related primarily to the Company's implementation of a
portfolio accounting system and the customization and maintenance of
the Company's proprietary software. The Company anticipates that costs
paid to outside vendors for portfolio accounting services will decrease
upon implementation of this new portfolio accounting system and that
costs for software development for this purpose will decrease after
this system has been implemented. The Company will continue to incur
software development costs for the customization and maintenance of the
Company's proprietary products and in connection with the amortization
of software development costs previously capitalized by the Company.
Interest expense decreased $100,466 to $16,121 for the six months
ended June 30, 1997, from $116,587 for the same period in 1996. The
decrease was due primarily to the repayment of the shareholder note
payable in December 1996 (See note 6 of Notes to Financial Statements
of Form 10-KSB for 1996).
Occupancy and equipment cost increased $68,208 to $607,754 for
the six months ended June 30, 1997, from $539,546 for the same period
in 1996. The increased costs are due primarily to the increased
depreciation cost of the Company's fixed assets. Professional fees
increased $91,272 to $300,708 from the six months ended 1996 from
$209,436 for the same period in 1996. The increase was primarily due
to the development of new client arrangements, sales and marketing
agreements, and the regulatory and compliance issues associated with
these new relationships.
Liquidity and Capital Resources
Between December 31, 1996, and June 30, 1997, working capital decreased
from $3,913,000 to $1,917,000. This $1,996,000 decrease resulted
primarily from the use of cash to fund operating losses. Cash and cash
equivalents decreased from $6,499,000 at December 31, 1996, to
$3,110,000 ($1,220,000 of which was unrestricted) at June 30, 1997, as
other liabilities and accounts payable were reduced significantly.
Investment management fees receivable increased $825,000 during the
period primarily as a result of the accrual of fees due from the new
customers discussed above.
In January 1997, the Company assisted Kenneth S. Phillips, the
Company's President and Chief Executive Officer, by pledging cash
collateral in the amount of $1,890,000 to a bank in connection with the
bank's loan to KP3 LLC (KP3), a company owned and controlled by Mr.
Phillips. The loan was made to KP3 for the purpose of financing
payment of the deferred portion of the purchase price of 1,643,845
shares of the Company's common stock owned by KP3 that were purchased
from a former officer of the Company at the time of his departure. The
Company has agreed to provide collateral for the loan for up to two
years and to lend funds to KP3 to service interest payments on the loan
during that period. In March and July 1997, the Company lent
approximately $32,000 (for a total of $64,000) to KP3 to service the
interest payments on the loan. The total amount of loans and pledges
of collateral authorized may not exceed $2.0 million.
The Company has incurred significant costs during the past several
years in developing internal operational systems and in developing,
marketing and supporting its proprietary Allocation Manager (AM)
investment advisory software for use by professional financial
consultants and expects having continuing costs in 1997 relating to the
development of its internal operating systems and to the development
and enhancement of its AM software. As a result of later than
projected roll-out of the product, assets under management within the
AM programs have grown at a rate slower than anticipated.
In seeking to capture greater market share, the Company has introduced
restructured and unbundled pricing which allows clients to select and
purchase only the services they want. In some instances this strategy
may result in lower pricing for some of its services in certain of its
distribution channels. In other instances the Company will be
providing fewer services than contemplated in its bundled structure,
thus lowering the Company's costs relative to servicing a particular
client. The Company may make additional adjustments in the future. As
a result of the restructured pricing, which allows clients to select
and purchase only the specific services they want on an unbundled
basis, gross revenues as a percentage of assets under management may
decrease.
On July 25, 1997, the Company entered into a definitive agreement to
acquire all of the outstanding shares of privately held ADAM Investment
Services, Inc. (ADAM) of Atlanta, Georgia. Pursuant to the terms of
the transaction, PMCI will pay the shareholders of ADAM up to $9
million over two years for the acquisition. Depending on the amount of
ADAM assets under management, the Company will pay either $4 or $5
million as the initial purchase price at closing. The acquisition is
subject to PMCI raising sufficient funds to pay the initial purchase
price, along with other customary conditions. The Company has retained
an investment banking firm to assist it in raising between $6 to $8
million of capital for the acquisition. Management believes that the
acquisition of ADAM will permit it to expand its presence in the mutual
fund marketplace where, through the development of Allocation Manager,
the Company has already demonstrated a strategic interest. The Company
and ADAM have similar target clients, overlapping distribution
networks, complementary products and materially duplicate expense
structures. The Company believes it can benefit from the economics of
scale from the integration of ADAM and PMC's infrastructure and
business.
In connection with the Company's relationship with Charles Schwab and
Co., Inc., the Company is considering expanding the scope of its
capital commitment to its wholly-owned broker/dealer, Portfolio
Brokerage Services, Inc. (PBS). The Company may enter into a prime
brokerage arrangement with Schwab to facilitate the consummation of
certain brokerage transactions initiated by independent portfolio
managers for the benefit of mutual clients of the Company and Schwab.
Prime brokerage would allow PBS to act as an executing broker for
certain transactions involving securities for clients in the Company's
managed account program which utilize Schwab brokerage services. PBS
would be required to have a much higher level of net capital than its
current requirement of $100,000 if it were to act as prime broker. The
Company is considering various options to meet PBS's additional capital
requirements which could include additional funding as part of the
capital raised for the ADAM acquisition.
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.
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. No further communications have been received from the former
employee or his attorney 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
During 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. A preferred dividend became payable on January 15, 1997,
which was not declared or paid. As of June 30, 1997, cumulative
dividends in arrears were $253,509.
ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. Number Exhibit Page Number
(27) Financial Data Schedule 16
B. No Reports on Form 8-K were filed by the Company during the
first quarter.
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: August 14, 1997 /S/ Kenneth S. Phillips
Kenneth S. Phillips
President, Chief Executive Officer
Date: August 14, 1997 /S/ Vali Nasr
Vali Nasr
Chief
Financial Officer
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