As filed with the Securities and Exchange Commission May 1,
1998.
Registration No: 333-40805
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NUMBER 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
___________________
PMC International, Inc.
(Name of small business issuer in its charter)
Colorado 6282 84-0627374
(State or jurisdiction (Primary (I.R.S. Employer
of Standard Industrial Identification No.)
incorporation or Classification Code
organization) Number)
555 17th Street, 14th Floor 555 17th Street, 14th Floor
Denver, Colorado 80202 Denver, Colorado 80202
(303) 292-1177 (Address of principal place of
(Address and telephone number of business or
principal executive offices) intended principal place of
business)
Kenneth S. Phillips
President and Chief Executive Officer
PMC International, Inc.
555 17th Street, 14th Floor
Denver, Colorado 80202
(303) 292-1177
(Name, address, and telephone number of agent for service)
Copies to:
Francis R. Wheeler, Esq.
Holme Roberts & Owen LLP
1700 Lincoln, Suite 4100
Denver, Colorado 80203
(303) 861-7000
Approximate date of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are
to be offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, other than securities
offered only in connection with dividend or interest reinvestment
plans, check the following box. /X/
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. / /
<PAGE>
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
PROSPECTUS
1,453,245 Shares
PMC International, Inc.
Common Stock
This Prospectus relates to the offer and sale by certain
persons (and the transferees, pledgees, donees and successors
thereof) (collectively the "Selling Shareholders") of shares (the
"Shares") of Common Stock, par value $.01 (the "Common Stock"),
of PMC International, Inc. (the "Company") currently held, or
issuable pursuant to options held, by the Selling Shareholders.
The Selling Shareholders may sell the Shares from time to time in
one or more transactions, including one or more underwritten
offerings. The Selling Shareholders may effect such transactions
directly to or through securities broker-dealers in the
over-the-counter market or otherwise, and such broker-dealers may
receive compensation in the form of discounts, concessions, or
commissions from the Selling Shareholders and/or the purchasers
of the Shares for whom such broker-dealers may act as agent or to
whom the Selling Shareholder might sell as principal, or both
(which compensation as to a particular broker-dealer may be in
excess of customary commissions). The Shares may also be offered
in one or more underwritten offerings, on a firm commitment or
best efforts basis. The underwriters in any underwritten
offering and the terms and conditions of any such offering will
be described in a supplement to this Prospectus. See "Selling
Shareholders" and "Plan of Distribution."
Of the 1,453,245 Shares offered hereby, 1,220,745 were
issued in connection with a private placement transaction
undertaken in connection with the acquisition of ADAM Investment
Services, Inc. (now known as PMC Investment Services, Inc.,
"PMCIS"). Keefe, Bruyette & Woods, Inc. acted as the placement
agent in connection with the issuance of those Shares registered
hereby. The remaining 232,500 Shares are issuable upon the
exercise of certain options owned by David Andrus, the former
Executive Vice President of the Company, Vali Nasr, the former
Chief Financial Officer of the Company, and former
employee of the Company.
All Shares offered hereby are shares currently held by the
Selling Shareholders or are shares issuable upon exercise of
certain options exercisable by Selling Shareholders. The Company
will not receive any of the proceeds from the sale of the Shares
offered hereby. The Company has agreed to bear all expenses in
connection with the registration and sale of the Shares being
offered by the Selling Shareholders other than compensation
payable to securities broker-dealers by the Selling Shareholders
and/or the purchasers of the Shares, any securities broker/dealer
expense allowances and transfer taxes. The expenses to be paid
by the Company in connection with the filing of Post-Effective
Amendment No.1 relating to the registration of the Shares are
estimated to be approximately $10,000. The Company has agreed
to indemnify the Selling Shareholders against certain
liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Plan of
Distribution." It is the view of the Securities and Exchange
Commission that such indemnification is contrary to federal
securities laws and unenforceable.
The Common Stock is not traded on an exchange or listed on
The Nasdaq Stock Market. It is traded in the over-the-counter
market. As a result, there may be a limited market for the
Shares which could have an adverse effect on the future sales
price and liquidity of the Shares. The last reported sale price
for Common Stock on April 20, 1998 was $3.25, as reported on the
Bloomberg financial markets system. See "Market for the Common
Stock."
No dealer, salesperson or individual has been authorized to
give any information, or to make any representations, other than
those contained in this Prospectus or in a Prospectus Supplement
in connection with the offer made by this Prospectus and any
Prospectus Supplement, and, if given or made, such information or
representations must not be relied upon as having been authorized
by the Company or the Selling Shareholders. Neither the delivery
of this Prospectus or any Prospectus Supplement nor any sale made
hereunder or thereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of the
Company since the date hereof or thereof or that the information
contained herein is correct as of any time subsequent to the date
hereof or thereof. This Prospectus and any Prospectus Supplement
shall not constitute an offer to sell or a solicitation of an
offer to buy any of the Shares in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such
jurisdiction.
A PURCHASE OF THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 3 TO 5 FOR A DISCUSSION OF CERTAIN
RISK FACTORS TO BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1998
<PAGE>
- - -------------------------------------------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary 1
Risk Factors 3
Use of Proceeds 6
Market for the Common Stock 6
Dividend Policy 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Business 11
Management 22
Security Ownership of Certain Beneficial Owners and
Management 28
Certain Relationships and Related Transactions 29
Description of Securities 30
Selling Shareholders 32
Plan of Distribution 34
Legal Matters 34
Experts 34
Additional Information 35
Index to Financial Statements F-1
<PAGE>
- - -------------------------------------------------------------------
- - -------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
more detailed information and financial statements appearing
elsewhere in this Prospectus. Investors should carefully
consider the information under the heading "Risk Factors." The
information set forth below contains "forward looking statements"
within the meaning of the federal securities laws, including
statements regarding opportunities for growth from expanded use
of existing distribution channels and expanded use by existing
distribution channels of the Company's products and services and
similar expressions concerning matters that are not historical
facts. These statements are subject to risks and uncertainties
that could cause actual results to differ materially from those
expressed in the statements.
The Company
PMC International, Inc., a Colorado corporation (the
"Company") develops, markets, and manages sophisticated
investment management products and services. Not a money manager
itself, the Company provides products and services that
facilitate the selection and/or monitoring of unaffiliated money
managers or mutual funds for customers of the Company's
distribution channels depending upon the size, sophistication and
requirements of such customers. The Company's products and
services address investment suitability and diversification,
asset allocation recommendations, portfolio modeling and
rebalancing, comprehensive accounting and portfolio performance
reporting. The Company's revenues are realized primarily from
fees charged to clients based on a percentage of managed assets
and to a lesser extent from consulting fees for certain advisory
services and licensing fees from its software products.
Founded in 1986, the Company is an independent sponsor of
privately managed accounts and asset allocation and wrap
programs. The majority of the Company's revenues are derived
from its individually managed wrap program, which the Company
created and has administered since 1987. In addition to its
traditional wrap program, since 1994 the Company has invested in
developing a range of related technology-based services and has
added staff to develop and support the Company's new products.
The Company's products and services are designed to assist
professional financial consultants in their efforts to market
high quality, fully diversified portfolio management products.
Through the use of technology, the Company assists third-party
financial advisors such as banks, insurance companies and
brokerage firms (collectively, "Institutional Channels") and
independent financial planners ("Independent Channels") in
allocating and diversifying a customer's investment portfolio
across multiple asset classes and investments. With respect to
Institutional Channels, the Company's products allow for a
repeatable sales process which helps increase sales productivity
while ensuring compliance with the Institutional Channels'
corporate and regulatory policies.
On December 15, 1997, at the Annual Meeting of Shareholders,
the Shareholders of the Company approved a 1 for 4 reverse split
of the Common Stock (the "Reverse Split"). The Company effected
the Reverse Split for all Shareholders of record as of
December 30, 1997 by amending its Articles of Incorporation on
that date. Such Reverse Split was paid on December 30, 1997.
Unless otherwise noted, all references in this Prospectus to
shares of Common Stock and share prices reflect the Reverse Split.
As of March 31, 1998, the Company had a staff of 89 people,
including approximately 55 professionals, and conducts business
in a number of countries. The Company has four subsidiaries:
(i) Portfolio Management Consultants, Inc., an investment advisory
firm; (ii)Portfolio Brokerage Services, Inc., a broker/dealer;
(iii) Portfolio Technology Services, Inc., which specializes in
developing proprietary software for use in the financial services
industry and (iv) PMC Investment Services, Inc., an investment
advisory firm which specializes in mutual fund asset allocation
products. Unless the context otherwise requires, references
herein to the Company include the 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.
<PAGE>
The Offering
Common Stock offered by the Selling 1,453,245 shares(1)
Shareholders
Common Stock outstanding before the 4,857,803 shares(2)
Offering
Common Stock outstanding after the 5,090,303 shares(3)
Offering
Use of Proceeds The Company will receive
none of the proceeds of the
sale of the Shares. See
"Use of Proceeds."
___________________
(1) Includes 232,500 shares of Common Stock issuable upon
exercise of certain outstanding options and warrants held by
Selling Shareholders.
(2) Does not include 1,083,448 shares of Common Stock reserved
for issuance upon exercise of (i) warrants, (ii) options
granted under the
Company's prior Stock Option Plan for Employees and under its
Equity Incentive Plan adopted December 1997 and (iii) other
options granted to employees and directors.
(3) Does not include 850,948 shares of Common Stock reserved for
issuance upon exercise of (i) warrants, (ii) options granted
under the Company's prior Stock Option Plan for Employees and under
its Equity Incentive Plan adopted December 1997 and (iii) other
options granted to employees, consultants and directors.
<PAGE>
RISK FACTORS
An investment in the Common Stock involves a high degree of
risk. Prospective investors are advised that they may lose all
or part of their investment. Prospective investors should
carefully review the following risk factors.
Future Operating Losses May Result in Need for Additional
Capital. The Company has incurred substantial losses since
inception. The Company suffered a $4,001,000 loss for the year
ended December 31, 1996, and a loss of $3,823,000 for the year
ended December 31, 1997. Historically, the Company has not
generated sufficient cash for its operations and has suffered
cash flow shortages. The Company has heretofore derived working
capital principally from borrowings and equity financings. In
December 1996, the Company closed a private placement of its
equity securities that generated approximately $7,500,000 of net
proceeds, after payment of expenses of the offering and the
repayment of approximately $2,500,000 of indebtedness.
Approximately $1.8 million of the net proceeds was used to pay
aged accounts payable of the Company in late 1996 and early 1997,
approximately $4.3 million was used to fund the Company's other
working capital and capital expenditure requirements during 1997
and approximately $1.4 million of the net proceeds have been
pledged by the Company as collateral for a loan made to a limited
liability company owned and controlled by the Company's Chief
Executive Officer. See "Business Corporate History Phillips &
Andrus LLC; KP3, LLC." In addition, on September 24, 1997, the
Company closed a private placement of its equity securities
primarily to facilitate the purchase of the PMCIS business (the
"PMCIS Private Placement"). The balance of the proceeds from the
PMCIS Private Placement were used for the Company's working
capital requirements for the fourth quarter of 1997 and the first
quarter of 1998. Through the first quarter of 1998, continuing
losses from operations resulted in the Company's cash balances
decreasing further. The Company is currently investigating
sources of short and long term capital as well as the
restructuring of certain operational systems and customer
relationships in order to support its working capital
requirements for the balance of 1998. The Company's future
liquidity needs are dependent upon the Company's ability to
generate higher levels of cash flow from operations, to borrow
funds, to complete additional equity offerings, or to reduce
operations, or a combination of the above. There can be no
assurance that financing will be available to the Company or that
the Company will otherwise find sources to meet its cash flow
requirements.
Limited Market for the Company's Common Stock May Adversely
Affect Share Price and Liquidity. The Common Stock is not traded
on an exchange or listed on The Nasdaq Stock Market ("Nasdaq")
National Market or SmallCap Market, but is quoted on The OTC
Bulletin Board (R) ("OTCBB"). Transactions in the Common Stock are
subject to Rule 15c2-6 under the Exchange Act, which imposes
certain requirements on broker/dealers who sell such securities
to persons other than established customers and accredited
investors. For transactions covered by the rule, broker/dealers
must make a special suitability determination for purchasers of
the securities and receive the purchaser s written agreement to
the transaction prior to sale. Thus, Rule 15c2-6 may affect the
ability of broker/dealers to sell Common Stock and thereby the
ability of investors to sell their Shares in the secondary
market. In addition, securities quoted on OTCBB may be subject
to more price volatility than securities listed on an exchange or
Nasdaq. Due to the fact that the Common Stock is not listed on
an exchange or on Nasdaq and the application of Rule 15c2-6, the
trading volume of the Common Stock is extremely low.
Consequently, there may be only a limited market for the Shares.
In addition, the lack of trading volume may have an adverse
affect on the price at which the Shares may be sold.
The Common Stock was delisted from The Nasdaq SmallCap
Market in February 1995 because the Company failed to satisfy the
requirements for continued listing. Under listing requirements
recently adopted by Nasdaq, and approved by the Commission, to be
included in The Nasdaq SmallCap Market, among other
requirements: (i) an issuer must have net tangible assets of
$4,000,000, (ii) its common stock must have a minimum bid of at
least $4.00 per share, and (iii) it must have at least 300
holders of at least 100 shares. On April 20, 1998, the last
reported sale price of the Common Stock was $3.25 and as of
December 31, 1997, the Company's net tangible assets were
$3,487,081. In January, 1998, the Company submitted an
application for listing on The Nasdaq SmallCap Market, however,
based upon the Company's net tangible assets falling below $4.0
million and the bid price for the Common Stock falling below
$4.50, the Company has withdrawn its application and intends to
resubmit it when the Company meets the listing requirements.
Company Revenues Would Be Adversely Affected by a Decline in
the Stock Market and by Adverse Economic Conditions. The
revenues of the Company are directly dependent upon the amount of
assets managed or administered by Independent Channels and
Institutional Channels using the Company's products and
services. A decline in the market
<PAGE>
value of such managed assets or a downturn in general economic
conditions could cause investors to cease using the products and
services offered through the Company's distribution channels,
including the Company's products and services, and could
materially and adversely affect the revenues of the Company.
PMCIS Acquisition Contingent Payments. On September 24,
1997, the Company acquired all of the issued and outstanding
common stock of PMCIS in consideration for payment of $5,000,000
in cash at the 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 PMCIS' standard fee assets under
management in excess of $500 million, determined on the one-year
anniversary of the closing of the PMCIS 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 PMCIS' standard
fee assets under management in excess of $700 million, determined
on the two-year anniversary of the closing of the PMCIS
acquisition, not to exceed $2.0 million. These future contingent
payments could have a material negative impact on the cash flows
of the Company if anticipated assets under management and income
levels are not achieved and operating costs are not contained at
desired levels. To the extent that the contingent payments to be
made in September, 1998 are of a material amount, the Company
does not anticipate having sufficient cash flow from operations
to service such payment. In that event, the Company intends to
seek outside sources of capital, but there can be no assurance
that capital will be available to the Company. See
"Business-Corporate History-PMCIS Acquisition and Financing."
The Company and its Customers Operate in a Very Competitive
Market. In offering services through its Institutional and
Independent Channels, the Company competes with other firms that
offer wrap and managed account programs. These distribution
channels in turn compete with banks, insurance companies, large
securities brokers and other financial institutions which offer
wrap and managed account programs to the public. The Company
believes that firms compete in this market primarily on the basis
of service, since the wrap fees charged by others are similar to
those charged by the Company. Firms that compete with the
Company in providing services to its Independent Channels and
Institutional Channels have more financial resources and greater
recognition in the financial community than the Company.
Competitors may reduce the fees charged for wrap and managed
account programs or pursue other competitive strategies that
could have an adverse impact on the Company. There are many
alternatives to wrap programs that are being offered to the
public, such as life cycle funds, asset allocation funds,
portfolio strategies and third-party asset allocation services,
and these services are competitive with those offered by the
Company. As financial institutions continue to grow and build
in-house asset administration service capabilities, some will be
able to provide these services internally rather than using
outsourcing providers. Competitors may succeed in developing
products and services that are more effective than those that
have been or may be developed by the Company and may also prove
to be more successful than the Company in developing these
products and marketing these services to third-party asset
managers. See "Business-Competition."
The Company's Customers Are Under No Obligation to Use its
Products. Most of the Company s gross revenues currently are
generated by fees from the Company's Private Wealth Management
investment advisory programs. The programs are provided by
Institutional Channels and Independent Channels either under the
Company's name or under the "private label" of such channel.
These Institutional Channels and Independent Channels are under
no obligation to continue to utilize the Company s programs.
While the Company has no reason to believe that its current
investment advisory relationships will not continue to generate
revenues for the Company consistent with prior years, there can
be no assurance that such will be the case.
Failure to Manage Growth Effectively Could Strain Company
Resources. Primarily to permit the Company to build its internal
systems and to service product development for new relationships
being established with Institutional Channels, and as a result of
the PMCIS acquisition, the number of persons employed by the
Company increased from 43 on March 31, 1996 to 89 on March 31,
1998. A continuing period of rapid growth could place a strain
on the Company s management, operations, financial and other
resources. The Company s ability to manage its growth
effectively will require it to continue to invest in its
operational and other internal systems, and to retain, motivate
and manage its employees. If the Company s management is unable
to manage growth effectively and new employees are unable to
achieve anticipated performance levels, the Company s results of
operations could be adversely affected. Potential investors
should consider the risks, expenses and difficulties frequently
encountered in connection with the operation and development of
an expanding business. There can be no assurance that the
Company will be able to manage effectively any future growth.
<PAGE>
There Is No Demonstrated Market for the Company's Software
Products. The Company has spent substantial resources on
research and development of software products, principally
Allocation Manager (TM), an asset allocation software program that
supports the sale and service of its asset allocation investment
products and services. While the Company believes such software
products will be effective in supporting its other products and
services, there can be no assurance that such will be the case or
that changes to or interpretations of existing federal and state
laws, rules and regulations will not adversely affect the ability
of such software products to do so.
The Company Is Dependent on Third-Party Suppliers. The
Company's products are dependent upon the delivery of timely data
updates, typically on a quarterly basis, from third-party
providers. To the extent such updates are not made available to
the Company on a timely basis, it would materially and adversely
affect the Company's ability to deliver its products and related
services.
Loss of Key Personnel Could Adversely Affect Management,
Product Development and Marketing Activities. The success of the
Company is dependent upon the abilities of its executive
officers. The loss of the Company s executive officers may have
a material adverse affect on the Company's management, product
development and marketing activities. See "Management."
New Government Regulation Could Reduce Demand for the
Company's Products and Services. The Company s business falls
entirely within the securities industry, an industry which is
heavily regulated by the federal and state governments. New
regulatory changes affecting the securities industry could
adversely affect the Company's business. In addition, as
investment advisers and a broker/dealer, the Company's
subsidiaries are subject to regulation by the Commission, the
NASD and state regulatory agencies. Consequently, the Company
could become subject to restrictions or sanctions from the
Commission, the NASD or such state regulatory agencies. It is
impossible to predict the direction future regulations will take
or the effect of such regulations on the Company s business.
The Company Is Controlled by a Small Group of Shareholders.
As of March 31, 1998, the Company s executive officers, directors
and affiliates of such persons beneficially own approximately
31.48% of the outstanding shares of Common Stock. This group of
shareholders therefore is in a position to exercise a substantial
influence over matters submitted to the vote of the Company s
shareholders. See "Description of Capital Stock."
Dividends Will Not Be Paid on Common Stock for the
Foreseeable Future. Payment of dividends by the Company on its
Common Stock is contingent upon, among other things, future
earnings, if any, the financial condition of the Company, capital
requirements, general business conditions, and other factors
which cannot now be predicted and, subject to the limitations
described below, is in the discretion of the Board of Directors
of the Company. In addition, no dividends may be paid on Common
Stock unless dividends payable on Series A Preferred Stock (the
"Preferred Stock") are current. See "Description of Capital
Stock-Preferred Stock." As of March 31, 1998 the Company was in
default in the payment of dividends on the Preferred Stock in the
amount of $298,419. The Company has never paid dividends on the
Common Stock and it does not intend to do so in the foreseeable
future. See "Market for the Common Stock."
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of
the Shares by the Selling Shareholders.
MARKET FOR THE COMMON STOCK
Prior to February 1995, the Common Stock was traded on The
Nasdaq Small Cap Market. See "Risk Factors-Limited Market for
the Company's Common Stock May Adversely Affect Share Price and
Liquidity." The Common Stock currently trades on The OTC
Bulletin Board under the symbol "PMCI." The following table
shows the high and low bid prices and trading volume of the
Common Stock for the periods indicated as reported by the
principal market maker in the Common Stock. These quotations
reflect inter-dealer prices without retail markup, markdown, or
commissions and may not necessarily represent actual transactions.
High Bid Low Bid
1995
First Quarter $5.00 $2.75
Second Quarter $2.75 $2.00
Third Quarter $5.25 $2.25
Fourth Quarter $6.50 $3.00
1996
First Quarter $4.00 $2.50
Second Quarter $7.25 $3.75
Third Quarter $8.25 $5.50
Fourth Quarter (1) $8.00 $5.50
1997
First Quarter $10.00 $8.00
Second Quarter $10.00 $6.50
Third Quarter $7.75 $5.00
Fourth Quarter $7.00 $6.00
1998
First Quarter $7.00 $4.00
Second Quarter (2) $4.25 $3.125
(1) Does not reflect the private placement of 1,294,250 shares
of Common Stock by the Company in December 1996 at a price of
$6.50 per share.
(2) Through April 16, 1998.
As of April 16, 1998 the Company had approximately 392
record holders of its Common Stock.
The Company currently has outstanding a total of 138,182
shares of Preferred Stock. As of March 31, 1998, the Company was
in default in the payment of dividends on the Preferred Stock in
the amount of $298,419. The Company is prohibited from paying
dividends on its Common Stock so long as it is in default in the
payment of dividends on the Preferred Stock. See "Risk
Factors-Dividends Will Not Be Paid on Common Stock for the
Foreseeable Future."
<PAGE>
DIVIDEND POLICY
The Company has never paid dividends on the Common Stock and
currently intends to retain all future earnings, if any, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information that the
Company believes is relevant to an assessment and understanding
of its results of operations. It should be read in conjunction
with the Financial Statements and Notes included elsewhere
herein. This discussion contains "forward looking statements"
within the meaning of the federal securities laws, including
statements regarding opportunities for growth from expanded use
of existing distribution channels and expanded use by existing
distribution channels of the Company's products and services and
similar expressions concerning matters that are not historical
facts. These statements are subject to risks and uncertainties
that could cause results to differ materially from those
expressed in the statements. For more information, see "Risk
Factors."
Overview
The Company develops, markets, and manages sophisticated
investment management products and services. Not a money manager
itself, the Company provides products and services to facilitate
the selection and/or monitoring of unaffiliated money managers or
mutual funds for customers of the Company's distribution channels
depending upon the size, sophistication and requirements of such
customers. The Company's products and services address
investment suitability and diversification, asset allocation
recommendations, portfolio modeling and rebalancing,
comprehensive accounting and portfolio performance reporting.
The Company's revenues are realized primarily from fees charged
to clients based on a percentage of managed assets and to a
lesser extent from consulting fees for certain advisory services
and licensing fees from its software products. Fees based upon
managed assets typically range from 20 to 250 basis points per
year, based upon a number of factors such as the size of account
and scope of services provided. At the present time, the
principal factors affecting the Company's revenues are whether
the Company adds or loses clients for its investment management
services, the performance of equity and fixed income markets, and
the type and size of accounts managed by the Company and related
differences in fees charged.
The Company acquired PMCIS on September 24, 1997 (see Note 1
to Financial Statements of the Company). The impact of the
acquisition on the Company's statements of income is fully
reflected on the December 31, 1997 balance sheet. Beginning in
the fourth quarter 1997, PMCIS's operations were fully reflected
in the Company's financial statements.
Results of Operations
Year Ended December 31, 1997, Compared to Year Ended December 31,
1996
Revenues. Revenues were $14,900,000 for the year ended
December 31, 1997, compared to $10,100,000 for the year ended
December 31, 1996, an increase of 48%. The increase was
attributable primarily to the PMCIS acquisition contribution of
$3,000,000 for the fourth quarter and the contribution of
$733,000 arising from the Company's new relationship with Ernst &
Young, LLP. New business, such as Ernst & Young LLP, pays 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. Revenues from Republic National Bank
of $550,000 were not recognized in 1997 as was anticipated due to
product roll-out delays.
Investment Manager and Other Fees. Investment Manager and
Other Fees were $8,200,000 for the year ended December 31, 1997,
compared to $5,600,000 for the year ended December 31, 1996, an
increase of 46%. Direct
<PAGE>
expenses increased primarily as a result
of the PMCIS acquisition. However, as discussed above, direct
expenses did not increase in proportion to revenues as certain of
these revenues, such as Ernst & Young LLP, are recognized on a
net basis to the Company.
Net Revenues after Investment Manager and Other Fees. Net
Revenues after Investment Manager and Other Fees were $6,700,000
for the year ended December 31, 1997, compared to $4,500,000 for
the year ended December 31, 1996, an increase of 49%. These
increases are explained above under Revenues and Investment
Management and Other Fees.
Operating Expenses. Operating Expenses were $10,500,000
for the year ended December 31, 1997, compared to $8,500,000 for
the year ended December 31, 1996, an increase of 24%. These
increases were due primarily to an increase in salaries and
benefits which increased $1,400,000 or 40%, and depreciation and
amortization increased as a result of the expansion of the
Company's products and services, the development of internal
systems and the servicing of several new distribution channels
and customers, primarily PMCIS, Republic National Bank and
Ernst & Young LLP. On a favorable note, the Company has been able
to decrease payroll and related expenses in 1998 which will
result in savings of approximately $1,500,000 annually; this is
the result of layoffs, attrition, and the PMCIS acquisition. The
Company does not anticipate significant purchases of equipment or
capital assets in 1998.
Income Taxes. The Company's effective tax rate for 1997 is
0.
Net Loss. The Company recorded a net loss of $3,800,000 for
the year ended December 31, 1997 as compared to $4,000,000 for
the year ended December 31, 1996. The improvement in earnings
was the result of revenues growing at a faster pace than direct
and operating expenses. However 1997 earnings estimates were not
met. This was due to higher than expected the costs related to:
development of the infrastructure to support new business
relationships; management restructuring; the PMCIS acquisition;
and raising capital.
The Company is in the process of converting certain assets
under administration from one portfolio accounting system to a
third party system. The ability to transfer those accounts,
maintain customer satisfaction, and manage related operating
costs could impact the financial results of the Company.
The revenues of the Company are directly dependent upon the
amount of assets under management or administered by the
Company. A decline in market value or in assets under management
as a result of market conditions or customer satisfaction could
impact the future profitability of the Company.
Liquidity and Capital Resources
At December 31, 1997, the Company had cash of $3,000,000, a
substantial portion of which was held in short-term interest
bearing accounts, including restricted cash of $1,500,000.
Year Ended December 31, 1997. Cash used in operating
activities was $3,400,000. This was due primarily to a net loss
from operations. Cash used in investing activities was
$6,400,000. Cash used in investing activities was the result of
goodwill generated from the PMCIS acquisition and capital
expenditures incurred as a result of business expansion. Cash
provided by financing activities of $6,300,000 was primarily
related to the September 1997 private placement of common stock.
PMCIS Acquisition and Financing. On September 24, 1997, the
Company completed the acquisition of PMCIS (formerly ADAM
Investment Services, Inc.), a financial services and investment
advisory company headquartered in Atlanta, Georgia. PMCIS has
provided investment consulting services to institutional
investors since 1980. PMCIS' primary services are based around
mutual funds. PMCIS offers seventeen model portfolios
constructed using no-load mutual funds and funds available at net
asset value. These "standard" portfolios consist of five global
tactical asset allocation portfolios, five global strategic asset
allocation portfolios and seven asset class portfolios that
concentrate on narrow asset class groups. PMCIS also has five
strategic asset allocation portfolios constructed using mutual
funds that invest in companies that are identified as operating
in a socially responsible manner. PMCIS' mutual fund portfolios
are also offered as options for use by 401(k) plans and with
several insurance companies within variable life and variable
annuity contracts. PMCIS currently has a staff of approximately
16 people who are located either in its corporate
<PAGE>
headquarters in Atlanta, Georgia or in the Company's headquarters in
Denver, Colorado. In 1995, PMCIS acquired Optima Funds Management, Inc.
("Optima"), a company that provides mutual fund wrap services to
clients. Optima was merged into PMCIS in December, 1997.
The agreement providing for the acquisition of PMCIS by the
Company provided that the Company would acquire all of the
outstanding capital stock of PMCIS for up to $9.0 million in cash
and up to $200,000 in Common Stock if certain conditions are met
over time. In addition, the Company agreed to assume the normal
operating liabilities of PMCIS at closing of the acquisition,
estimated to be approximately $1.6 million. At the closing of
the PMCIS transaction, the Company paid $5,000,000 in cash and
agreed to make two earn-out payments on the first and second
anniversary dates of the closing. The first earn-out payment
will equal 1.0% of PMCIS' standard fee assets under management
in excess of $500 million, determined on the one-year
anniversary of the closing of the PMCIS 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 PMCIS' standard
fee assets under management in excess of $700 million, determined
on the two-year anniversary of the closing of the PMCIS
acquisition, not to exceed $2.0 million. The Company anticipates
that PMCIS will continue to operate as a wholly owned subsidiary
of the Company in the future.
In connection with the PMCIS acquisition, on September 24,
1997, the Company sold 1,220,749 shares of its Common Stock in
the PMCIS Private Placement at a price of $6.00 per share
(adjusted for the Reverse Split). The proceeds from this
transaction, after deducting expenses relating to the issuance of
the Common Stock, were approximately $6,500,000, of which the
Company used $5,000,000 to purchase PMCIS at the PMCIS closing.
The additional $1,500,000 is currently being used by the Company
for working capital purposes.
Cash Flow Requirements. Most of the Company's ongoing
losses and additional cash flow requirements relate to its
addition of staff and incurrence of capital expenditures in
anticipation of establishing and developing new distribution
relationships, specifically new institutional clients and, more
recently, the increased spending in integrating the PMCIS
business in the Company. The Company recognizes that there
generally is a substantial delay between when such relationship
costs as these are incurred and when the related revenues are
recognized. While there can be no assurance such will be the
case, the Company anticipates that its use of cash will increase
in the first quarter of 1998 before decreasing in the second and
third quarters of 1998 as cash is received from developing
distribution relationships and the PMCIS business is more fully
integrated into the Company. Future cash needs will depend
largely upon the Company's success in developing customer
relationships and servicing existing relationships, with the
intended result of increasing assets managed using the Company's
products and services. See "Risk Factors-Future Operating Losses
May Result in Need for Additional Capital." The Company
anticipates that it will continue to experience operating losses
until such time as it can realize the benefits of: the PMCIS
acquisition, the related assets under management and the expected
economies of scale of merged operations; employee attrition and
turnover, and related reduction in payroll and associated costs;
the launching of new institutional programs and the realization
of associated fee income; and, other developing relationships and
the ability to leverage personnel and manage operating costs in a
normal operating environment.
On March 9, 1998, the Company obtained a line of credit in
the amount of $600,000 from a bank to finance the outstanding
receivable from Ernst & Young. Pursuant to its agreement with
Ernst & Young, the Company is to receive certain minimum revenues
quarterly through 1998. Those revenues are reflected as an
account receivable in the amount of $733,000 at December 31, 1997.
The Company is currently investigating sources of short and
long term capital as well as the restructuring of certain
operational systems and customer relationships, in order to
support its working capital requirements for the balance of
1998. The Company's future liquidity needs are dependent upon
the Company's ability to generate higher levels of cash flow from
operations, to borrow funds, to complete additional equity
offerings, or to reduce operations, or a combination of the
above. There can be no assurance that financings will be
available to the Company or that the Company will otherwise find
sources to meet its cash flow requirements.
The Company has historically incurred net losses and
accordingly experience cash flow problems. As a result of the
acquisition of PMCIS, the Company is obligated to make a deferred
purchase payment on September 24, 1998. The payment will be
equal to 1.0% of certain PMCIS assets under management in excess
of $500,000,000, with the payment not to exceed $2,000,000. As
of December 31, 1997, this payment would not be able to be made
principally
<PAGE>
due to the fact that $1,400,000 of cash is
restricted. In addition, through the first quarter of 1998,
continuing losses from operations have resulted in the Company's
cash balances decreasing further. In March 1998, the Company
implemented a cost reduction plan. Management believes that this
plan along with projected increases in revenues and deferral of
payments of expenses should allow the Company to continue without
requiring additional resources, excluding the PMCIS payment. The
Company is currently investigating sources of short and long term
capital to meet the PMCIS payment as well as working capital
needs. Should additional capital not be raised, the Company will
be required to restructure the terms of the PMCIS payment, to
remove the restriction from its cash balances, restructure its
operations or a combination of the above. See "Risk
Factors-Future Operating Losses May Result in Need for Additional
Capital."
1996 Private Placement and Restructuring. In December 1996
the Company completed a private placement of 1,294,250 shares of
Common Stock at a price of $8.50 per share. Also in December
1996, the Company completed a restructuring of its debt and a
partial restructuring of its outstanding Preferred Stock. The
restructuring involved (i) the payment of all outstanding
interest on the Bedford loans, the repayment to Bedford of
$1,976,250 of outstanding principal on the Bedford loans, the
exercise by Bedford of warrants to purchase 255,937 shares of
Common Stock and the delivery by Bedford of canceled promissory
notes in the amount of $1,023,750 in satisfaction of the exercise
price of the warrants, the cancellation of Bedford's remaining
warrants, and the issuance to Bedford of new warrants to purchase
up to 37,500 shares of Common Stock at an exercise price of $8.50
per share; (ii) the issuance of 375,000 shares of Common Stock
upon the exercise of warrants issued to investors in connection
with the Company's private placement of promissory notes and
warrants in December 1995/January 1996 and May/June 1996 and the
delivery of canceled promissory notes in the aggregate principal
amount of $1,500,000 in satisfaction of the exercise price of
such warrants, payment by the Company of all interest accrued on
such notes as of the exercise date, and the issuance of new
warrants to purchase an aggregate of up to 37,500 shares of
Common Stock to such investors; (iii) the repayment of the
November 1996 bridge loan, and (iv) the conversion of 173,120
shares of Preferred Stock into 59,510 shares of Common Stock,
resulting in a reduction in the Company's cumulative dividend
obligation to the holders of Preferred Stock from $583,576 as of
September 30, 1996, to $322,700 as of December 31, 1996. The
conversion of additional shares of Preferred Stock into Common
Stock was effected in January 1997.
As a result of the private placement and restructuring, the
Company's shareholders' equity increased from a $4,047,682
deficit at September 30, 1996 to $6,270,537 at December 31, 1996
and cash increased from $701,160 at September 30, 1996 to
$6,499,000 at December 31, 1996. Through December 31, 1997,
approximately $1.4 million of the net proceeds was pledged by the
Company as collateral for a loan made to a limited liability
company owned and controlled by the Company's Chief Executive
Officer, approximately $1.8 million was used to pay aged accounts
payable of the Company in late 1996 and early 1997 and
approximately $1.8 million was used to fund the Company's other
working capital and capital expenditure requirements during
1997. See "Business-Corporate History-Phillips & Andrus LLC;
KP3, LLC."
Uses of Cash. Between December 31, 1996, and December 31,
1997, cash and cash equivalents decreased from $6,499,000 at
December 31, 1996 to $3,000,000 ($1,500,000 of which was
unrestricted) at December 31, 1997 as the Company made capital
investments into furniture, fixtures and product development and
reduced other liabilities and accounts payable. Investment
management fees receivable increased $736,000 during the period
primarily as a result of the accrual of fees due from the new
relationships being established with Institutional Channels.
Other assets and liabilities have increased as a result of the
PMCIS acquisition and in conjunction with the increase of sales
volume. See "-Results of Operations-Twelve Months Ended
December 31, 1997 Compared to Twelve Months Ended December 31,
1996."
In January 1997, the Company provided assistance to Mr.
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 410,961 shares of the Company's Common
Stock owned by KP3 that were purchased from Mr. Marc Geman, a
former officer of the Company, at the time he terminated his
association with the Company (the " KP3 Shares"). See
"Business-Corporate History-SEC Investigation and Settlement."
The Company agreed to provide collateral for the loan for up to
two years and to lend funds to KP3 to service interest payments
on the loan during that period. The pledge by the Company of
collateral for the loan permitted the deferred portion of the
purchase price of the Company's Common Stock to be paid to Mr.
Geman, thereby eliminating the possibility that Mr. Geman could
reacquire a substantial stock ownership in the Company. See
"Business-Corporate
<PAGE>
History-Phillips & Andrus, LLC; KP3, LLC."
Through December 31, 1997 and March 31, 1998, the Company had
lent $150,800 and $190,000, respectively, to KP3 specifically to
service interest payments on the KP3 loans. 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 the KP3 Shares. Such loan was restructured
through a different bank on October 1, 1997 and April 15, 1998.
In connection therewith, the Company has provided two cash
collateral guarantees totaling $1,750,000; the Company retains
the 410,961 KP3 shares as collateral. The due date of the new
loans are December 31, 1998.
Capitalized Software Development Costs. The Company has
incurred significant costs during the past several years in
developing internal operational systems and in developing,
marketing and supporting its proprietary Allocation Manager (TM)
investment advisory software for use by professional financial
consultants and expects to have continuing costs in 1997 relating
to the enhancement of Allocation Manager (TM). Prior to achieving
technological feasibility 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. The Company's policy is to
capitalize all software costs incurred in developing computer
software products until such products are available for release
to customers. Subsequent cost incurred to enhance and redesign
existing software products are capitalized and such
capitalization ceases when the enhanced or redesigned products
are released. 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,
subject to enhancement and customization, 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 has also capitalized the acquisition costs of
software acquired from third parties in connection with the
development of its internal systems. See "-Results of
Operations-1996 Compared to 1995-Software Development Costs."
Other Matters. In seeking to capture greater market share,
the Company has introduced restructured and unbundled pricing
which in some instances results in lower pricing for some of its
services in certain of its distribution channels. The Company
may make additional adjustments in the future. As a result of
the restructured pricing, gross revenues as a percentage of
assets under management may decrease.
The Company anticipates that it will continue to experience
operating losses until such time, if ever, as investment
management fees from managed assets and consulting and license
fees increase sufficiently to cover the Company's increasing
operating expenses. The Company is investigating sources of long
and short term capital, as well as the restructuring of certain
of its operational systems and customer relationships in order to
obtain and/or generate sufficient working capital to meet its
requirements for the balance of 1998. 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, that sources of capital will be available to the Company
as the need arises, or that the Company will become profitable in
the future. See "Risk Factors-Future Operating Losses May Result
in Need for Additional Capital", and "-PMCIS Acquisition
Contingent Payments."
BUSINESS
Industry Overview
The financial services industry has been one of the fastest
growing sectors in recent years. As the industry has grown, a
substantial shift from commission and transaction-based products
to advisory and fee-based products has occurred. Evidenced most
clearly in the popularity of mutual funds, consumer demand for
investment advice and services in connection with managed asset
products has increased enormously over the past 10 years. The
mutual fund industry has grown from 1,528 funds encompassing $495
billion of assets in 1985 to 6,809 funds encompassing $4.49
trillion of assets in 1997. Increasingly, investors are looking
for expertise to assist them in understanding the range of
<PAGE>
investment products that are currently marketed. As such,
managed account programs, such as asset allocation and wrap
accounts which assist investors in developing and implementing
appropriate investment strategies, have grown significantly to
service this segment of the marketplace. Wrap programs, which
offer a highly-personalized, fee-based (as opposed to
commission-based) platform for financial management, have grown
to more than $139 billion in assets at year-end 1996.
In recent years, there have been two principal objectives in
the development and marketing of asset allocation and wrap
programs. First, to improve customer service, programs were
developed offering asset allocation and professional money
management services that would better position a customer s
investment portfolio. Asset allocation is believed to be a
significant determinant of successful long-term investment
performance. In addition, by consolidating the numerous
investment services, costs of portfolio management can often be
reduced as compared to purchasing individual services in
traditional a la carte fashion. The second reason for developing
these programs was to shift customer assets from dormant custody
accounts, which traded periodically and without predictability,
into predictable revenue producing assets for the sponsoring
firm. In developing a "trust building" product, wrap program
sponsors provide the following four basic functions for a
customer in addition to money management, brokerage and custody
services: (i) customer evaluation, (ii) asset allocation and
investment policy development, (iii) investment management
evaluation and selection, and (iv) quarterly monitoring and
reporting services.
As wrap programs have grown in size and popularity,
investment portfolio managers (those that manage individual
accounts consisting of stocks and bonds) and mutual fund
distributors are increasing their involvement within these
programs. These programs give money managers and mutual funds
the ability to market themselves and participate in distribution
channels of financial planners, which in turn provide them with
the opportunity to increase their assets under management. With
attention rapidly shifting to long-term asset allocation
strategies, consultant wrap assets, assets managed by
professional money managers, have grown from $60 billion in 1993
to$103.2 billion in 1996, while mutual fund wrap assets have
grown from $8 billion in 1993 to $36.2 billion in 1996. In 1988,
assets in these wrap programs were estimated at less than $2
billion.
Background of the Company
Founded in 1986, the Company is an independent sponsor of
privately managed accounts and asset allocation and wrap
programs. The majority of the Company's revenues are derived
from its individually managed wrap program, which the Company
created and has administered since 1987. In addition to its
traditional wrap program, since 1994 the Company has invested in
developing a range of related technology-based services and has
added staff to develop and support the Company's new products.
The Company's products and services are designed to assist
professional financial consultants in their efforts to market
high quality, fully diversified portfolio management products.
Through the use of technology, the Company assists third-party
financial advisors such as banks, insurance companies and
brokerage firms (collectively, "Institutional Channels") and
independent financial planners ("Independent Channels") in
allocating and diversifying a customer's investment portfolio
across multiple asset classes and investments. In respect to
Institutional Channels, the Company's products allow for a
repeatable sales process which helps increase sales productivity
while ensuring compliance with the Institutional Channels'
corporate and regulatory policies.
The Company has a staff of approximately 89 people,
including approximately 55 professionals, and conducts business
in a number of countries. The Company has four subsidiaries:
(i) Portfolio Management Consultants, Inc., an investment advisory
firm; (ii) Portfolio Brokerage Services, Inc., a broker/dealer;
(iii) Portfolio Technology Services, Inc., which specializes in
developing proprietary software for use in the financial services
industry; and (iv) PMCIS Investment Services, Inc., an investment
advisory firm which specializes in mutual fund asset allocation
products.
Products and Services
Portfolio Management Consultants, Inc.
Portfolio Management Consultants, Inc. ("PMC"), a wholly
owned subsidiary of the Company, currently has four discrete but
vertically integrated product lines. Each product offered by PMC
is designed to assist professional financial consultants in
various aspects of their business. The four services are:
(i) Private Wealth Management (TM), PMC's individually managed asset
and wrap account program, (ii) Allocation Manager (TM), a mutual fund
asset allocation
<PAGE>
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 ("MARS"), a portfolio accounting and reporting service
that operates as a service bureau, and (iv) Style Manager (SM), a
discretionary money management program, using style index funds
and mutual funds, that offers equity style rotation. In
addition, PMC provides consulting services to Institutional
Channels and high net worth customers.
Private Wealth Management(TM)
Private Wealth Management (TM), PMC's multi-manager
institutional wrap program, has historically been PMC's largest
revenue producer. Targeted toward customers with high net worth
(typically having a portfolio larger than one million dollars),
Private Wealth Management (TM) assists financial planners in
assembling a custom-selected team of professional money managers
which precisely matches an individual investor's personal
investment goals, risk tolerance, and objectives.
Each portion of an individual's portfolio (allocated into
asset classes such as equity, fixed income and cash, and asset
sub-classes such as value, growth, large cap, small cap, and
emerging markets) is managed by an institutional money management
firm that has been chosen from PMC's list of recommended managers
as best suited to match an investor's investment philosophy
within a specific discipline. An important and proprietary
component of the Private Wealth Management (TM) program involves the
basis of selection of these money managers. PMC currently
recommends a number of independent money managers for its Private
Wealth Management (TM) multi-manager program, representing a diverse
range of philosophies and styles. These managers are chosen
based largely on quantitative analysis emphasizing return-based,
multi-factor style benchmarking. High correlation to benchmark
indices, supported by positive alpha, are necessary to meet the
"Preferred" standard for manager recommendations. Also
considered in manager evaluations are historical performance,
investment philosophy and style, disciplines, employee turnover,
rate of growth, accounts gained or lost, and industry
reputation. To help a customer choose and understand investment
options, PMC provides detailed profiles on money managers in the
context of style and methodology to achieve maximum investment
diversification. Additionally, PMC will provide guidance on the
termination of existing managers and the rebalancing of the
customer s assets. The Company considers periodic portfolio
rebalancing decisions to be an extremely important determinant of
long-term performance. Thus, several rebalancing options are
offered within PMC's private account programs.
Private Wealth Management (TM) is marketed under both the PMC
label and private labels. Institutional Channels currently using
private-label versions of Private Wealth Management (TM) include
Chase Investment Services Corp., National Financial Correspondent
Services ("NFCS"), the wholly-owned brokerage and securities
clearing subsidiary of Fidelity Management and Research, Israel
Discount Bank of New York, Ernst & Young LLP, Republic National
Bank of New York, TD Securities, Inc., an affiliate of Toronto
Dominion Bank and Cowen & Company. The relationship with Ernst &
Young also encompasses institutional consulting, Allocation
Manager (TM) services, and MARS. Additionally, PMC distributes
Private Wealth Management (TM) under its own name through thirty
financial planning broker-dealers and investment advisors
representing more than 10,000 registered sales professionals. To
support the sales process, the Company employs a staff of
marketing representatives. The Company has a joint marketing
agreement with Schwab Institutional Management ("Schwab"),
pursuant to which a specialized version of the Private Wealth
Management (TM) program is marketed to independent investment
advisors who utilize the services of Schwab. Currently, PMC is
servicing Institutional Channels in the United States, Canada and
seven Latin American countries with many institutional money
managers participating in the Company s wrap programs.
Allocation Manager (TM)
Allocation Manager (TM), introduced in late 1995 and as an
operating product during the third quarter of 1996, is a
Windows-based software program. The program is designed to aid
in the solicitation, sale, and servicing of mutual funds,
variable annuities, offshore investments and other selected
financial products. A highly-flexible program based upon
theories of mass customization, Allocation Manager (TM) has the
capability of being tailored for use by specific financial
distribution channels having their own proprietary product mix.
This product assists in guiding a wide range of investors through
the complex process of choosing an appropriate combination of
mutual funds.
<PAGE>
Allocation Manager(TM) was built with the intention of being
customized by PMC's existing and prospective clients, many of
whom have proprietary families of mutual funds. As a result,
Allocation Manager (TM) supports a broad range of financial products
and programs, both domestically and globally, and can be
customized to the individual requirements of Institutional
Channels. Customized versions of Allocation Manager (TM) have been
created for Chase Investment Services Corp., Ernst & Young LLP,
Republic National Bank of New York, CIGNA Financial Services,
MONY Securities Corporation, Texas Commerce Bank and others.
A version of Allocation Manager (TM), called Fund Counselor (SM), is
being marketed by NFCS. Under the Fund Counselor (SM) program, NFCS
will provide brokerage, clearing and custodial services and will
make the program available to its more than 225 bank, insurance
and financial planning broker/dealers. Allocation Manager (TM) is
being distributed through the Schwab system pursuant to a joint
marketing agreement. It is also being made available to
correspondents of EVEREN Clearing Corp.
Based upon (i) the substantial growth in the mutual funds
industry over the last 15 years, (ii) investor trends in mutual
fund investment and (iii industry expectations, management
believes PMC s existing expertise and operations will permit a
smooth integration of this new program with existing products and
services offered by the Company while expanding and diversifying
the distribution channels for such products and services.
Because the program also provides educational tutorials, training
modules and dynamic portfolio modeling, Allocation Manager (TM) is
much more than simply a "front-end" sales tool. It can be
positioned as a technology sale with licensing revenues to PTS or
it can be positioned, subject to applicable regulatory guidelines
and restrictions, as an investment management tool, allowing PMC
to receive asset-based pricing.
Managed Account Reporting Services
Management believes that as a result of the growth within
the fee-based financial advisory segment of the industry over the
past ten years, many institutions have been seeking ways to
improve their reporting capabilities. The Company's 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 monthly and quarterly reports.
MARS provides detailed statements that include comprehensive
management reporting, account reconciliation and cost-based
accounting on a full-accrual basis. In addition, PMC provides
full color, quarterly performance reports detailing the
investor's objectives and performance of each investment
strategy, money manager or mutual fund, as well as the entire
portfolio.
During 1996 PMC entered into an agreement with National
Financial Services Corporation, an affiliate of Fidelity
Management and Research ("NFSC"), to manage NFSC's newly created
performance reporting service called MAPS Tool Box ("MAPS").
MAPS provides NFSC s correspondents with access to high quality,
quarterly performance reports and tax lot, cost basis and fully
accrued account statements. This service is targeted at high net
worth investors managed by financial planners and financial
consultants who use the securities clearing services of NFSC.
MARS is also being marketed within the Schwab system to the many
investment advisors that use Schwab's custodial services.
Effective October 1997, the Company began providing MARS reports
to clients of Scotia McLeod, Inc. through a third party vendor
agreement with Infowise, Inc.
Style Manager (SM) Asset Management Products
Style Manager (SM) is a family of discretionary asset management
products which recommend strategies for the periodic rebalancing
of both institutional and retail investor portfolios. Through
the use of Style Manager (SM), clients portfolios are periodically
rebalanced through the rotation of U.S. equity styles (i.e.,
growth and value companies and large, mid and small
capitalization companies), with the intention of capturing
superior performance that results from taking advantage of
certain cyclical sector inefficiencies in the U.S. equity
markets. Recommended shifts in equity allocations are designed
to move assets away from under-performing sectors into those
likely to perform best. Although Style Manager (SM) recommends
shifts within the U.S. equity markets, it does not recommend
shifts between macro asset
<PAGE>
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 (SM) versions have
been developed.
Portfolio Brokerage Services, Inc.
Portfolio Brokerage Services, Inc. ("PBS"), a wholly owned
subsidiary of the Company, is registered as a broker/dealer with
the NASD and in all U.S. jurisdictions. PBS executes security
transactions for certain of PMC s privately managed account
programs on behalf of its customers through the customer s
custodian bank on a delivery vs. payment basis. A self-clearing
broker/dealer, substantially all trading activity of PBS is
unsolicited and initiated by the independent money managers used
in PMC's Private Wealth Management (TM) program. Managers make all
buy and sell decisions and place most orders with PBS for
execution. PBS executes substantially all trades through
third-party market makers. All transactions are effected on an
agency basis.
Portfolio Technology Services, Inc.
Portfolio Technology Services, Inc. ("PTS"), a wholly owned
subsidiary of the Company, is a technology company dedicated to
assisting the Company in providing innovative products to the
financial services industry. PTS leverages the product knowledge
of PMC to design and build integrated product solutions to meet
the challenge of consolidating products and pricing in multiple
segments of the financial services industry. As its primary
contribution to the Company, PTS has developed the sales
workstation platform used for Allocation Manager (TM) and
communication interfaces to multiple custodial systems. PTS
licenses its technology and provides customization services in
support of the Company's relationship with its Institutional
Channels. The Company estimates that it has spent approximately
$1.1 million for software development activities in its last two
fiscal years. In some cases, customers may bear the cost of such
activities directly when software is customized for their
particular requirements. Payments by customers for this purpose
during the last two fiscal years are not material.
PMCIS Investment Services, Inc.
PMCIS Investment Services, Inc. ("PMCIS"), formerly ADAM
Investment Services, Inc., was formed in 1980 to provide
investment consulting services to institutional investors.
PMCIS' primary services are based around mutual funds. PMCIS
offers 17 model portfolios constructed using no-load mutual funds
and funds available at net asset value. PMCIS' mutual fund
portfolios are offered as options for use by 401(k) plans and
with several insurance companies within variable life and
variable annuity contracts.
Today PMCIS offers independent financial advisers a variety
of investment services for use in helping their clients reach
their financial goals. With respect to standard fee assets under
management, PMCIS' services typically are provided for a fee
that is based on a percentage of assets under management. Fees
based on managed assets typically range from 100 to 185 basis
points per year. Fees are reduced as accounts reach certain
breakpoints. Occasionally fees are established on a negotiated
basis. PMCIS collects all fees directly from client accounts and
pays the adviser's portion to the adviser. In certain instances
PMCIS does not collect the adviser's portion of the fee and the
adviser invoices the client directly.
The services PMCIS provides are described below:
Mutual Fund Portfolios. PMCIS offers 17 model portfolios
constructed using no-load mutual funds and funds available at net
asset value. These "standard" portfolios consist of five global
tactical asset allocation portfolios, five global strategic asset
allocation portfolios and seven asset class portfolios that
concentrate on narrow asset class groups. PMCIS will also
construct customized mutual fund portfolios for larger accounts.
Socially Responsible Portfolios. PMCIS offers five
strategic asset allocation portfolios constructed using mutual
funds that invest in companies that are identified as operating
in a socially responsible manner. These portfolios are targeted
to individual investors as well as endowments and foundations
that support social or religious causes.
<PAGE>
401(k) Services. PMCIS offers its mutual fund portfolios as
options for use by 401(k) plans. PMCIS has developed marketing,
enrollment and educational material for use in the 401(k)
market. PMCIS has also developed relationships with custodial
and record keeping firms that work with advisers using PMCIS'
401(k) services.
Insurance and Annuity Services. PMCIS has developed
relationships with several insurance companies under which it
provides asset allocation and portfolio construction services
within variable life and variable annuity contracts. Financial
advisers can use these contracts in conjunction with PMCIS'
mutual fund portfolios to manage an investor's assets in a
consistent manner both inside and outside of insurance policies.
Private Label Program. PMCIS has developed and is
initiating a "private label" program that will allow advisers to
determine the asset allocation strategy and select the mutual
funds used in constructing client portfolios. This program will
give advisers more involvement in, and influence over, investment
strategy and portfolio construction.
Marketing, Education and Training Services. PMCIS provides
advisers with a variety of marketing materials, newsletters,
slide presentations, software and proposal preparation services
that support the advisers' efforts to market PMCIS' services.
PMCIS also supports advisers' marketing efforts through field
wholesalers and in-house customer service personnel. PMCIS
educates advisers in its investment approach and trains advisers
how to market its services through visits to the advisers'
offices and through periodic regional seminars.
Back-Office and Administrative Services. PMCIS assists
advisers in opening client accounts and monitors and trades
client portfolios on a discretionary basis. PMCIS provides
comprehensive quarterly reports to all clients.
Distribution. PMCIS distributes its services through six
marketing representatives who are supported by five account
servicing representatives. Marketing representatives recruit new
advisers to use PMCIS' services and provide training and
marketing support to advisers on an ongoing basis. Account
servicing representatives support the efforts of the marketing
representatives and provide customer assistance to advisers.
In 1995, PMCIS acquired Optima Funds, Inc. ("Optima"), a
registered investment advisor. Optima was merged into PMCIS in
December 1997. At the time of the merger, Optima provided mutual
fund wrap services to clients with assets under management of
approximately $100 million. PMCI' current Chief Investment
Officer was the President and Chief Investment Officer of Optima.
Significant Relationships
Most of the Company s gross revenues are generated by fees
from the Company s Private Wealth Management (TM) investment advisory
programs. The programs are marketed and sold by Institutional
Channels and Independent Channels either under the Company's name
or under the "private label" of such channel. The Company has no
reason to believe that its current investment advisory
relationships will not continue to generate revenues for the
Company consistent with prior years.
Pursuant to a joint marketing agreement between the Company
and Schwab, a specialized version of the Private Wealth
Management (TM) program is being marketed as an optional additional
service to independent registered investment advisors ("RIAs")
who utilize the services of Schwab. Schwab provides custody and
clearing services for independent RIAs. With respect to Schwab
Institutional Management's RIA customers who determine to use the
Company's products and services, Schwab will provide brokerage,
custody and securities clearing services while PMC will provide
asset allocation, money manager due diligence, monthly and
quarterly reporting, sales support and training.
In July 1997, the Company and PTS entered into agreements
with Ernst & Young LLP to provide institutional consulting,
Private Wealth Management (TM), Allocation Manager (TM) and MARS
reporting services. Under the agreement, the Company provides
end-to-end investment advisory services to Ernst & Young LLP in
support of its advisory and reporting services to clients. Also
in 1997, the Company entered into agreements with Republic
National Bank of New York to provide customized software,
advisory and reporting services in connection with both mutual
fund and privately managed accounts.
<PAGE>
The Company targets other means of distribution, and has
executed selling agreements with new Institutional Channels for
its products. These new relationships include CIGNA Financial
Services, Inc., Cowen & Company, Texas Commerce Bank and EVEREN
Clearing Corp.
Competition
In offering services through its Institutional and
Independent Channels, the Company competes with other firms that
offer wrap and managed account programs. These distribution
channels in turn compete with banks, insurance companies, large
securities brokers and other financial institutions which offer
wrap or managed account programs to the public. The Company
believes that firms compete in this market primarily on the basis
of service, since the wrap fees charged by others are similar to
those charged by the Company. While a number of firms each
provide a portion of the services provided by the Company through
its Institutional Channels, the Company believes it is one of a
few firms offering integrated services to customers. Firms that
compete with the Company in providing services to its Independent
Channels and Institutional Channels have more financial resources
and greater recognition in the financial community than the
Company. Competitors may reduce the fees charged for wrap or
managed account programs or pursue other competitive strategies
that could have an adverse impact on the Company.
The Company's success is in large part a function of the
Independent Channels and Institutional Channels through which its
services are offered to others. There are many alternatives to
wrap programs that are being offered to the public, such as life
cycle funds, asset allocation funds, portfolio strategies and
third-party asset allocation services, and these services are
competitive with those offered by the Company. As financial
institutions continue to grow and build in-house asset
administration service capabilities, some will be able to provide
these services internally rather than using outsourcing
providers. Competitors may succeed in developing products and
services that are more effective than those that have been or may
be developed by the Company and may also prove to be more
successful than the Company in developing these products and
marketing these services to third-party asset managers.
The Company believes that there will be increasing demand in
the financial services industry for the delivery of products and
services electronically or on-line. At present, the Company
delivers or makes available certain of its products and services
to selected clients through the Internet or electronically. The
Company's products were developed with Internet delivery in mind
and the Company anticipates that a modest investment of resources
over the coming year will result in significantly broader
availability of its products and services on-line. There can be
no assurance, however, that the Company will be able to keep pace
with its competitors in the electronic delivery of services.
Government Regulation
The Company's business falls entirely within the securities
industry, an industry which is heavily regulated by the federal
and state governments. New regulatory changes affecting the
securities industry could adversely affect the Company's
business. In addition, as investment advisers and a
broker/dealer, the Company's subsidiaries are subject to
regulation by the Commission, the NASD and state regulatory
agencies. Consequently, the Company could become subject to
restrictions or sanctions from the Commission, the NASD or such
state regulatory agencies. It is impossible to predict the
direction future regulations will take or the effect of such
regulations on the Company's business.
Year 2000
Many existing computer programs use only two digits to
identify a specific year and therefore may not accurately
recognize the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results
by or at the year 2000. Due to the Company's dependence on
computer technology to operate its business, and the dependence
of the financial services industry on computer technology, the
nature and impact of Year 2000 processing failures on the
Company's business could be material. The Company is currently
modifying its computer systems in order to enable its systems to
process data and transactions incorporating year 2000 dates
without material errors or interruptions.
The success of the Company's plan depends in large part on
parallel efforts being undertaken by other entities, including
third party vendors, with which the Company's systems interact
and therefore, the Company is taking steps to determine the
status of these other entities' Year 2000 compliance. The
Company is formulating contingency plans to
<PAGE>
be implemented in the
event that any other entity with which the Company's systems
interact, or the Company itself, fails to achieve timely and
adequate Year 2000 compliance.
The Company currently expects that costs to comply will not
be material since these costs will be substantially borne by outside entities.
These costs exclude the time that may be spent by management and
administrative staff in guiding and assisting the information
technology effort described above or for bringing internal
systems into Year 2000 compliance.
Corporate History
SEC Investigation and Settlement
During November 1993, the staff of the Commission began an
examination of PMC and in January 1994, the Commission issued a
"Formal Order of Investigation." In April 1994, the staff of the
Commission made a formal enforcement recommendation against PMC,
its President Mr. Kenneth S. Phillips and its former Chief
Executive Officer, Mr. Marc Geman. Mr. Geman terminated his
association with the Company to pursue other interests at the
closing of the initial Bedford Loan in July 1995. See "-
- - -Bedford Financing" and "- -Phillips & Andrus, LLC; KP3, LLC."
The recommendation alleged that PMC and such officers had
violated anti-fraud provisions of the Securities Act, the
Exchange Act and the Investment Adviser's Act of 1940, and the
record keeping requirements of the Exchange Act.
Over the course of the following two years the Company
committed significant resources to its defense and the defense of
its officers. The case addressed issues associated with
disclosures and standards of "best execution" in advisory and
wrap programs. The investigation adversely affected the Company
s new business development activities during the period, as very
few firms were willing to develop relationships with the Company
while an enforcement recommendation was pending.
On June 27, 1996, PMC and Mr. Phillips announced that they
had reached a settlement agreement with the Commission. Pursuant
to the settlement agreement, PMC and Mr. Phillips, without
admitting or denying the Commission s allegations, consented to
an Order whereby PMC agreed to engage a compliance executive and
to refund net principal trading profits together with prejudgment
interest thereon, in an amount to be determined by an independent
accountant. The net trading profits were determined to be
$457,000, plus $146,000 of interest through the date of payment.
The refund process was completed in May 1997. In addition, Mr.
Phillips agreed to a censure and payment of a $25,000 fine.
On June 27, 1996, administrative proceedings were instituted
against Mr. Geman, as an individual, by the Commission in
connection with the above described investigation. A hearing was
held before an administrative law judge on November 5 and 6,
1996. On August 5, 1997, the administrative law judge issued his
initial decision finding that, although the Company met its
obligations to its clients to provide "best execution", Mr. Geman
aided, abetted, and caused violations by the Company of the
anti-fraud provisions of the federal securities laws and books
and records violations of the Securities Exchange Act of 1934.
The decision barred Mr. Geman from associating with any broker or
dealer, investment advisor, investment company, or municipal
securities dealer, with the right to re-apply in eighteen
months. Mr. Geman was ordered to cease and desist from
committing or causing violations of the securities laws and was
ordered to pay civil money penalties in the amount of $500,000.
Both Mr. Geman and the Commission have appealed the decision.
Bedford Financing
In July 1995, the Company entered into a transaction with
Bedford Capital Financial Corporation ("Bedford") pursuant to
which Bedford loaned $1.2 million to the Company and received an
option to loan up to an additional $1.8 million to the Company
for a specified period of time and pursuant to certain call
provisions. Each dollar loaned carried a ten-year warrant to
purchase one share of the Common Stock at an exercise price of
$4.00 per share. In connection with this funding and the related
shareholder and investment agreements, Bedford received certain
rights including, but not limited to, the right to elect two of
the Company's five directors, the right to receive options that
mirrored certain issuances or option grants by the Company, and a
security interest in all assets of the Company and its
subsidiaries. Contemporaneously with the closing of the July
1995 transaction with the Company, Bedford also purchased 1.0
million shares of Common Stock from Mr. Geman, the former chief
executive officer of the Company who was a subject of the
<PAGE>
investigation by the staff of the Commission. Between July 1995
and July 1996, the Company obtained the full $3.0 million
financing from Bedford and certain assignees of Bedford (the
"Bedford Loans").
In addition, the Company granted to Bedford certain other
rights in connection with future debt and equity financings which
included a right of first negotiation regarding future fundings,
a 30-day exclusive negotiation period, and a right of first
refusal to match unsolicited offers for financing. The Company
also agreed to pay a $100,000 annual monitoring fee to Nevcorp
Inc., which is owned by J.W. Nevil Thomas, who has been
designated by Bedford to serve on the Company's Board of
Directors.
The Company's relationship with Bedford was restructured,
and the Nevcorp agreement was terminated, in December 1996. See
"-December 1996 Restructuring."
December 1995 and June 1996 Offerings
In December 1995 and January 1996, the Company issued a
total of 482.5 units through a private offering (the "December
1995 Offering"), with each unit consisting of a convertible
promissory note with a principal amount of $1,000 and a warrant
to purchase 250 shares of common stock at an exercise price of
$4.00 per share. During June 1996 the Company issued an
additional 1,017.5 units through another private offering (the
"June 1996 Offering") under substantially the same terms. These
private offerings were issued primarily to employees, business
associates and affiliates of the Company or Bedford. The
purchasers of units in the December 1995 and June 1996 Offerings
received registration rights with respect to the shares of Common
Stock underlying the warrants.
Phillips & Andrus, LLC; KP3, LLC
Phillips & Andrus, LLC, a Colorado limited liability company
("P&A"), was formed in July 1995 to acquire 410,961 shares of
Common Stock from Mr. Geman in exchange for a promissory note
issued to Mr. Geman in the amount of $2,015,000. The promissory
note was secured by the Common Stock acquired. While Mr.
Phillips, President and Chief Executive Officer of the Company,
and David L. Andrus, Executive Vice President of the Company,
were the members of P&A, substantially all of the membership
interests in P&A were owned by Mr. Phillips. The Company and
Messrs. Phillips and Andrus believed that it would be in the
Company's interest that Mr. Geman's involvement with the Company
and direct ownership interest in Common Stock be eliminated. In
October 1996, affiliates of Bedford loaned P&A funds to make the
initial interest payments on the note owed to Mr. Geman. In
December 1996, after notifying its shareholders of the proposal
to do so, the Company loaned a total of $250,000 to P&A to repay
principal owed under the promissory note to Mr. Geman. These
loans permitted P&A to avoid defaults under the promissory note
owed to Mr. Geman.
In January 1997 P&A was liquidated and the assets of P&A,
consisting of the 410,961 shares of Common Stock, were
transferred, subject to certain liabilities, to KP3, LLC, a
Colorado limited liability company ("KP3"), the members of which
are Mr. Phillips and a custodian for Mr. Phillips' son. Mr.
Phillips owns substantially all of the membership interests in
KP3. Also in January 1997, KP3 obtained a bank loan in the
amount of $1,750,000 for a term of approximately 12 months (the
"KP3 Loan"), the proceeds of which were used (i) to repay the
loans made to P&A by the Company and certain affiliates of
Bedford, and (ii) to prepay the balance of the principal and all
interest owing under the promissory note to Mr. Geman. The
Company pledged certain collateral for the KP3 Loan, valued at
approximately $1,890,000, and KP3 agreed to reimburse the Company
for any amount paid by it toward the KP3 Loan. KP3's
reimbursement obligation is secured by a pledge of all 410,961
shares of Common Stock held by KP3. The pledge by the Company to
the bank to secure the KP3 Loan permitted the promissory note to
Mr. Geman to be paid and to eliminate the possibility that Mr.
Geman could reacquire a substantial stock ownership in the
Company. Through March 31, 1998, the Company has lent
approximately $190,000, including interest to KP3 specifically to
service interest payments on the KP3 loans. KP3 has agreed to
reimburse the Company for all amounts paid by the Company on the
loan or for collateral applied to the KP3 Loan, including
interest at an annual rate of 9% and has granted the Company a
security interest in the KP3 Shares. Such loan was restructured
through a different bank on October 1, 1997 and April 15, 1998.
In connection therewith, the Company has provided two cash
collateral guarantees totaling $1,750,000 and the Company retains
the 410,961 KP3 Shares as collateral. The KP3 loans are due
December 31, 1998.
<PAGE>
Bedford and certain of its affiliates have an option,
exercisable through July 26, 2000, to acquire a total of 83,750
shares of Common Stock currently owned by KP3 for an aggregate
purchase price of $410,637.85, increasing at a rate of 9% per
annum subsequent to July 27, 1995.
November 1996 Bridge Loan
In November 1996, the Company borrowed $250,000 (the
"November 1996 Bridge Loan") to fund its working capital
requirements pending closing of the December 1996 Offering. See
"-December 1996 Offering." Half of the loan was provided by
Keefe, Bruyette & Woods, Inc. ("KBW"), placement agent in the
December 1996 Offering, and the balance by certain members of
management of the Company and a subsidiary of Bedford. The
lenders received five-year warrants to purchase an aggregate of
6,250 shares of Common Stock. The warrants have an exercise
price of $6.50 per share. The lenders received registration
rights with respect to the Common Stock to be issued upon
exercise of the warrants. The November 1996 Bridge Loan was
repaid in December 1996 from the proceeds of the December 1996
Offering.
December 1996 Offering
In December 1996 the Company completed a private placement
of 1,294,250 shares of Common Stock at a price of $8.50 per share
(the "December 1996 Offering"). A portion of the proceeds of the
December 1996 Offering were used (i) to repay interest due and
owing on the promissory notes issued in connection with the
December 1995 and June 1996 Offerings, including the notes held
by the father and brother of Mr. Phillips, the Company's Chief
Executive Officer, Mr. Andrus, the Company's Executive Vice
President, and certain employees of the Company, (ii) to repay
interest due and owing under the Bedford Loans, (iii) to repay a
portion of the principal on the Bedford Loans and (iv) to repay
the November 1996 Bridge Loan (including the notes held by
Mr. Phillips, Mr. Andrus and certain other members of the
Company's management).
December 1996 Restructuring
Simultaneous with the closing of the December 1996 Offering,
the Company completed a restructuring of its debt and a partial
restructuring of its outstanding Preferred Stock. The
restructuring involved (i) the payment of all outstanding
interest on the Bedford Loans, the repayment to Bedford and its
assignees of $1,976,250 of outstanding principal on the Bedford
Loans, the exercise by Bedford and its assignees of warrants to
purchase 255,937 shares of Common Stock and the delivery by
Bedford and its assignees of canceled promissory notes in the
amount of $1,023,750 in satisfaction of the exercise price of the
warrants, the cancellation of the remaining warrants to Bedford
and its assignees, and the issuance to Bedford and its assignees
of new warrants to purchase up to 37,500 shares of Common Stock
at an exercise price of $8.50 per share; (ii) the issuance of
375,000 shares of Common Stock upon the exercise of warrants
issued to investors in connection with the Company's private
placement of promissory notes and warrants in the December 1995
and June 1996 Offerings, the delivery of canceled promissory
notes in the aggregate principal amount of $1,500,000 in
satisfaction of the exercise price of such warrants, the payment
by the Company of all outstanding interest due and owing on such
notes as of the exercise date and the issuance to the holders of
such warrants of new warrants to purchase up to 37,500 shares of
Common Stock; (iii) the repayment of the November 1996 Bridge
Loan, and (iv) the enchange of 173,120 shares of Preferred Stock
for 59,510 shares of Common Stock, resulting in a reduction in
the Company's cumulative dividend obligation to the holders of
Preferred Stock from $583,576 as of September 30, 1996 to
$322,700 as of December 31, 1996. As part of the restructuring,
in January 1997, the Company negotiated the exchange of
37,715 shares of Preferred Stock for 12,965 shares of
Common Stock. The new warrants issued by the Company to Bedford
and others pursuant to clauses (i) and (ii) are referred to as
the "New Warrants."
The New Warrants are exercisable over a period of five
years, at an exercise price of $8.50 per share. Registration
rights were granted with respect to the Common Stock received
upon the exercise of the old warrants and the shares of Common
Stock underlying the New Warrants. The New Warrants contain
adjustment provisions relating to the exercise price per share
and the number of shares of Common Stock to be issued upon their
exercise in the event of issuances of additional shares of Common
Stock (including through the issuance of options, rights or
warrants to purchase Common Stock or securities convertible into
Common Stock) by the Company at a price below market price,
certain extraordinary dividends and distributions on the Common
Stock, stock splits or other reclassifications of the
<PAGE>
outstanding
shares of Common Stock, and any merger, consolidation or
reorganization involving the Company or a transfer by the Company
of substantially all of its assets or properties.
PMCIS Acquisition and Financing
On September 24, 1997, the Company completed the acquisition
of PMCIS, a financial services and investment advisory company
headquartered in Atlanta, Georgia. PMCIS has provided investment
consulting services to institutional investors since 1980.
PMCIS' primary services are based around mutual funds. PMCIS
offers 17 model portfolios constructed using no-load mutual funds
and funds available at net asset value. These "standard"
portfolios consist of 5 global tactical asset allocation
portfolios, 5 global strategic asset allocation portfolios and 7
asset class portfolios that concentrate on narrow asset class
groups. PMCIS also has 5 strategic asset allocation portfolios
constructed using mutual funds that invest in companies that are
identified as operating in a socially responsible manner.
PMCIS' mutual fund portfolios are also offered as options for use
by 401(k) plans and with The Hartford Insurance Company within a
variable life contract. PMCIS had one wholly-owned subsidiary,
Optima, which it acquired in 1995. Optima provides mutual fund
wrap services to clients. Optima was merged into PMCIS in
December, 1997.
The agreement providing for the acquisition of PMCIS by the
Company provided that the Company would acquire all of the
outstanding capital stock of PMCIS for up to $9.0 million in cash
and up to $200,000 in Common Stock if certain conditions are met
over time. In addition, the Company agreed to assume the normal
operating liabilities of PMCIS at closing of the acquisition,
estimated to be approximately $1.6 million. At the closing of
the PMCIS transaction, the Company paid $5,000,000 in cash and
agreed to make two earn-out payments on the first and second
anniversary dates of the closing. The first earn-out payment
will equal 1.0% of PMCIS's standard fee assets under management
in excess of $500 million, determined on the one-year
anniversary of the closing of the PMCIS 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 PMCIS's standard
fee assets under management in excess of $700 million, determined
on the two-year anniversary of the closing of the PMCIS
acquisition, not to exceed $2.0 million. PMCIS is now a wholly
owned subsidiary of the Company, and the Company anticipates that
PMCIS will continue to operate as a wholly owned subsidiary of
the Company in the near future.
In connection with the PMCIS acquisition, on September 24,
1997, the Company sold 1,220,749 shares of its Common Stock in
the PMCIS Private Placement at a price of $6.00 per share. The
Purchases received registration rights with respect to the Common
Stock purchased. The proceeds from this transaction, after
deducting expenses relating to the issuance of the Common Stock,
were approximately $6,500,000, of which the Company used
$5,000,000 to purchase PMCIS at the PMCIS closing and a
substantial amount of the balance for employee severance,
relocation, and related expenses associated with the closing of
PMCIS's Atlanta headquarters.
Properties
The Company leases approximately 20,000 square feet of
office space for its corporate headquarters in the Qwest Tower at
555 17th Street, Denver, Colorado pursuant to a lease which
expires in 2001. The Company pays approximately $20,000 per
month for this office space. PMCIS subleases approximately
12,000 square feet of office space in the Galleria Plaza, 100
Galleria Parkway, Suite 1200, Atlanta, Georgia, pursuant to a
sublease which expires April, 1999. PMCIS pays approximately
$24,000 per month for this office space. On January 21, 1998,
PMCIS entered into a sublease agreement for its Atlanta office
space. Pursuant to the agreement, PMCIS sublet a substantial
portion of the above described office space for: $4.25 per square
foot until February 17, 1998; $8.50 per square foot from February
17, 1998 until March 31, 1998; and $17.00 per square foot from
April 1, 1998 until the termination of the lease in April, 1999.
PMCIS still occupies the remaining space and will remain
responsible for the balance of the lease payments not covered by
such sublease.
Employees
The Company and its subsidiaries has a staff of 89 persons
as of March 31, 1998, all full-time employees, including
approximately 55 professionals. None of the Company's employees
are subject to a collective bargaining agreement. The Company's
management considers the Company's employee relations to be good.
<PAGE>
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 Company responded to the
letter and stated its position that no amounts are owed. By
correspondence from The National Association of Security Dealers
("NASD") dated December 19, 1997, PMC was notified that the
matter was submitted by the employee to the NASD for
arbitration. The employee is seeking damages for lost earnings
from his prior employer, lost commissions from PMC and other
damages, totaling $1,190,000. PMC has responded to the NASD
Arbitration demand by denying that the NASD has jurisdiction over
the matter and seeking to have the matter dismissed. The matter
has been transferred to the NASD's regional office in Atlanta,
Georgia. The Company believes that the claims described in the
NASD Arbitration notice are without basis and intends to defend
the matter vigorously.
In October 1997, the Company notified its then Executive
Vice President, Mr. David Andrus, that under the terms of his
employment agreement, his employment with the Company as an
officer and employee would cease effective January 11, 1998. The
employment agreement stipulated that Mr. Andrus was to receive
severance payments in an amount equal to his base salary, payable
ratably on a semi-monthly basis for up to one year after the date
of his separation from the Company. Such payments would cease
sooner in the event Mr. Andrus were to gain employment affording
him comparable compensation. The Company believes there is
sufficient basis to dispute Mr. Andrus' right to receive
severance payments. The Company ceased paying Mr. Andrus in
February 1998, retained legal counsel regarding this matter and
has notified Mr. Andrus that the Company disputes his right to
receive such payments. An attorney for Mr. Andrus has made
demand on the Company for payments under the agreement. The
Company intends to vigorously defend this matter.
The Company is not aware of any other material legal
proceedings or investigations currently pending or threatened
against the Company. See "Management-Employment Agreements."
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding
the Company's directors and executive officers:
Name Age Position
Kenneth S. Phillips 46 President, Chief Executive
Officer and Director
Scott A. MacKillop 46 Executive Vice President, Chief
Operating Officer and Director
Stephen M. Ash 40 Chief Financial Officer and
Treasurer
Maureen E. Dobel 39 General Counsel, Corporate
Secretary and Director
J. W. Nevil Thomas 59 Chairman of the Board of
Directors
D. Porter Bibb 60 Director
Emmett J. Daly 37 Director
Richard C. Hyde 52 Director
Kenneth S. Phillips-President and Chief Executive Officer,
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 co-founding
participant in the Wilshire cooperative in 1986 (associated with
the institutional consulting firm Wilshire Associates). He
served as 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 trade organization
with more than 1,200 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
<PAGE>
Management Institute and the Institute for International
Research. Mr. Phillips received his education at Colorado State
University and holds numerous NASD license designations.
Scott A. MacKillop-Executive Vice President, Chief Operating
Officer, Director. Mr. MacKillop joined the Company in September
1997 as a Director, Executive Vice President and the Chief
Operating Officer of the Company, and as President of PMCIS, the
Company's wholly owned subsidiary, as Chief Operating Officer of
Optima, a wholly owned subsidiary of PMCIS, and as a member of
the Boards of Directors of both PMCIS and Optima. Mr. MacKillop
was appointed to the Board of Directors on October 27, 1997. Mr.
MacKillop has been employed by PMCIS since 1992. From 1991 until
1992 Mr. MacKillop served as outside general counsel to PMCIS.
Mr. MacKillop received a B.A. degree from Stanford University in
1972 and a J.D. degree from George Washington University Law
School in 1976.
Stephen M. Ash, CPA-Chief Financial Officer and Treasurer.
Mr. Ash joined the Company during the fourth quarter of 1997 as
Vice President Finance and Operations. In February, 1998 he was
named Treasurer and President of Portfolio Brokerage Services,
Inc., the Company's wholly owned subsidiary. He was named Chief
Financial Officer in March 1998. Prior to joining the Company,
from 1994 until 1997, Mr. Ash was a Senior Operations Manager for
Mees Pierson Trust Company, a division of Fortis, located in
Curacao, Netherlands Antilles. Mr. Ash has more than ten years
experience as a Certified Public Accountant, first as a Senior
Manager in the audit department of KPMG - Peat Marwick from 1986
to 1993, and then as a Senior Manager with Ernst & Young from
1993 to 1994, specializing in the audit of off-shore mutual
funds, partnerships, and other investment vehicles. Mr. Ash is a
graduate of The State University of New York with a B.S. in
Business Administration..
Maureen E. Dobel-General Counsel, Corporate Secretary and
Director. Ms. Dobel joined PMC in September 1995 as Corporate
Counsel and was named General Counsel and Corporate Secretary in
December 1995. Ms. Dobel was appointed to the Board on March 27,
1998. Prior to joining PMC, Ms. Dobel spent eight years in
private practice, specializing in securities, corporate, real
estate and transactional matters. Ms. Dobel received a B.A.
degree from Drake University in 1980 and J.D. degree from the
University of Nebraska-Lincoln College of Law in 1984.
J.W. Nevil Thomas-Chairman of the Board. 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 and of
Bedford and its subsidiary as described above, Mr. Thomas is a
director of Gan Canada Limited, 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 B.B. Com. from the University of Toronto, an M.A.
in Economics from Queens University, an 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 October 1995. Mr. Bibb is a Managing Director 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. In
addition to being a Director of the Company, Mr. Bibb is a
Director of East Wind Group, Inc. 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 in February 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. Before 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.
Richard C. Hyde-Director. Mr. Hyde became a director of the
Company in July 1997. Mr. Hyde is President of Moreland Capital,
Inc., an asset management and investment consulting firm. He is
also a Principal in Vestor Associates, LLC, the general partner
of Vestor Partners, LP, a private equity investment fund. Prior
to his current
<PAGE>
affiliations, from 1970 to 1995 Mr. Hyde served in
investment/asset management positions with Ameritrust Company and
its successor organizations, Society Corporation and Key Corp.
From 1984 through 1993, he was Chief Investment officer. From
1993 through 1995, Mr. Hyde was the CEO of Society Asset
Management and Managing Director of Key Asset Management
Holdings. Mr. Hyde holds both a Bachelor of Science and MBA --
Finance from Miami University of Ohio.
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
currently Emmett J. Daly, a Senior Vice President of KBW. The
director to be designated by the investors is Mr. Hyde.
Under a Shareholders Agreement dated December 1996 among
Bedford, the Company, Mr. Phillips, Mr. Andrus and KP3 (as
successor to P&A), (i) so long as Bedford holds at least 10% of
the Company's outstanding Common Stock, it is entitled to
designate one director, (ii) so long as Bedford holds at least 5%
of the Company's outstanding Common Stock, Bedford is entitled to
designate one additional director reasonably acceptable to Mr.
Phillips and (iii) Mr. Phillips is entitled to designate three
directors, including one member of senior management designated
after the date of the agreement. Mr. Thomas currently is the
director designated by Bedford. The director designated by
Bedford, acceptable to Mr. Phillips, currently is Mr. Bibb.
Mr. Phillips, Mr. MacKillop and Ms. Dobel are the three directors
Mr. Phillips is entitled to designate.
Compensation of Directors
During 1997, 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
February 28, 1997, Mr. Daly was granted options to purchase
12,500 shares of Common Stock at an exercise price of $10.00 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 $10.00, $14.00, $18.00, $22.00, and $26.00,
respectively, for twenty consecutive trading days. On July 9,
1997, Mr. Hyde was granted options to purchase 12,500 shares of
Common Stock at an exercise price of $7.872 per share.
Mr. Hyde's 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 $7.872, $11.872, $15.872, $19.872, and
$23.872, respectively, for twenty consecutive trading days. On
October 27, 1997, Mr. MacKillop was granted options to purchase
12,500 shares of Common Stock at an exercise price of $6.485 per
share. Mr. MacKillop's 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 $6.485, $10.50, $14.50, $18.50,
and $22.50, respectively, for twenty consecutive trading days.
On March 27, 1998, Ms. Dobel was granted options to purchase
12,500 shares of Common Stock at an exercise price of $4.75 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 $4.75, $8.75, $12.75, $16.75 and $20.75,
respectively, for twenty consecutive trading days.
Committees of the Board of Directors
The Company's Board has established an Audit Committee, a
Compensation Committee and an Executive Committee. The Audit
Committee is composed of Messrs. Daly, Thomas and Phillips, two
of whom are independent directors. The functions of the Audit
Committee are to recommend to the Board the appointment of
independent auditors, to review the plan and scope of any audit
of the Company's financial statements and to review the Company's
significant accounting policies and other related matters.
The Compensation Committee consists of three independent
directors who are not employees of the Company. Messrs. Bibb,
Daly and Hyde currently serve as the members of the Compensation
Committee. The functions of the Compensation Committee are to
make recommendations to the Board regarding the compensation of
executive officers and to administer the Company's bonuses and
stock option plans, including, if approved, the Equity Incentive
Plan. It
<PAGE>
also makes recommendations to the Board with respect to
the compensation of the Chairman of the Board and the Chief
Executive Officer and approves the compensation paid to other
senior executives.
The Executive Committee consists of Messrs. Phillips,
MacKillop and Daly. The Executive Committee possesses the powers
and discharges the duties of the Board between meetings of the
full Board.
Executive Compensation
The following table provides certain information concerning
compensation paid by the Company and its subsidiaries to the
Company's Chief Executive Officer and to the three other
executive officers whose salary and bonus exceeded $100,000 in
1997 (the "Named Executive Officers").
Summary Compensation Table
Long-Term
Annual Compensation
Compensation
Other Securities
Fiscal Annual Underlying
Name and Principal Salary Bonus Compensation
Position Year ($) ($) Options(1)
Kenneth S. 1997 300,865 50,000 * 938
Phillips(2) 1996 252,000 - * 12,500
President, Chief 1995 228,124 - * -0-
Executive Officer
Scott A. MacKillop 1997 206,331(2) 75,750
Executive Vice
President & Chief
Operating Officer
David L. Andrus(4) 1997 292,500 50,000 -0-
Former Executive 1996 240,000 - 262,500
Vice President 1995 40,000 - -0-
Vali Nasr(5) 1997 191,456 20,360 -0-
Former Chief 1996 129,375 9,640 12,500
Financial Officer & 1995 126,475 -0-
Treasurer
(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. MacKillop joined the Company in September 1997, in
connection with the acquisition of PMCIS.
(3) Includes $150,000 in salary received in 1997 from PMCIS for
services rendered prior to its acquisition by the Company.
(4) Mr. Andrus' employment with the Company terminated effective
January 11, 1998.
(5) Mr. Nasr's employment with the Company terminated effective
January 30, 1998. Subsequently, Mr. Nasr served as a
consultant to the Company until mid-March 1998.
* Amount received was less than $50,000 or 10% of total
salary and bonus for the year.
During the year ended December 31, 1997, the Company granted
to the Named Executive Officers options to acquire a total of
76,688 shares of Common Stock as set forth in the following table.
<PAGE>
Option Grants in Last Fiscal Year
Name Number of % of Total ($/Share) Expiration
Shares Options Exercise Date
Underlying Granted to Price
Options Employees
Granted in
Fiscal
Year(4)
Kenneth S. 938(1) 0.6 6.485 12/31/2002
Phillips
Scott A. 62,500(2) 51.6 6.485 09/24/2003
MacKillop
12,500(3) 6.485 10/27/2002
750(1) 6.485 12/31/2002
_______________________
(1) Options were granted on December 31, 1997 and are fully
vested.
(2) Options were granted on September 24, 1997 and vest ratably
20% per year over a five-year period commencing September 24,
1998.
(3) Options were granted on October 24, 1997; 2,500 options are
vested and 20% of the remainder vest each time the average bid
and asked price of the Common Stock equals $4.75, $8.75,
$12.75, $16.75 and $20.75, respectively, for twenty consecutive
trading days.
(4) Based on an aggregate of 146,826 options granted in 1997 to
employees of the Company, including the Named Executive
Officers.
The following table sets forth certain information with
respect to the value of options held at December 31, 1997 by the
Named Executive Officers. The Named Executive Officers did not
exercise any options to purchase Common Stock during 1997.
Fiscal Year End Option Values
Name Number of Securities ($)Value of
Underlying Unexercised
Unexercised Options In-the-Money Options
at Year End at Year End (1)
---------------------- ----------------------
ExercisableUnexercisable ExercisableUnexercisable
---------------------- ----------------------
Kenneth S. Phillips 5,938 7,500 $12,500 $18,750
David L. Andrus 193,750(2) 0 $71,250 0
Scott A. MacKillop 3,250 72,500 $49 $1,088
Vali Nasr 12,500(3) 0 $31,250 0
(1) The closing price for the Common Stock as reported on the
Nasdaq National Market on December 31, 1997 (the last day of
trading in 1997) was $6.50. Value is calculated on the basis
of the difference between the option exercise price and $6.50,
multiplied by the number of shares of Common Stock underlying
the option.
(2) As of April 11, 1998, options to purchase 23,750 shares
expired.
(3) As of April 30, 1998, options to purchase 12,500 shares will
expire.
Employment Agreements
The Company has employment agreements with Mr. Phillips, its
President and Chief Executive Officer, and PMCIS has an
employment agreement with Mr. MacKillop, the Executive Vice
President and Chief Operating Officer of the Company. In
addition, the Company had an employment agreement with Mr.
Andrus, its former Executive Vice President.
The employment 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. Effective January
<PAGE>
1, 1997, Mr. Phillips salary was
increased to $300,000. 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 options granted to Mr.
Phillips vest immediately upon his death or upon a change in
control of the Company.
The employment agreement with Mr. MacKillop is dated
September 23, 1997, and is for a two-year term. PMCIS may
terminate the agreement at any time after the one-year
anniversary of the date of the agreement by giving six months'
prior written notice. The agreement provides for a minimum
salary of $240,000, an annual bonus of up to $50,000, options to
acquire 62,500 shares of Common Stock, and participation in the
Company's other benefit plans.
The employment agreement with Mr. Andrus is dated July 26,
1995, was amended in December 1996 and was terminated effective
January 11, 1998. It provided for a three-year term ending
November 1998 terminable by either party upon 90 days' prior
notice. The agreement provided for a minimum salary of $240,000,
options to acquire 250,000 shares of Common Stock, and
participation in the Company's other benefit plans. Effective
January 1, 1997, Mr. Andrus salary had been increased to
$300,000. The agreement provided that all options granted to Mr.
Andrus vest immediately upon a change in control of the Company.
On October 13, 1997, the Company notified Mr. Andrus that his
affiliation with the Company as an officer and employee would
cease effective January 11, 1998. The Agreement provided that,
if Mr. Andrus were terminated without cause, he would receive
severance payments in an amount equal to his base salary, payable
ratably on a semi-monthly basis for up to one year after January
11, 1998, the date of his separation from the Company. Such
payments would cease sooner in the event Mr. Andrus were to gain
employment affording him comparable compensation. The Company
believes there is sufficient basis to dispute Mr. Andrus' right
to receive severance payments. The Company ceased paying
Mr. Andrus in February 1998, retained legal counsel regarding the
matter and has notified Mr. Andrus that the Company disputes his
right to receive such payments. An attorney for Mr. Andrus has
made demand on the Company for payments not made. The Company
intends to vigorously defend this matter. See "Business-Legal
Proceedings."
<PAGE>
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 31, 1998 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 Named Executive
Officer, and (iv) all directors and executive officers of the
Company as a group. Unless otherwise indicated in the footnotes,
each stockholder has sole voting and investment power with
respect to shares listed in the table. 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.
Name Address Number of Percent of
Shares Class
Kenneth S. Phillips 555 Seventeenth 688,379(1) 14.2 %
Street, 14th Fl.
Denver, Colorado
80202
Scott A. MacKillop 555 Seventeenth 8,750(2) *
Street, 14th Fl.
Denver, Colorado
80202
Stephen M. Ash 555 Seventeenth 0
Street, 14th Fl.
Denver, Colorado
80202
Maureen E. Dobel 555 Seventeenth 7,001(3) *
Street, 14th Fl.
Denver, Colorado
80202
J.W. Nevil Thomas Scotia Plaza, 7,500(4) *
Suite 4712
40 King Street
West
Toronto, Ontario
M5H 3Y2
D. Porter Bibb 540 Madison 5,000(5) *
Avenue
New York, New
York 10022
Emmett J. Daly Two World Trade 52,500(6) 1.1
Center, 85th Fl
New York, New
York 10048
Richard C. Hyde Moreland 2,500(7) *
Capital, Inc.
30050 Chagrin
Blvd., Suite 100
Pepper Pike,
Ohio 44124
Vali Nasr(8) 4770 W. Easter 12,500(9) *
Ct.
Littleton,
Colorado, 80123
David L. Andrus(10) 2554 Linden Drive 196,750(11) 3.6
Boulder, CO 80304
Bedford Capital 2nd Floor, 742,812(12) 15.2
Financial Charlotte Hs.
Corporation Shirly Street,
Box N964
Nassau, Bahamas
KP3, LLC 555 Seventeenth 410,961(13) 8.5
Street, 14th Fl.
Denver, Colorado
80202
OCH ZIFF Capital 153 E. 53rd 466,666 9.6
Management Street, 43rd Fl.
New York, NY
10022
Bay Pond Partners, c/o Wellington 365,833 5.6
L.P. Management
Company, L.L.P.,
75 State Street
Boston,
Massachusetts
02109
Bay Pond Investors c/o Wellington 270,250 7.5
(Bermuda), Ltd. Management
Company, L.L.P.,
75 State Street
Boston,
Massachusetts
02109
Wheatley Partners, 80 Cutter Mill 401,916 8.3
L.P. Road, Suite 311
Great Neck, New
York 11021
All Officers and
Directors as a . . . . . . . . 771,630 15.68
group (8 persons) . . . . . . . .
. . . . . . . . . . . . . . . . .
* Less than 1%.
<PAGE>
(1) Includes 410,961 shares owned by KP3, of which Mr. Phillips
is the managing member and has the controlling ownership
interest and 6,375 shares underlying presently exercisable
warrants.
(2) Includes 2,500 shares underlying presently exercisable
options.
(3) Includes [7,001] shares underlying presently exercisable
options.
(4) Includes 5,000 shares underlying presently exercisable
options and 2,500 shares owned by Mr. Thomas' spouse, Suzanne
E. Thomas. Does not include shares owned by Bedford of which
Mr. Thomas is a director and a 6.13% shareholder.
(5) Includes 5,000 shares underlying presently exercisable
options. Does not include 50,000 shares underlying presently
exercisable options granted to Ladenburg, Thalmann & Co., Inc.,
of which Mr. Bibb is a managing director.
(6) Includes 6,250 shares jointly owned with Regina Daly and
36,250 shares underlying presently exercisable options.
(7) Includes 2,500 shares underlying presently exercisable
options.
(8) As of January 30, 1998, Mr. Nasr no longer was an officer or
employee of the Company.
(9) Includes 12,500 shares underlying presently exercisable
options, which expire April 30, 1998.
(10) As of January 11, 1998, Mr. Andrus no longer was an officer
or employee of the Company.
(11) Includes 196,750 shares underlying presently exercisable
options, of which 23,750 expire April 11, 1998.
(12) Includes 34,062 shares underlying presently exercisable
options or warrants issued by the Company and 58,750 shares
owned by KP3 and included in the beneficial ownership of
Mr. Phillips that Bedford may acquire pursuant to a presently
exercisable option.
(13) Shares beneficially owned by KP3 are also included in shares
beneficially owned by Mr. Phillips; and 58,750 of such shares
also have been included in the beneficial ownership of Bedford.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 March 31, 1998, a total of $100,000 in
indemnification payments had been made by the Company under that
agreement.
David L. Andrus, former Executive Vice President of the
Company, participated in the June 1996 offering of debt
securities and warrants. Mr. Andrus purchased $100,000 principal
amount, of subordinated debt and received a promissory note and
warrants to purchase 25,000 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 40,625 shares of Common Stock. Mr. Andrus and the
other Company employees participated in the offering on the same
terms as all other investors. See "Business-Corporate
History-December 1995 and June 1996 Offerings."
In November 1996 the Company borrowed $250,000 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 Chief
Executive Officer and former Executive Vice President,
respectively, and certain other employees of the Company.
Bedford, a shareholder 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 repaid upon the closing of the December 1996 Offering. The
lenders also received warrants to purchase a total of
6,250 shares of Common Stock at a price of $6.50 per share and
registration rights with respect to the shares of Common Stock
underlying the warrants. See "Business-Corporate
History-November 1996 Bridge Loan."
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 them, exercised certain of the warrants held by
them, were issued certain shares of Common Stock by the Company
in cancellation of their other warrants and were issued new
five-year warrants to purchase 37,500 shares of the Common Stock
with an exercise price equal to the price to investors in the
December 1996 Offering. As a result of these transactions, all
$3 million in outstanding debt previously owed by the Company to
Bedford and its assignees was eliminated. Bedford also
relinquished certain rights held by it and its right to elect
directors of the Company was 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. See
"Business-Corporate History-December 1996 Restructuring."
<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 375,000 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 37,500 shares of Common Stock at an exercise price of $8.50
per share. The brother and father of Mr. Phillips, the Company's
President and Chief Executive Officer, Mr. Andrus, former
Executive Vice President of the Company, and certain other
employees of the Company, participated in the restructuring on
the same terms as the other parties.
Commencing in December 1996, the Company has provided
certain financial assistance to KP3, a limited liability company
principally owned and controlled by Mr. Phillips, the Company's
President and Chief Executive Officer. See "Business - Corporate
History - Phillips & Andrus, LLC; KP3, LLC" for a summary of
these transactions.
On September 24, 1997, the Company completed the acquisition
of PMCIS by acquiring all of the outstanding capital stock of
PMCIS from its seven shareholders. Mr. MacKillop was the
President and a minority shareholder of PMCIS. The Company paid
to the PMCIS shareholders $5.0 million in cash at closing and
agreed to make two earn-out payments on the first and second
anniversary dates of the closing. In connection with the stock
purchase, the Company agreed to indemnity the shareholders
against certain claims for a period of 30 months after the
closing or, in some cases, for a longer period of time. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources," and
"Business-Corporate History-PMCIS Acquisition and Financing."
As part of the September 1997 offering, Emmett J. Daly and
J.W. Nevil Thomas, directors of the Company, Scott A. MacKillop,
the President of PMCIS and current Executive Vice President,
Chief Operating Officer and Director of the Company, Michael T.
Wilkinson, a former director and principal shareholder of PMCIS,
and two other PMCIS employees participated in the offering. All
of such individuals participated in the offering on the same
terms as all other investors. See "Business-Corporate
History-PMCIS Acquisition and Financing."
DESCRIPTION OF SECURITIES
The Company is authorized to issue 50,000,000 shares of
Common Stock, $0.01 par value. As of April 16, 1998, the Company
had 4,857,803 shares of Common Stock issued and outstanding with
rights, options and warrants outstanding which could require the
Company to issue 1,083,448 additional shares of Common Stock.
Common Stock
Holders of Common Stock are each entitled to cast one vote
for each share held of record on all matters presented to the
shareholders. Cumulative voting is not allowed; hence, the
holders of a majority of the outstanding Common Stock can elect
all directors. Holders of Common Stock are entitled to receive
such dividends as may be declared by the Company's Board of
Directors out of funds legally available therefor and, in the
event of liquidation, and subject to the rights of the holders of
Preferred Stock, to share pro-rata in any distribution of the
Company s assets after payment of liabilities. No dividends may
be paid on the Common Stock unless dividends payable on the
Preferred Stock are current. The Board of Directors is not
obligated to declare a dividend and it is not anticipated that
dividends will be paid in the foreseeable future.
Holders of Common Stock do not have preemptive rights to
subscribe to additional shares of capital stock if issued by the
Company. There are no conversion, redemption, sinking fund or
similar provisions regarding the Common Stock. All of the
outstanding shares of Common Stock are fully paid and
non-assessable.
Registration Rights. Common Stock issuable upon exercise of
warrants issued in connection with the November 1996 Bridge Loan
and the December 1996 Restructuring and Common Stock issued in
the December 1996 Offering has the following registration
rights: an obligation by the Company and effect and maintain a
shelf registration until such time as the registered shares are
sold or are otherwise transferable during which time holders of
25% of the registrable securities can request an underwritten
offering. The Company filed Registration Statement
Number 333-21335 pursuant
<PAGE>
to these rights. All Common Stock
issued or issuable to Bedford shares this registration right and
also has the right to piggyback on public offerings by the
Company.
Common Stock issued in connection with the September 1997
PMCIS Financing has the following registration rights: an
obligation by the Company and effect and maintain a shelf
registration until such time as the registered shares are sold or
are otherwise transferable during which time holders of 25% of
the registrable securities can request an underwritten offering.
The Company filed Registration Statement Number-333-40805
pursuant to these rights.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of
preferred stock. Under Colorado law, the rights, preferences and
limitations of the preferred stock may be established from time
to time by the Company s Board of Directors. The Company s
Articles of Incorporation, as amended (the "Articles") provide
that the Board of Directors has the authority to divide the
preferred stock into series and, within the limitations provided
by Colorado statute, to fix by resolution the voting power,
designation preferences, and relative participation, optional or
other special rights, and the qualifications, limitations or
restrictions of the shares of any series so established.
As of the date of this Prospectus, the only series of
preferred stock to be designated is the $0.325 Cumulative
Convertible Series A Preferred Stock ("Series A Preferred") with
450,000 shares authorized of which 138,182 shares are issued and
outstanding.
Holders of the Series A Preferred are entitled to receive
dividends at a rate of $.325 per share per annum. Dividends are
payable semi-annually on January 15 and July 15 in each year, but
only when and as authorized by the Board of Directors of the
Company out of assets legally available for dividends. Dividends
accrue from the date of issuance of the shares and are
cumulative. The first dividend due on July 15, 1991, was paid.
The preferred dividends due subsequently have not been paid by
the Company, and as a result, the dividends have cumulated.
Upon liquidation or dissolution of the Company, holders of
the Series A Preferred 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 Series A
Preferred ($2.50), plus all unpaid cumulative dividends. As of
March 31, 1998, cumulative dividends in arrears with respect to
the Series A Preferred totaled approximately $298,419. The
Series A Preferred is non-participating and the holders of the
Series A Preferred have no preemptive rights and no voting rights
except as may be required by Colorado law.
At the option of the Company, the Series A Preferred may be
redeemed in whole or in part, at any time at a price of $2.75 per
share, plus unpaid cumulative dividends, upon 45 days' prior
written notice. Redemption can only occur if certain conditions,
which have not occurred as of the date of this Prospectus, are
satisfied. The voluntary conversion rights have expired.
The Company may, in the future, issue other series of
preferred stock having terms established by the Company's Board
of Directors without requiring the approval of holders of the
Common Stock. Any such issuance of preferred stock could make
removal of the Company's management more difficult than at
present. The provisions relating to preferred stock will make
the removal of management more difficult even if such removal
would be considered beneficial to shareholders generally, and may
have the effect of limiting shareholder participation in certain
transactions such as mergers or tender offers whether or not such
transactions are favored by incumbent management. Because the
Board of Directors has authority to establish the terms of the
preferred stock, such stock could be issued to defend against an
attempted takeover of the Company.
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information regarding
the Selling Shareholders and the Shares offered by the Selling
Shareholders pursuant to this Prospectus. Of the 1,453,245
Shares offered hereby for resale by the Selling Shareholders,
232,500 Shares represent shares of Common Stock to be issued upon
the exercise of outstanding stock options issued by the Company.
See "Description of Capital Stock." As more fully disclosed in
the footnotes to this table, certain of the Selling Shareholders
are currently, or have been within the past three years, officers
or directors of the Company or have had other material
relationships with the Company. Because the Selling Shareholders
may offer all or some portion of the Shares pursuant to this
Prospectus, no estimate can be given as to the amount of the
Shares that will be held by the Selling Shareholders upon
termination of any such offering. The amount of Shares offered
hereby may in some instances exceed the number of Shares of
Common Stock owned by a particular Selling Shareholder prior to
the offering. This difference is due to Shares of Common Stock
issuable by the Company to Selling Shareholders upon their
exercise of options. Unless otherwise indicated, all ownership
amounts after the Offering are less than 1% of the Company's
Common Stock.
<PAGE>
Shares Shares %
Beneficially Number of Beneficially Ownership
Selling Shareholder Owned Shares Owned After
Prior to Offered After the the
Offering Hereby Offering (8) Offering
(8)
- - --------------------------------------------------------------------
Acadia Fund I L.P. 30,250 30250 0 --
- - --------------------------------------------------------------------
Barlow Partners, Inc. 28,333 3,333 25,000 *
- - --------------------------------------------------------------------
Bay Pond Investors 270,250 35,000 235,250 4.84
(Bermuda) L.P.
- - --------------------------------------------------------------------
Bay Pond Partners, L.P. 406,083 78,333 327,750 6.75
- - --------------------------------------------------------------------
Canmerge Consultants 18,750 5,000 13,750 *
Limited
- - --------------------------------------------------------------------
Emmett J. Daly(1) and 52,500 12,500 40,000 --
Regina Daly JT/TEN (1)
- - --------------------------------------------------------------------
Endicott Partners, L.P. 25,000 25,000 0 --
- - --------------------------------------------------------------------
Euro Credit Investments 140,813 5,000 135,813 2.80
Ltd.
- - --------------------------------------------------------------------
Michael J. Flinn(2) 5,500 5,500 0 --
- - --------------------------------------------------------------------
Growth Services Inc. 5,000 5,000 0 --
- - --------------------------------------------------------------------
Guernroy Limited 5,000 5,000 0 --
- - --------------------------------------------------------------------
Keefe, Bruyette & 157,541 41,666 115,875 2.37
Woods, Inc.
- - --------------------------------------------------------------------
Adam J. Lewis 1,666 1,666 0 --
- - --------------------------------------------------------------------
James C. Lott & Mary M. 10,000 5,000 0 --
Lott JT/TEN
- - --------------------------------------------------------------------
Scott A. MacKillop (1) 8,750 5,500 3,250 --
(3)
- - --------------------------------------------------------------------
Malta Hedge Fund, L.P. 44,625 44,625 0 --
- - --------------------------------------------------------------------
Malta Hedge Fund II, 7,875 7,875 0 --
L.P.
- - --------------------------------------------------------------------
Malta Partners, L.P. 51,333 51,333 0 --
- - --------------------------------------------------------------------
Malta Partners II, L.P. 12,833 12,833 0 --
- - --------------------------------------------------------------------
Thomas B. Michaud 3,250 3,250 0 --
- - --------------------------------------------------------------------
Gary A. Miller(2) 5,500 5,500 0 --
- - --------------------------------------------------------------------
Och-Ziff Capital 466,666 466,666 0 --
Management, L.P.
- - --------------------------------------------------------------------
Rainbow Partners 166,666 166,666 0 --
- - --------------------------------------------------------------------
Andrew M. Senchak 2,500 2,500 0 --
- - --------------------------------------------------------------------
Suzanne E. Thomas 2,500 2,500 0 --
- - --------------------------------------------------------------------
J.W. Nevil Thomas (1) 7,500 2,500 5,000 *
- - --------------------------------------------------------------------
Eric R. Thorpe 833 833 0 --
- - --------------------------------------------------------------------
Peter L. van der Velden 2,750 2,500 250 *
- - --------------------------------------------------------------------
Wheatley Foreign 27,083 13,333 13,750 *
Partners, L.P.
- - --------------------------------------------------------------------
Wheatley Partners, L.P. 374,833 153,333 221,500 4.60
- - --------------------------------------------------------------------
Michael T. Wilkinson (4) 17,500 17,500 0 --
- - --------------------------------------------------------------------
Albert Yanni 3,250 3,250 0 --
- - --------------------------------------------------------------------
David Andrus(5) 173,000 170,000 3,000 *
- - --------------------------------------------------------------------
Carolyn Kling(6) 50,000 50,000 0 --
- - --------------------------------------------------------------------
Vali Nasr(7) 17,500 12,500(8) 5,000 *
- - --------------------------------------------------------------------
* Less than 1%.
(1) Director of the Company
(2) Employee of the Company
(3) Scott A. MacKillop is the President of PMCIS and Executive
Vice President and director of the Company.
(4) Michael T. Wilkinson is a former director of PMCIS, a
subsidiary of the Company.
(5) David Andrus is a former Director and Executive Vice
President of the Company.
(6) Former Senior Vice President of PMC.
(7) Vali Nasr is the former Chief Financial Officer of the
Company.
(8) Assumes all shares offered are sold in the Offering.
<PAGE>
PLAN OF DISTRIBUTION
The Selling Shareholders' Shares may be offered and sold
from time to time in the discretion of the Selling Shareholders
in the over-the-counter market, or otherwise, at prices and terms
then prevailing or at prices related to the then-current market
price, or in negotiated transactions. The Selling Shareholders
will act independently of the Company in making decisions with
respect to the timing, manner and size of each sale hereunder.
The Selling Shareholders' Shares may be sold by one or more of
the following methods, without limitation: (i) a block trade in
which a broker or dealer so engaged will attempt to sell the
Shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (ii) purchases
by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus;
(iii) ordinary brokerage transactions and transactions in which
the broker solicits purchases; and (iv) face-to-face transactions
between sellers and purchasers without a broker/dealer. In
effecting sales, brokers or dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive commissions or
discounts from Selling Shareholders in amounts to be negotiated.
Such brokers and dealers and any other participating brokers or
dealers may be deemed to be "underwriters'' within the meaning of
the Securities Act, in connection with such sales.
Sales of Selling Shareholders' Shares may also be made
pursuant to Rule 144 under the Securities Act, where applicable.
The Shares may also be offered in one or more underwritten
offerings, on a firm commitment or best efforts basis. The
Company will receive no proceeds from the sale of the Shares by
the Selling Shareholders. The Shares may be sold from time to
time in one or more transactions at a fixed offering price, which
may be changed, or at varying prices determined at the time of
sale or at negotiated prices. Such prices will be determined by
the Selling Shareholders or by agreement between a Selling
Shareholder and its underwriters, dealers, brokers or agents.
To the extent required under the Securities Act, the
aggregate amount of Shares being offered and the terms of the
offering, the names of any such agents, brokers, dealers or
underwriters and any applicable commission with respect to a
particular offer will be set forth in an accompanying Prospectus
Supplement. Any underwriters, dealers, brokers or agents
participating in the distribution of the Shares may receive
compensation in the form of underwriting discounts, concessions,
commissions or fees from a Selling Shareholder and/or purchasers
of Shares, for whom they may act. In addition, sellers of Shares
may be deemed to be underwriters under the Securities Act and any
profits on the sale of Shares by them may be deemed to be
discount commissions under the Securities Act. Selling
Shareholders may have other business relationships with the
Company and its subsidiaries or affiliates in the ordinary course
of business.
From time to time one or more of the Selling Shareholders
may transfer, pledge, donate or assign Shares to lenders, family
members and others and each of such persons will be deemed to be
a "Selling Shareholder" for purposes of this Prospectus. The
number of Shares beneficially owned by those Selling Shareholders
who so transfer, pledge, donate or assign Shares will decrease as
and when they take such actions. The plan of distribution for
Shares sold hereunder will otherwise remain unchanged, except
that the transferees, pledgees, donees or other successors will
be Selling Shareholders hereunder.
LEGAL MATTERS
Certain legal matters in connection with the Shares offered
hereby have been passed upon for the Company by Holme Roberts &
Owen LLP, Denver, Colorado.
EXPERTS
The financial statements of PMC International, Inc. as of
December 31, 1997 and 1996, and for the years then ended included
herein have been included herein in reliance upon the report of
Spicer, Jeffries & Co., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the information requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements
and other information may be inspected without charge at, and
copies thereof may be obtained at prescribed rates from, the
public reference facilities of the Commission's principal office
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. In addition,
the Commission maintains a world wide web site that contains
reports, proxy and information statements and other information
regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
The Company has filed with the Commission a registration
statement on Form SB-2 under the Securities Act with respect to
the securities offered hereby (together with all amendments and
exhibits, the "Registration Statement"). This Prospectus, which
is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain
portions of which have been omitted in accordance with the rules
and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect
to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made
to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in
its entirety by such reference. For further information with
respect to the Company and the securities offered hereby
reference is made to the Registration Statement, and to the
exhibits thereto, which may be inspected at, and copies thereof
may be obtained at prescribed rates from, the public reference
facilities of the Commission at the addresses set forth above.
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONTENTS
======================
Financial statements for the years ended
December 31, 1997 and 1996
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
Notes to Consolidated Financial Statements F-8
<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 as of December 31,
1997 and 1996, 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, 1997 and 1996, 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 5, 1998
<PAGE>
<TABLE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<CAPTION>
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
CASH AND CASH EQUIVALENTS (Notes 1 and 7) $ 2,953,740 $ 6,499,390
RECEIVABLES:
Investment management fees 1,041,390 113,778
Other receivables 166,221 187,109
FURNITURE AND EQUIPMENT, at cost, net of accumulated
depreciation of $1,277,801 and $539,782 (Note 1) 965,168 604,085
SOFTWARE AND PRODUCT DEVELOPMENT COSTS,
at cost, net of accumulated amortization of
$963,469 and $352,971 (Note 1) 1,208,713 843,272
PREPAID EXPENSES AND OTHER ASSETS 1,023,364 340,006
LONG TERM NOTES RECEIVABLE (Note 2) 623,115 575,804
GOODWILL (net of amortization of $146,096) 5,394,606 -
----------------- ----------------
$ 13,376,317 $ 9,163,444
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 1,687,967 $ 839,095
Accrued expenses 644,012 535,520
Other liabilities 104,125 730,909
Deferred revenue 1,307,382 552,868
Notes payable (Note 6) 366,158 14,694
Obligations under capital leases (Note 7) 384,986 219,821
----------------- ----------------
Total liabilities 4,494,630 2,892,907
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 3):
Preferred stock - no par value - authorized 5,000,000 shares;
issued and outstanding, 138,182 and 175,897 shares 345,455 439,742
Common stock, $.01 par value - authorized, 50,000,000 shares;
issued and outstanding, 4,857,903 and 3,617,939 shares 48,579 36,179
Additional paid-in capital 22,977,526 16,461,953
Deficit (14,489,873) (10,667,337)
----------------- ----------------
Total shareholders' equity 8,881,687 6,270,537
----------------- ----------------
$ 13,376,317 $ 9,163,444
================= ================
</TABLE>
<PAGE>
<TABLE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1997 AND 1996
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUE:
Investment management fees (Note 1) $ 14,668,348 $ 9,944,544
Other income 194,366 142,337
----------------- ----------------
Total revenue 14,862,714 10,086,881
----------------- ----------------
EXPENSES:
Investment manager and other fees 8,151,912 5,580,846
Salaries and benefits 5,039,136 3,524,825
Clearing charges and user fees 613,794 813,239
Advertising and promotion 1,060,930 830,140
General and administrative 1,317,354 1,098,895
Software development costs 272,772 132,392
Occupancy and equipment costs 1,708,714 1,125,744
Professional fees 520,638 827,292
Settlement expense - 155,000
----------------- ----------------
Total expenses 18,685,250 14,088,373
----------------- ----------------
NET LOSS $ (3,822,536) $ (4,001,492)
=============== ================
NET LOSS PER COMMON SHARE (Note 1) $ (0.98) $ (2.85)
=============== ================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (Note 1) 3,961,768 1,425,509
================= ================
</TABLE>
<PAGE>
<TABLE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, 1997 AND 1996
<CAPTION>
Total
Common Stock Additional Preferred Shareholders'
------------ Paid - In Stock Equity
Shares Amount Capital Shares Amount Deficit (Deficit)
-------- ------- ------- ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995
as previously stated 5,555,713 $ 55,556 $3,523,909 349,017 $ 872,543 $ (6,665,845) $(2,213,837)
Stock Split effected (Note 1) (4,166,785) (41,667) 41,667 - - - -
---------- -------- ----------- -------- --------- ------------- ------------
BALANCES, December 31, 1995 as restated 1,338,928 13,889 3,565,576 349,017 872,543 (6,665,845) (2,213,837)
Stock options exercised 250 2 1,373 - - - 1,375
Notes payable converted to common stock 875,000 8,750 2,515,000 - - - 2,523,750
Preferred stock converted to common stock 59,511 595 432,206 (173,120) (432,801) - -
Issuance of stock 1,294,250 12,943 10,988,182 - - - 11,001,125
Less stock issuance costs - - (1,040,384) - - - (1,040,384)
Net loss - - - - - (4,001,492) (4,001,492)
---------- -------- ----------- -------- --------- ------------- ------------
BALANCES, December 31, 1996 3,617,939 36,179 16,461,953 175,897 439,742 (10,667,337) 6,270,537
Stock options exercised 6,250 63 26,812 - - - 26,875
Issuance of stock 1,220,749 12,207 7,312,287 - - - 7,324,494
Preferred stock converted to common stock 12,965 130 94,157 (37,715) (94,287) - -
Less stock issuance costs - - (917,683) - - - (917,683)
Net loss - - - - - (3,822,536) (3,822,536)
---------- -------- ----------- -------- --------- ------------- ------------
BALANCES, December 31, 1997 4,857,903 $ 48,579 $22,977,526 138,182 $ 345,455 $ (14,489,873) $ 8,881,687
========== ======== =========== ======== ========= ============= ============
</TABLE>
<PAGE>
<TABLE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1997 AND 1996
INCREASE (DECREASE) IN CASH
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,822,536) $ (4,001,492)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,137,790 537,522
Accretion of discount on note receivable (96,590) (67,181)
Changes in operating assets and liabilities:
Investment management fees receivable (736,202) (105,981)
Other receivables (5,738) (97,273)
Prepaid expenses and other assets 121,788 (119,401)
Accrued expenses 108,492 (172,377)
Accounts payable 525,947 (597,029)
SEC settlement distribution (605,591) -
Other liabilities (21,193) 159,520
Deferred revenue (21,547) 141,521
-------------- --------------
Net cash used in operating activities (3,415,380) (4,322,171)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (303,028) (376,574)
Reduction of long-term note receivable 345,582 393,854
Issuance of notes receivable (301,613) -
Acquisition of ADAM, net of cash acquired (5,104,007) -
Cost of software development (1,027,163) (295,022)
-------------- --------------
Net cash used in investing activities (6,390,229) (277,742)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 3,125,000
Principal payments on notes payable (8,536) (2,234,026)
Payments on obligations under capital lease (165,191) (67,672)
Sale of common stock, less offering costs 6,406,811 9,960,741
Proceeds from exercise of stock options 26,875 1,375
-------------- --------------
Net cash provided by financing activities 6,259,959 10,785,418
-------------- --------------
NET INCREASE (DECREASE) IN CASH (3,545,650) 6,185,505
CASH, at beginning of year 6,499,390 313,885
-------------- --------------
CASH, at end of year $ 2,953,740 $ 6,499,390
============== ==============
</TABLE>
<PAGE>
<TABLE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1997 AND 1996
INCREASE (DECREASE) IN CASH
(Continued)
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 34,137 $ 367,180
============== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment via capital lease obligation $ 330,356 $ 205,433
============== ============
Conversion of preferred stock to common stock $ 94,287 $ 432,801
============== ============
Conversion of notes payable to common stock $ - $ 2,523,750
============== ============
Transfer of assets via accounts receivable at net book value $ 43,002 $ -
============== ============
The Company purchased all of the capital stock of
ADAM for $5,163,386. In connection with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 6,622,370
==============
Cash paid for the capital stock (5,163,386)
==============
Liabilities assumed $ 1,458,984
==============
</TABLE>
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 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 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.
On September 24, 1997, PMCI completed its acquisition (the
"Acquisition") of PMC Investment Services, Inc., ("PMCIS")
formerly 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 1,220,749 shares of PMCI common stock at
$6.00 per share.
PMC was organized in 1986 and its principal business activity is
the administration of private and institutional managed account
programs with its customers located substantially in the United
States. Its services include investment suitability analysis,
portfolio modeling and asset allocation, money manager selection,
portfolio accounting and performance reporting. PMC is
registered as an investment advisor under the Investment Advisors
Act of 1940.
F-8
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Organization (continued)
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 versus payment basis.
Portfolio Technology Service, Inc. ("PTS"), a wholly owned
subsidiary of PMCI, 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.
ADAM was formed in 1980 to provide investment consulting services
to institutional investors. ADAM's primary services are based
around mutual funds. ADAM offers 17 model portfolios constructed
using no-load mutual funds and funds available at net asset
value. ADAM's mutual fund portfolios are offered as options for
use by 401(k) plans and with an insurance company within a variable
annuity contract.
The accompanying consolidated financial statements include the
historical accounts of PMC for all periods and the accounts of
PMCI since September 30, 1993, PBS and PTS since inception and
ADAM since September 24, 1997. All intercompany accounts and
transactions have been eliminated in consolidation.
On December 15, 1997, at the Annual Meeting of Shareholders of
the Company, the Shareholders of the Company approved a 1 for 4
reverse split of the Common Stock (the "Reverse Split"). On
December 30, 1997, the Company effected the Reverse Split to all
shareholders of record as of December 30, 1997.
Unless otherwise noted, all references to shares and share
prices, including retroactive treatment, reflect the Reverse
Split.
Significant Accounting Policies
Revenue from investment management services is recorded as such
revenues accrue under the terms of the related investment
management contracts. A specific charge to earnings is recorded
when a significant and permanent contingency exists; primarily
the inability to collect amounts due according to contract terms.
F-9
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Significant Accounting Policies (continued)
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 feasibility in 1995,
the Company incurred approximately $50,000 in research and
development costs after receiving the products from the unrelated
individuals. 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 generates revenues from four sources:
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.
During 1997, PMC entered into agreements with certain clients to
provide customized software, advisory, consulting and reporting
services in connection with the clients' investment advisory
services. PMC has capitalized product development costs
consisting of salaries and other direct costs relating to these
products. These costs are being amortized on the straight line
method over the terms of the related contracts.
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.
Goodwill, which resulted from the acquisition of ADAM, as
described above, is being amortized over a period of 120 months.
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-10
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Significant Accounting Policies (continued)
The Company follows the intrinsic value based method of
accounting as prescribed by APB 25, Accounting for Stock Issued to
Employees, for its stock-based compensation. Under the Company's
stock option plan, the exercise price is equal to the fair value
of the options at the grant date and no compensation cost is
recognized.
Cash and cash equivalents for purposes of the statement of cash
flows includes highly liquid investments with a maturity of three
months or less at the date of acquisition.
Net loss per share of common stock is based on the weighted
average number of shares of common stock outstanding. Common
stock equivalents are not included in the weighted average
calculation since their effect would be anti-dilutive. Dividends
on cumulative preferred stock, of $44,909 and $57,166 for the
years ended December 31, 1997 and 1996 respectively, have been
added back to the net loss in computing the net loss per share.
The Company adopted the provisions of SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, in its financial statements for the year ended
December 31, 1996. The adoption of SFAS 121 had no material
affect on the Company's financial statements. The Company reviews
its long-lived assets for impairment to determine if the carrying
amount of the asset is recoverable.
Certain 1996 amounts have been reclassified to conform to 1997
presentation.
NOTE 2 - LONG TERM NOTES 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 from 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, 1997 is $379,377 compared to its carrying amount of
$349,332. While the original transaction involved a transfer of
operations, the transaction was handled on an arms length basis.
The Company did not provide any guarantee of the obligations of
the buyer and had no further involvement with the business after
the sale. As of December 31, 1997, the Company agreed to defer
the September 1997 through December 1997 payments; these payments
were made in January 1998.
F-11
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 2 - LONG TERM NOTE RECEIVABLE (continued)
During January, 1997, the Company authorized financing of 38,672
shares of PMCI's common stock which had been purchased and owned
by a number of PMC employees, including one officer, 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, $46,300 from the one officer
and $95,793 from employees of the Company that are not officers
or directors. In January, 1997 PMCI paid off the prior bank loan
and financed this amount for its employees as notes receivable,
collateralized by the underlying stock. PMCI is receiving
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 due from employees. At December 31,
1997, $118,057 was included in notes receivable related to these
notes.
During 1997, the Company loaned a limited liability company owned
and controlled by the Company's president and chief executive
officer, (the "LLC") amounts sufficient to pay interest on a bank
loan guaranteed by the Company (see Note 7). The balance of such
loan at December 31, 1997 was $155,726 including accrued
interest. The loan matures on December 31, 1998.
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 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, 1998, cumulative dividends in arrears totaled
approximately $298,400.
F-12
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 3 - SHAREHOLDERS' EQUITY (continued)
Common Stock
During December, 1996, the Company issued 2,229,011 shares of its
common stock through several issuances. First, a private
placement was completed whereby 1,294,250 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 375,000 common
shares, and 37,500 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 255,937 shares of common stock were exercised for cash
of $1,023,750 and warrants to purchase 494,062 shares of common
stock were exchanged for 244,062 shares of common and 37,500 new
warrants. Additionally, certain preferred shareholders exercised
their conversion rights and exchanged 173,120 preferred shares
for 59,510 shares of common.
During January, 1997, certain shareholders voluntarily exchanged
37,715 shares of Preferred Stock for 12,965 shares of common
stock.
In September 1997, the Company issued 1,220,749 shares of common
stock in a private placement for cash of $7,324,494 less offering
costs of $917,683.
NOTE 4 - INCOME TAXES
The Company has an unused net operating loss carryforward of
approximately $11,000,000 for income tax purposes, $1,200,000
expiring in 2009, $1,800,000 in 2010, $3,800,000 in 2011 and the
remainder expiring in 2012. This net operating loss carryforward
may result in future income tax benefits of approximately
$4,300,000; however, because realization is uncertain at this
time, a valuation reserve in the same amount has been
established. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets as of December 31,
1997 and 1996 are as follows:
1997 1996
=========== ==========
Deferred tax liabilities $ - $ -
=========== ==========
Deferred tax assets
Net operating loss carry forwards 4,276,800 2,579,000
Legal settlement - 233,300
----------- ----------
Total deferred tax assets 4,276,800 2,812,300
Valuation allowance for deferred
tax assets (4,276,800) (2,812,300)
=========== ==========
$ - $ -
=========== ==========
The valuation allowance for deferred tax assets was increased by
$1,464,500 and $1,487,800 during 1997 and 1996, respectively.
F-13
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
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, 1997, PBS
had net capital and net capital requirements of $1,145,758 and
$100,000, respectively. The Company's net capital ratio
(aggregate indebtedness to net capital) was .09 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, 1997.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
1997 1996
----------- -----------
5% note payable to a former
stockholder of ADAM Investment
Services, Inc., unsecured, requiring
annual principal and interest $ 240,000 $ -
payments and maturing February 9,
1999.
11% note payable to a former
shareholder of ADAM Investment
Services, Inc., unsecured, due 120,000 -
February 5, 2000, payable in
quarterly payments of principal and
interest.
11.5% note payable to shareholder(s),
unsecured, due August 1, 1998,
payable in monthly installments of 6,158 14,694
$832 including interest.
----------- -----------
$ 366,158 $ 14,694
=========== ===========
In 1995 a shareholder acquired 250,000 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 300,000 shares of common stock at $4.00 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. This
shareholder exercised its option and loaned the Company an
additional $1,800,000 through several partial exercises through
July 9, 1996, and received 450,000 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 255,937
common shares at $4.00 per share to be used against the remaining
principal balance, and (3) the shareholder would exchange its
remaining warrants for 244,062 shares of common stock and 37,500
warrants to purchase common stock at $8.50 per share.
In November, 1996, the Company borrowed $250,000 from the Company's
President, Executive Vice President, Company employees, a shareholder,
and the Company's investment bankin firm 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).
F-14
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 6 - NOTES PAYABLE (continued)
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 250 shares of common stock at a price per share equal
to the greater of $4.00 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 $4.00 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
apply their principal balance against the exercise price of their
warrants and, in addition, they would also receive warrants to
purchase 37,500 shares of the Company's stock at an exercise
price of $8.50 per share. Subsequently, the noteholders agreed
to this arrangement.
As of December 31, 1997, maturities of notes payable are as
follows:
September 30, Amount
------------ ------
1998 $166,158
1999 160,000
2000 40,000
-----------
$ 366,158
===========
Interest expense for the years ended December 31, 1997 and 1996
was $43,227 and $331,008 respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
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 should disgorge its net 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 $616,000. At December 31, 1997,
approximately $9,400 is included in other liabilities in the
accompanying financial statements.
F-15
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
In January, 1997, LLC, mentioned in Note 2, 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 410,961 shares of Common Stock owned by the LLC
that were purchased from a former officer of the Company at the
time of his departure. In connection with this borrowing, the
Company agreed to collateralize the loan on behalf of the LLC.
Accordingly, $1,890,000 of cash was restricted for this purpose.
Subsequently, the Company renegotiated the arrangement with
another bank and accordingly, as of December 31, 1997, $1,422,264
included in cash and cash equivalents in the accompanying balance
sheet is restricted under this arrangement with the Company
guaranteeing the uncollateralized balance. The Company 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. As of December 31, 1997,
(see Note 2) the Company has loaned the LLC $150,400 designated
to pay the interest on the bank loan. The LLC has agreed to
reimburse the Company for any amounts paid by the Company toward
the loan or for collateral applied to the loan, including
interest at an annual rate of 9%, and has granted the Company a
security interest in 323,461 shares of the Company's common stock
held by it.
The Company leases office space and equipment under various
operating and capital leases. Included in furniture and
equipment is $562,532 of equipment under capital leases at
December 31, 1997 and accumulated depreciation relating to these
leases of $219,198.
Future minimum lease payments under noncancelable leases as of
December 31, 1997 are as follows:
Principal
Year ending due
December 31, Operating Capital Capital Lease
- - -------------- --------- ------- -------------
1998 $ 681,334 $ 230,421 $ 203,023
1999 812,782 147,473 136,628
2000 828,340 46,908 45,335
2001 568,716 - -
2002 574,176 - -
--------- --------- ----------
$3,465,348 424,802 $ 384,986
========== ==========
Less amount representing interest 39,816
---------
Present value of net minimum
lease payments $ 384,986
=========
Total rent expense for facilities and equipment for the years
ended December 31, 1997 and 1996, was $628,551 and $471,339,
respectively.
F-16
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
The Company has historically incurred net losses and accordingly
experienced cash flow problems. As a result of the acquisition
of ADAM, the Company is obligated to make a deferred purchase
payment on September 24, 1998. The payment will be equal to 1.0%
of certain ADAM assets under management in excess of
$500,000,000, with the payment not to exceed $2,000,000 plus interest.
As of December 31, 1997, this payment would not be able to be made
principally due to the fact that $1,400,000 of cash is
restricted. In addition, through the first quarter of 1998,
continuing losses from operations have resulted in the Company's
cash balances decreasing further. In March 1998, the Company
implemented a cost reduction plan. Management believes that this
plan along with projected increases in revenues and deferral of
payments of expenses should allow the Company to continue without
requiring additional resources, excluding the ADAM payment. The
Company is currently investigating sources of short and long term
capital to meet the ADAM payment as well as working capital
needs. Should additional capital not be raised, the Company will
be required to restructure the terms of the ADAM payment, to
remove the restriction from its cash balances, restructure its
operations or a combination of the above.
NOTE 8 - STOCK OPTIONS AND WARRANTS
The Company has an equity incentive stock option plan. The Plan
was adopted by the Company's Board of Directors on November 12,
1997, and approved by shareholders on December 15, 1997. The Board
believes that approval of the Plan is in the
best interests of the Company. The purpose of the Plan is to
provide incentives to attract, retain and motivate eligible
persons whose present and potential contributions are important
to the success of the Company, by offering them an opportunity to
participate in the Company's future performance through awards of
options and stock bonuses. Options totaling 177,386 were granted
in 1998 under the Plan. Also the Company has granted options to
officers, employees, shareholders and certain other individuals
and entities. These plans and arrangements allow these parties
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.
In addition, common stock warrants have been issued in connection
with certain private offerings of stock and debt. At December
31, 1997, warrants to purchase common stock at various prices
were outstanding which expire as follows:
Expiration Exercise
Date Warrants Price
-------------- -------- -----
December, 1998 75,000 $6.48
June, 2001 50,000 4.00
November, 2001 6,250 6.50
December, 2001 137,500 8.50
--------
268,750
========
F-17
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 8 - STOCK OPTIONS AND WARRANTS (continued)
The following table describes certain information related to the
Company's compensatory stock option activity for the years ending
December 31, 1997 and 1996.
1997 1996
------------------- -------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Options Prices of Options Prices
---------- ------ ---------- -------
Outstanding, beginning of year 627,625 $5.80 254,000 $5.68
Grants during year -
Exercise price equals
market price 209,795 7.07 338,125 5.60
Exercise price greater than
market price - - 50,000 6.24
Exercised during year (6,250) 4.30 (250) 5.52
Forfeited during year (56,750) 5.17 (5,500) 4.52
Expired during year (13,125) 10.00 (8,750) 11.16
------- ----- ------- -----
Outstanding, end of year 761,295 6.03 627,625 5.80
======= =======
Exercisable 519,000 5.68 350,125 5.80
======= =======
The weighted average grant date fair value of the options granted
in 1997 and 1996 was as follows:
1997 1996
-------- --------
Exercise price equals
market price $ 3.40 $ 2.68
Exercise price is greater than
market price $ - $ 4.12
During 1996, the fair value of each option grant was estimated
using the Black-Scholes option-pricing model with the following
assumptions: risk-free interest rate of 5.71% to 6.56%; dividend
yield of -0-%; expected lives of five to six years; and
volatility of 37.2% to 44.2%.
F-18
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 8 - STOCK OPTIONS AND WARRANTS (continued)
A summary of the Company's outstanding and exercisable stock
options as of December 31, 1997 are as follows:
Weighted Average
Number Remaining
Range of of Weighted Average Contractual
Exercise Prices Options Exercise Price Life (months)
- - ------------------ ---------- -------------------- -----------------
$4.00 - $5.50
Outstanding 251,625 $ 4.64 19
Exercisable 251,625 4.64 21
$6.00 - $6.50
Outstanding 417,170 6.24 40
Exercisable 217,375 6.23 21
$7.50 - $8.50
Outstanding 62,500 8.37 49
Exercisable 50,000 8.50 48
$10.00
Outstanding 30,000 10.00 57
Exercisable - - -
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 vested 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 resulted in the pro-forma amounts
indicated below:
1997 1996
----------- -----------
Net loss $(3,860,050) $(5,111,682)
=========== ===========
Net loss per share $ (.99) $ (3.63)
=========== ===========
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 matches 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.
F-19
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
==========================================
NOTE 10 - RISKS AND UNCERTAINTIES
The Company'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
the Company attracts new, or loses existing clients and the
appreciation or depreciation of the U.S. and international equity
and fixed income markets. 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.
The Company has been notified of a threatened litigation from a
former employee alleging damages of $1,190,000. Management, after
review and discussion with counsel, believes the Company has
meritorious defenses and intends to vigorously defend itself in
this matter, but it is not feasible to predict the final outcome
at the present time.
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 107 requires disclosure of the fair value of financial
instruments, both assets and liabilities recognized and not
recognized in the statement of financial position, for which it
is practicable to estimate fair value.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
The carrying amount of cash and cash equivalents approximates
fair value because of the short maturity of those instruments.
The carrying amount of receivables, accounts payable, accrued
expenses and other liabilities approximates fair value because
the collection or payments on those instruments are expected in
the short term.
The long term note receivable was discounted at inception (see
Note 2) and at December 31, 1996, discounting the note at the
current interest rate at which similar loans would be made to
borrowers with similar credit ratings and for the same maturities
yields a fair value which approximates the carrying value.
Based on the borrowing rates currently available to the Company
for loans with similar terms and maturities, the carrying value of
obligations under capital leases approximate fair value.
The carrying amount of deferred revenue approximates fair value
because it is expected to be realized within ninety days.
F-20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article V of the Company's Restated Articles of
Incorporation requires the Company to indemnify any person who is
or is threatened to be made a party to any civil, criminal,
administrative, arbitrative or investigative proceeding
instituted or threatened by reason of the fact that he is or was
a director or officer of the Company or is or was serving at the
request of the Company as a director or officer of another
corporation, partnership, joint venture, trust, other enterprise
or employee benefit plan if the claim is based on actions taken
by such person in good faith with the reasonable belief that such
action was in the best interest of the Company.
Article V of the Company's Restated Articles of
Incorporation further requires the Company to indemnify any
person who is or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the
right of the Company by reason of the fact that he is or was a
director or officer of the Company or is or was serving at the
request of the Company as a director or officer of another
corporation, partnership, joint venture, trust, other enterprise
or employee benefit plan if the claim is based on actions taken
by such person in good faith with the reasonable belief that such
action was in the best interest of the Company, provided,
however, that such person generally shall not be indemnified for
negligent or wilful misconduct.
Section 7-109-102 of the Colorado Business Corporation Act
("CBCA") permits indemnification of a director of a Colorado
corporation, in the case of a third party action, if the director
(i) conducted himself or herself in good faith, (ii) reasonably
believed that (a) in the case of conduct in an official capacity,
his or her conduct was in the corporation's best interest, or
(b) in all other cases, his or her conduct was not opposed to the
corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe that the
conduct was unlawful. The CBCA further provides for mandatory
indemnification of directors and officers who are successful on
the merits or otherwise in litigation.
The above discussion of the Restated Articles of
Incorporation and the CBCA is only a summary and is qualified in
its entirety by the full text of each of the foregoing.
Reference is made to the Restated Articles of Incorporation which
are filed as an Exhibit to the Registration Statement for the
complete text of such documents.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than
underwriting discounts and commissions) expected to be incurred
in connection with the issuance and distribution of the
securities registered hereby, all of which expenses are estimated:
Legal fees and expenses $8,500
Accounting fees and other expenses 1,500
Total $10,000
All of the above expenses will be borne by the Company.
Item 26. Recent Sales of Unregistered Securities
The following is a summary of the transactions by the
Company during the last three years involving sales of the
Company's securities that were not registered under the
Securities Act:
In July 1995, the Company entered into a transaction with
Bedford pursuant to which Bedford loaned $1.2 million to the
Company and received an option to loan up to an additional $1.8
million to the Company for a specified
<PAGE>
period of time and
pursuant to certain call provisions. Between July 1995 and July
1996, the Company obtained the full $3.0 million financing from
Bedford. As additional consideration for the loans, between July
1995 and July 1996, the Company issued to Bedford and/or its
affiliates warrants to purchase an aggregate of 750,000 shares of
Common Stock at an exercise price of $4.00 per share. Bedford
was an accredited investor. Bedford received registration rights
with respect to the shares of Common Stock underlying the
Warrants.
In December 1995 and January 1996, through a private
placement, the Company issued for an aggregate purchase price of
$482,500 a total of 482.5 units to 12 purchasers
with each unit consisting of a convertible promissory note with a
principal amount of $1,000 and a warrant to purchase 250 shares
of Common Stock at an exercise price of $4.00 per share. During
June 1996 the Company issued for an aggregate purchase price of
$1,017,500 an additional 1,017.5 units to 15 purchasers
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.
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. As consideration for the
loans, the lenders received five-year warrants to purchase an
aggregate of 6,250 shares of the Common Stock at an exercise
price of $6.50 per share. The lenders received registration
rights with respect to the Common Stock to be issued upon
exercise of the warrants.
On December 24, 1996, in a private placement, the Company
issued 1,294,250 shares of Common Stock to 18 purchasers at
a price of $8.50 per share for an aggregate offering price of
$11,001,125. All purchasers were accredited investors.
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 June 1996 private placements and
the Bedford loans. In connection with the restructuring, Bedford
exercised warrants to purchase a total of 255,938 shares of
Common Stock, and received new warrants to purchase 37,500 shares
of Common Stock at an exercise price of $8.50 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 375,000 shares of Common Stock, and received, pro
rata, new warrants to purchase an aggregate of 37,500 shares of
Common Stock at an exercise price of $8.50 per share.
On September 24, 1997, in connection with the acquisition of
PMCIS (f/k/a ADAM Investment Services, Inc.), the Company
completed a private placement of 1,220,749 shares of Common Stock
to 30 purchasers at a price of $6.00 per share, for an
aggregate purchase price of $7,324,494. All purchasers were
accredited investors.
For each of the above sales of securities, the Company
claims exemption from registration, inter alia, under
Section 4(2) of the Securities Act and Regulation D promulgated
thereunder because, to the Company's knowledge, each of the
purchases was made for the purchaser's own investment purposes
and not for further distribution or resale, there were no more
than 35 non-accredited investors, each of whom was sophisticated
and had substantial knowledge of and experience in financial and
business matters and was capable of evaluating the risks of the
subject investment. In addition, the issuer satisfied the other
applicable requirements of Regulation D in connection with each
such offering and sale.
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 59,510 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.
<PAGE>
Item 27. Exhibits
The following exhibits have been previously filed or are
filed herewith:
3.1 Restated Articles of Incorporation of the Company (6)
3.2 Bylaws of the Company (1)
4.1 Specimen Common Stock certificate of the Company
(3)
4.2 The Articles of Incorporation and Bylaws of the
Company are included as Exhibits 3.1 and 3.2
4.3 Form of warrant issued to each of the lenders in
the November 1996 bridge financing (1)
4.4 Warrant dated December 24, 1996 issued to Keefe,
Bruyette & Woods, Inc (1)
4.5 Form of warrant issued to investors in connection
with the December 1996 restructuring
4.6 Form of Warrant dated December 24, 1996 issued to
Bedford and certain of its associates (1)
5.1 Opinion of Holme Roberts & Owen LLP (2)
10.1 Employment Agreement between the Company and
Kenneth S. Phillips dated as of July 26, 1995(1)
10.2 Amended and Restated Employment Agreement between
the Company and David L. Andrus dated as of
December 17, 1996(1)
10.3 Form of Subscription Agreement between the Company
and each of the lenders in the November 1996
bridge financing(1)
10.4 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 (1)
10.5 Form of Subscription Agreement between the Company
and each of the investors in the December 1996
private placement. (1)
10.6 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 ("PTS") (1)
10.7 Amended and Restated Registration Rights Agreement
dated as of December 24, 1996 among the Company
and Bedford (1)
10.8 Shareholders Agreement dated as of December 24,
1996 among the Company, Bedford, Kenneth S.
Phillips, David L. Andrus and Phillips & Andrus
LLC (1)
10.9 1994 Incentive Stock Option Plan (1)
10.10Reimbursement and Pledge Agreement dated January
8, 1997 between the Company and KP3 (1)
10.111997 Equity Incentive Plan (5)
10.12Stock Purchase Agreement among PMC International,
Inc., Michael T. Wilkinson, Scott A. MacKillop,
Gary A. Miller, Michael J. Flinn, Jared L. Shope,
Graham L. Guy, John W. Burgin, and ADAM
Investment Services, Inc., dated as of July 25,
1997 (4)
10.13Non-Compete Agreement between PMCIS f/k/a ADAM
Investment Services, Inc., and Michael T.
Wilkinson, dated as of September 23, 1997 (4)
10.14Employment Agreement between PMCIS f/k/a ADAM
Investment Services, Inc., and Scott A. MacKillop,
dated as of September 23, 1997 (4)
10.15Form of Subscription Agreement, dated as of
September 22, 1997, between the Company and each
of the purchasers in the PMCIS ADAM Private
Placement (6)
10.16Form of Registration Rights Agreement, dated as of
September 22, 1997, among the Company and the
purchasers in the PMCIS Private Placement (6)
10.17Term Loan Agreement dated September 10, 1997,
among the Company, KP3 and Citywide Banks/Aurora
National Bank (6)
10.18Term Loan Agreement dated March 31, 1998, among
the Company, KP3 and Citywide Banks/Aurora
National Bank (6)
21.1 List of Subsidiaries (5)
23.1 Consent of Spicer, Jeffries & Co., Certified
Public Accountants
<PAGE>
23.2 Consent of Holme Roberts & Owen LLP (included in
Exhibit 5.1)
24.1 Power of Attorney
(1) Previously filed with the Company's Registration Statement
on Form SB-2 (File No. 333-21335), dated February 7,
1997.
(2) Previously filed with Amendment Number 2 to the Company's
Registration Statement on Form SB-2 (File No. 333-21335),
dated June 23, 1997.
(3) Previously filed with Amendment Number 3 to the Company's
Registration Statement on Form SB-2 (File No.
333-21335), dated July 2, 1997.
(4) Incorporated by Reference to the Company's Current Report on
Form 8-K (File No. 0-14937), dated October 9, 1997.
(5) Incorporated by Reference to Amendment Number 1 to the
Company's Registration Statement on Form SB-2 (File No.
333-40805), dated February 6, 1998.
(6) Previously filed with Post-Effective Amendment Number 1 to the
Company's Registration Statement on Form SB-2 (File No. 333-21335),
dated April 29, 1998.
Item 28. Undertakings.
The Registrant hereby undertakes that it will:
(1) file, during any period in which it offers to sell
securities, a post-effective amendment to this registration
statement to:
(i) include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change
in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) include any additional or changed material
information on the plan of distribution required in a
post-effective amendment is incorporated by reference from
periodic reports filed by the small business issuer under the
Exchange Act.
(2) for determining liability under the Securities Act,
treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering.
(3) file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end
of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the provisions
described in Item 24 or otherwise, the Registrant has been
advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will
be governed by a final adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on
Form SB-2 and authorized this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in
the City of Denver, State of Colorado, on this 27th day of April,
1998.
PMC International, Inc.
a Colorado corporation
By: /s/ Kenneth S. Phillips
Kenneth S. Phillips
President and Chief
Executive Officer
In accordance with the requirements of the Securities Act of
1933, this Statement has been signed by the following persons in
the capacities and on the dates stated.
Title Position Held
Signature With the Registrant Date
/s/ Kenneth S. Phillips President, Chief April 27,
Executive Officer and 1998
Kenneth S. Phillips Director (Principal
Executive Officer)
/s/ Scott A. MacKillop Executive Vice April 27,
President and 1998
Scott A. MacKillop Director
/s/ Stephen M. Ash Chief Financial April 28,
Officer and Treasurer 1998
Stephen Ash (Principal Accounting
and Financial Officer)
/s/ Maureen E. Dobel General Counsel, April 27,
Corporate Secretary 1998
Maureen E. Dobel and Director
/s/ J.W. Nevil Thomas Chairman of the Board April 27,
and Director 1998
J.W. Nevil Thomas
/s/ D. Porter Bibb Director April 27,
1998
D. Porter Bibb
/s/ Emmett J. Daly Director April 27,
1998
Emmett J. Daly
/s/ Richard Hyde Director April 29,
1998
Richard Hyde
<PAGE>
EXHIBIT INDEX
Description
Exhibit
Number
3.1 Restated Articles of Incorporation of the Company (6)
3.2 Bylaws of the Company (1)
4.1 Specimen Common Stock certificate of the Company (3)
4.2 The Articles of Incorporation and Bylaws of the Company
are included as Exhibits 3.1 and 3.2
4.3 Form of warrant issued to each of the lenders in the
November 1996 bridge financing (1)
4.4 Warrant dated December 24, 1996 issued to Keefe,
Bruyette & Woods, Inc (1)
4.5 Form of warrant issued to investors in connection with
the December 1996 restructuring
4.6 Form of Warrant dated December 24, 1996 issued to
Bedford and certain of its associates (1)
5.1 Opinion of Holme Roberts & Owen LLP (2)
10.1 Employment Agreement between the Company and Kenneth S.
Phillips dated as of July 26, 1995(1)
10.2 Amended and Restated Employment Agreement between the
Company and David L. Andrus dated as of December 17,
1996(1)
10.3 Form of Subscription Agreement between the Company and
each of the lenders in the November 1996 bridge
financing(1)
10.4 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 (1)
10.5 Form of Subscription Agreement between the Company and
each of the investors in the December 1996 private
placement. (1)
10.6 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 ("PTS")
(1)
10.7 Amended and Restated Registration Rights Agreement
dated as of December 24, 1996 among the Company and
Bedford (1)
10.8 Shareholders Agreement dated as of December 24, 1996
among the Company, Bedford, Kenneth S. Phillips, David
L. Andrus and Phillips & Andrus LLC (1)
10.9 1994 Incentive Stock Option Plan (1)
10.10Reimbursement and Pledge Agreement dated January 8,
1997 between the Company and KP3 (1)
10.111997 Equity Incentive Plan (5)
10.12Stock Purchase Agreement among PMC International, Inc.,
Michael T. Wilkinson, Scott A. MacKillop, Gary A.
Miller, Michael J. Flinn, Jared L. Shope, Graham L.
Guy, John W. Burgin, and ADAM Investment Services,
Inc., dated as of July 25, 1997 (4)
10.13Non-Compete Agreement between PMCIS f/k/a ADAM
Investment Services, Inc., and Michael T. Wilkinson,
dated as of September 23, 1997 (4)
10.14Employment Agreement between PMCIS f/k/a ADAM
Investment Services, Inc., and Scott A. MacKillop,
dated as of September 23, 1997 (4)
10.15Form of Subscription Agreement, dated as of
September 22, 1997, between the Company and each of the
purchasers in the PMCIS ADAM Private Placement (6)
10.16Form of Registration Rights Agreement, dated as of
September 22, 1997, among the Company and the
purchasers in the PMCIS Private Placement (6)
10.17Term Loan Agreement dated September 10, 1997, among the
Company, KP3 and Citywide Banks/Aurora National Bank (6)
10.18Term Loan Agreement dated March 31, 1998 among the
Company, KP3 and Citywide Banks/Aurora National Bank (6)
21.1 List of Subsidiaries (5)
23.1 Consent of Spicer, Jeffries & Co., Certified Public
Accountants
23.2 Consent of Holme Roberts & Owen LLP (included in
Exhibit 5.1)
24.1 Power of Attorney
<PAGE>
(1) Previously filed with the Company's Registration Statement
on Form SB-2 (File No. 333-21335), dated February 7,
1997.
(2) Previously filed with Amendment Number 2 to the Company's
Registration Statement on Form SB-2 (File No. 333-21335),
dated June 23, 1997.
(3) Previously filed with Amendment Number 3 to the Company's
Registration Statement on Form SB-2 (File No.
333-21335), dated July 2, 1997.
(4) Incorporated by Reference to the Company's Current Report on
Form 8-K (File No. 0-14937), dated October 9, 1997.
(5) Incorporated by Reference to Amendment Number 1 to the
Company's Registration Statement on Form SB-2 (File No.
333-40805), dated February 6, 1998.
(6) Previously filed with Post-Effective Amendment Number 1 to the
Company's Registration Statement on Form SB-2 (File No. 333-21335)
dated April 29, 1998.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in Post Effective Amendment
Number 1 to the PMC International, Inc. Registration Statement on
Form SB-2 of our report dated March 5, 1998 accompanying the
consolidated financial statements of PMC International, Inc. for
the years ended December 31, 1997 and 1996 which is part of the
registration statement and to the reference to us under the
heading "Experts" in such registration statement.
April 29, 1998
Spicer, Jeffries & Co.
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Kenneth S.
Phillips, Scott A. MacKillop, Stephen M. Ash, and Maureen E.
Dobel, and each of them, his attorneys-in-fact and agents, with
full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign a registration
statement to be filed with the Securities and Exchange Commission
(the "Commission") on Form SB-2 in connection with the
registration by PMC International, Inc. a Colorado corporation
(the "Company"), of securities ("Securities") on behalf of
certain selling stockholders, and all amendments (including
post-effective amendments) thereto, and to file the same, with
all exhibits thereto, and other documents in connection
therewith, with the Commission; and to sign all documents in
connection with the qualification and sale of the Securities with
Blue Sky authorities and with the National Association of
Securities Dealers, Inc.; granting unto said attorneys-in-fact
full power and authority to perform any other act on behalf of
the undersigned required to be done in the premises, hereby
ratifying and confirming all that said attorneys-in-fact may
lawfully do or cause to be done by virtue hereof.
Date: April 27, 1998 /s/ Kenneth S. Phillips
Kenneth S. Phillips
Date: April 27, 1998 /s/ Scott A. MacKillop
Scott A. MacKillop
Date: April 28, 1998 /s/ Stephen M. Ash
Stephen M. Ash
Date: April 27, 1998 /s/ Maureen E. Dobel
Maureen E. Dobel
Date: April 27, 1998 /s/ J. W. Nevil Thomas
J.W. Nevil Thomas
Date: April 27, 1998 /s/ D. Porter Bibb
D. Porter Bibb
Date: April 27, 1998 /s/ Emmett J. Daly
Emmett J. Daly
Date: April 29, 1998 /s/ Richard Hyde
Richard Hyde
