As filed with the Securities and Exchange Commission February 6, 1998.
Registration No: 333-40805.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 Standard (I.R.S. Employer
of 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: As soon as practicable
after this registration statement becomes effective.
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>
CALCULATION OF REGISTRATION FEE
Title of each Amount to Proposed Proposed Amount of
class be maximum maximum registration
of securities to registered offering aggregate fee
be price offering
registered per share price
Common Stock, par 1,220,745 $6.625(3) $8,087,462 $2,450.75(5)
value $.01
Common Stock, par 193,750(2) $6.625(3) $1,283,594 $388.96(5)
value $.01
Common Stock, par 105,000(2) $4.125(4) $433,125 $149.35
value $.01(1)
Total $9,804,181 $2,989.06
(1) Reflects additional amount being registered by Amendment. The filing
fee for the initial 1,414,495 Shares was paid on the original filing,
November 21, 1997.
(2) Represents shares of Common Stock issuable upon the exercise of certain
options held by Selling Shareholders.
(3) Estimated solely for purposes of calculating the registration fee, based
on the average of the high and low bid and asked prices for the Common Stock
for November 19, 1997, as reported in the over-the-counter market.
(4) Estimated solely for purposes of calculating the registration fee, based
on the average of the high and low bid and asked prices for the Common
Stock for February 4, 1998, as reported in the over-the-counter market.
(5) Previously paid.
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
1,519,495 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 1,519,495 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. ("ADAM"). Keefe, Bruyette & Woods, Inc. acted as
the placement agent in connection with the issuance of those
Shares registered hereby. The balance of the 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 certain former
employees of the Company.
All Shares offered hereby are shares currently held by the
Selling Shareholders or issuable upon exercise of certain options
exercisable by two 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 relating to the registration of the Shares is
estimated to be approximately $20,000. 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 February 4, 1998 was $4.125, 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
<PAGE>
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 February __, 1998
<PAGE>
AVAILABLE 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 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 (the "Registration Statement").
This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits thereto. For
further information with respect to the Company and the
securities offered hereby reference is made to the Registration
Statement, including 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.
TABLE OF CONTENTS
Page
Prospectus Summary................................................1
Risk Factors......................................................3
Use of Proceeds...................................................6
Market for the Common Stock.......................................6
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................7
Business.........................................................14
Management.......................................................25
Executive Compensation...........................................27
Security Ownership of Certain Beneficial Owners and
Management.................................................30
Certain Relationships and Related Transactions...................31
Description of Capital Stock.....................................32
Selling Shareholders.............................................33
Plan of Distribution.............................................35
Legal Matters....................................................35
Experts..........................................................35
<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. (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.
As of January 31, 1997, the Company had a staff of
approximately 79 people, including approximately 45
professionals, and conducts business in a number of countries.
The Company has four subsidiaries: (i) Portfolio Management
Consultants, Inc. ("PMC"), an investment advisory firm;
(ii) Portfolio Brokerage Services, Inc. ("PBS"), a broker/dealer;
(iii) Portfolio Technology Services, Inc. ("PTS"), which
specializes in developing proprietary software for use in the
financial services industry and (iv) ADAM, an investment advisory
firm which specializes in mutual fund asset allocation products.
ADAM was acquired by the Company on September 24, 1997 and its
name was changed on December 12, 1997 to PMC Investment Services,
Inc. All references herein to ADAM shall be to its successor in
interest, PMC Investment Services, Inc. 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.
1
<PAGE>
The Offering
Common Stock offered by the Selling Shareholders
1,519,495 shares
Common Stock outstanding before the Offering
4,857,903 shares(1)
Common Stock outstanding after the Offering
5,156,653 shares(2)
Use of Proceeds.................... The Company will receive none
of the proceeds of the sale
of the Shares. See "Use of
Proceeds."
___________________
(1) Does not include 929,545 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, (iii) other options granted to employees and
directors.
(2) Does not include 630,795 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, (iii) other options granted to employees and directors.
<PAGE>
Recent Developments
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 and share prices reflect the Reverse Split.
2
<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, a $770,259 loss for the three months
ended September 30, 1997, and a loss of $2,082,383 for the nine
months ended September 30, 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 ADAM business (the
"ADAM Private Placement"). The balance of the proceeds from the
ADAM Private Placement were used for the Company's working
capital requirements for the fourth quarter of 1997 and the first
quarter of 1998. While the Company believes that the proceeds of
the December 1996 and ADAM Private Placements will be sufficient
to support its working capital requirements through the
first quarter of 1998, there can be no such
assurance. 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
cashflow 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") or
The Nasdaq Small Cap Market, but is quoted in the bulletin board
of the over-the-counter market (the "OTC Bulletin Board").
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 traded in the OTC Bulletin Board 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 Small Cap
Market in February 1995 because the Company failed to satisfy the
requirements for continued listing. Under listing requirements
recently adopted by the National Association of Securities
Dealers (the "NASD"), and adopted by the Commission, to be
included in The Nasdaq Small Cap Market, among other
requirements:
3
<PAGE>
(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) the Company must have at least
300 holders of at least 100 shares. While the Company currently
satisfies the net tangible assets and minimum bid requirements
for inclusion on The Nasdaq Small Cap Market, there can be no
guarantee whether it will continue to do so. On February 4,
1998, the last reported sale price of the Common Stock was $4.125
and as of September 30, 1997, the Company's net tangible assets
were $9,385,187. On January 26, 1998, the Company submitted an
application for listing on The Nasdaq Small Cap Market disclosing
that the Company had approximately 240 holders of more than 100
Shares. Since the Company has less than 300 shareholders of
greater than 100 Shares, there can be no assurance that the
Company's application will be accepted by The Nasdaq Small Cap
Market until such requirement is satisfied.
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 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.
ADAM Acquisition Contingent Payments. On September 24,
1997, the Company acquired all of the issued and outstanding
common stock of ADAM 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 ADAM's standard fee assets under
management in excess of $500 million, determined on the one-year
anniversary of the closing of the ADAM 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 ADAM 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 the September 1998 contingent payment is of a
material amount, the Company may not have sufficient cashflow from
operations to service that payment. In that event, the Company
intends to seek outside sources of capital, however, there can be
no assurance that such capital will be available to the Company.
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."
4
<PAGE>
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. The
Company's private-label relationship with Chase Investment
Services Corp. ("CISC") accounted for approximately 18% of the
Company's gross revenues during 1996. CISC restructured its
business in 1996, which restructuring materially and adversely
affected the gross revenues derived from that relationship since
that time. While the Company has no reason to believe that its
current investment advisory relationships will not continue to
generate revenues for the Company consistent with prior years,
other than that with CISC as discussed above, there can be no
assurance that such will be the case. Assets under management
for CISC and related revenues have remained stable since
completion of the CISC restructuring.
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 ADAM acquisition, the number of persons employed by the
Company increased from approximately 43 on March 31, 1996 to
approximately 79 on January 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.
There Is No Demonstrated Market for the Company's Software
Products. The Company has spent substantial funds 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."
5
<PAGE>
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 January 30, 1998, the Company's executive officers,
directors and affiliates of such persons beneficially own
approximately 33.28% 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 January 30, 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."
6
<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 $7.50 $6.00
1998
First Quarter (2) $7.00 $4.125
______________________________
(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 February 4, 1998.
As of January 30, 1998 the Company had approximately 399
record holders of its Common Stock.
7
<PAGE>
The Company currently has outstanding a total of 138,182
shares of Preferred Stock. As of January 30, 1998, the Company
was in default in the payment of dividends on the Preferred Stock
in the amount of $298,419. The Company may not pay dividends on
its Common Stock so long as it is in default in the payment of
dividends on the Preferred Stock.
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."
General
The Company develops, markets, and manages sophisticated
investment management products and services. Not a money manager
itself, the Company provides products and services to facilitate
the selection and/or monitoring of unaffiliated money managers or
mutual funds for customers of the Company's distribution channels
depending upon the size, sophistication and requirements of such
customers. The Company's products and services address
investment suitability and diversification, asset allocation
recommendations, portfolio modeling and rebalancing,
comprehensive accounting and portfolio performance reporting.
The Company's revenues are realized primarily from fees charged
to clients based on a percentage of managed assets and to a
lesser extent from consulting fees for certain advisory services
and licensing fees from its software products. Fees based upon
managed assets typically range from 20 to 250 basis points per
year, based upon a number of factors such as the size of account
and scope of services provided. At the present time, the
principal factors affecting the Company's revenues are whether
the Company adds or loses clients for its investment management
services, the performance of equity and fixed income markets, and
the type and size of accounts managed by the Company and related
differences in fees charged.
The Company acquired ADAM on September 24, 1997 (see Note 2
to Financial Statements of the Company). As the transaction was
completed just six days prior to the end of the third quarter of
1997, the impact of the acquisition on the Company's statements
of income is nominal during the third quarter, but is fully
reflected on the September 30, 1997 balance sheet. Beginning in
the fourth quarter 1997, ADAM's operations will be fully
reflected in the Company's financial statements.
8
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Results of Operations
Nine Months Ended September 30, 1997, Compared to Nine Months
Ended September 30, 1996
Revenues were $9,306,000 for the nine months ended September
30, 1997, compared to $7,692,000 for the corresponding nine
months in 1996, an increase of 21%. The increase was
attributable primarily to investment management fees generated
from new institutional client relations. In addition, asset
based fees increased in direct proportion to increases in the
stock market. Revenues related to these new relationships are
based upon a percentage of assets under management using the
Company's products and services. Much of the new business is
from distribution channels that pay the Company only its net
portion of the fees, and does not include the fees for third
parties (i.e., portfolio managers, solicitors, brokerage or
custody). Historically, fees paid to the Company through its
primary distribution channels included fees payable for these
other services. When the Company acts in the capacity of vendor,
consultant or sub-advisor to another entity that is either a
registered investment advisor or exempt under the law, the
Company is likely to be paid only its portion of the total client
fee. When the Company acts in the capacity of investment
advisor, it is more likely to collect the gross fee paid by the
client and then pay investment manager and other third party
fees.
Investment Manager and Other Fees were $4,437,000 for the
nine months ended September 30, 1997, compared to $4,225,000 for
the corresponding nine months in 1996, an increase of 5%. Direct
expenses increased as a result of new business and the need to
allocate additional resources to service such new business.
However, as discussed above, direct expenses did not increase in
proportion to revenues as certain of these revenues are
recognized on a net basis to the Company. In addition, asset
based direct expenses increased in direct proportion to increases
in the stock market.
Net Revenue After Investment Manager and Other Fees was
$4,868,000 for the nine months ended September 30, 1997, compared
to $3,467,000 for the corresponding period in 1996, an increase
of 40%. These increases are explained above.
Operating Expenses were $6,700,000 for the nine months ended
September 30, 1997, compared to $5,581,000 for the corresponding
nine months in 1996, an increase of 20%. These increases were
due primarily to an increase in salaries and benefits which
increased 31% for the nine month period, and general and
administrative costs which increased 49% for the nine month
period. Personnel and the related operating costs increased to
support the expansion of the Company's products and services, the
development of internal systems and the servicing of several new
distribution channels and customers.
Also, the Company established a reserve of $250,000 for
potential losses resulting from uncollectible accounts
receivable. The Company's management determined that a reserve
should be established in the third quarter on revenue recognized
from new business relationships entered into in 1997.
The total number of Company employees at September 30, 1997
was 84 including employees transferred from ADAM, as compared to
50 at September 30, 1996. Clearing charges and user fees
decreased by 30% for the nine month period as a result of the
implementation of a new in-house trading system and termination
of an outside service bureau. Advertising and promotion
increased by 26% for the nine month period as a result of
development and support of new distribution channels. Product
development costs increased by 90% for the nine month period as a
result of implementation on a new portfolio accounting system and
maintenance of proprietary software. Interest costs for the nine
month period decreased by 89% as a result of the repayment of a
note payable. Depreciation and amortization increased by 66% for
the nine month period as a result of a general increase in the
level of fixed assets. The Company believes continued expansion
of its operations is essential. As a consequence, the Company
anticipates that operating expenditures will continue at these
increased levels.
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Income Taxes Based on current estimates of operating
results, the Company expects its effective tax rate to be -0- for
1997.
Net Loss The Company recorded a net loss of $2,082,000 for
the nine months ended September 30, 1997, compared to $2,114,000
for the corresponding nine months in 1996, a decrease of 2%. The
Company recorded a net loss of $770,000 for the quarter ended
September 30, 1997 as compared to $734,000 for the quarter ended
June 30, 1997, an increase of 5%. For the quarter ended
September 30, 1997, the net loss before interest, taxes,
provision for bad debt, depreciation and amortization was
$187,000 as compared to $685,000 for the corresponding quarter in
1996, a reduction of 73%.
The improvement in earnings was the result of revenues growing at
a faster pace than direct and operating expenses. Also, certain
product development costs of a type that the Company had not
previously incurred, amounting to $594,000, were capitalized
during the quarter ended September 30, 1997. (See Note 1 to the
Financial Statements attached) Capitalizing such costs directly
impacts the earnings of the Company. However, revenues from new
business continue to be less than operating expenses resulting in
a net loss in the current period ended September 30, 1997.
1996 Compared to 1995
Revenues. Investment management fees for 1996 were $9.63
million, compared to $8.63 million in 1995. The increase of
$1 million or 12% for 1996 over 1995 was due primarily to an
increase in assets under management. Trading income for 1996
decreased approximately 52% from $94,948 in 1995 to $44,787 in
1996, primarily because the Company stopped receiving payments
for order flow in 1996. Other income (which consists primarily
of 12b-1 fees and interest income) decreased approximately 8%
from $444,643 in 1995 to $407,102 in 1996, primarily because the
principal balance of the Company's note receivable decreased and
a lower portion of managed assets were held as cash balances
(thereby resulting in lower 12b-1 fees).
Investment Manager and Other Fees. Investment manager and
other fees increased $0.44 million or 9% from $5.14 million in
1995 to $5.58 million in 1996. The increase was due primarily to
an increase in assets under management.
Salaries and Benefits; General and Administrative. Salaries
and benefits increased nearly $0.97 million to nearly $3.49
million for 1996 from $2.52 million for 1995. The increase was
due primarily to the increased staffing requirements associated
with the development, release and support of the Company's new
products. At December 31, 1996 the Company employed
approximately 53 employees as compared with approximately 43
employees at December 31, 1995. New staff was added in the areas
of marketing, sales, software programming and systems support.
General and administrative expense increased $53,117 to $845,767
for 1996 from $792,650 for 1995. The increase was due primarily
to costs related to increased staffing.
Advertising and Promotion. Advertising and promotion
expense increased $200,664 to $830,140 for 1996 from $629,476 for
1995. The increase was due primarily to increased costs
associated with the development, release and support of the
Company's new products, including increased costs in such areas
as telecommunications, printing, reference materials and
publications. The Company also increased its expenses for
marketing seminars and conventions, incurring approximately
$306,000 in such expenses during 1996 compared to $113,000 during
the same period in 1995.
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Software Development Costs. Software development costs
increased $75,592 to $132,392 for 1996 from $56,800 for 1995.
These costs related primarily to the Company's implementation of
a portfolio accounting system and the customization and
maintenance of the Company's proprietary software. The portfolio
accounting system is not expected to be fully operational until
the third quarter of 1997. The Company anticipates that costs
paid to outside vendors for portfolio accounting services will
decrease upon implementation of this system and that costs for
software development for this purpose will decrease after this
system has been implemented. The Company will continue to incur
software development costs for the customization and maintenance
of the Company's proprietary products and in connection with the
amortization of software development costs previously capitalized
by the Company.
Settlement Expense. Settlement expense (which represents
the refund of principal trading profits and related interest due
in connection with the settlement of an investigation of the
Company by the Commission) decreased $310,000 to $155,000 for
1996 from $465,000 for 1995. The Company will not incur any
settlement expense in 1997. See "Business-Corporate History-SEC
Investigation and Settlement."
Other Expense. Occupancy and equipment costs increased
approximately $130,000 to nearly $610,000 for 1996 from $480,000
for 1995. The increase was due primarily to the increased costs
associated with the implementation of a brokerage trading system,
the purchase and development of the portfolio accounting system
referred to above and the development, release and support of the
Company's new products, with approximately 55% of this increase
attributable to the addition of non-capitalized hardware and
software. The Company's expenses also reflect increased
equipment leases and an annual adjustment to the Company's office
lease for common operating costs. Clearing charges and user fees
increased $46,724 to $813,239 for 1996 from $766,515 for 1995.
The increase resulted from increased trading activity in the
Company's managed assets. Professional fees increased $278,226
to $763,086 for 1996 from $484,860 for 1995. The increase was
due primarily to the completion and release of the Company's new
products, the development of new sales and marketing agreements,
and the regulatory and compliance issues associated with these
new products and relationships. Legal and accounting fees were
also incurred in connection with settlement of the Commission's
investigation of the Company, ensuring regulatory compliance by
the Allocation Manager(TM) mutual fund software program and in the
establishment of complex relationships with several new clients.
The Company expects only minimal fees to be incurred in 1997 in
connection with the Commission's investigation of the Company.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash of $3,465,000, a
substantial portion of which was held in short-term interest
bearing accounts, including restricted cash of $1,890,000.
Effective in October 1997, the amount of resstricted cash was
reduced to $1,400,000. (See Note 2 to the Company's Financial
Statements)
For the nine months ended September 30, 1997, cash used in
operating activities was $3,047,000. This was due primarily to
net operating losses sustained. Also, as a result of the ADAM
acquisition, accounts receivable, prepaid expenses, accounts
payable, accrued expenses and deferred income increased. In
addition, accounts receivable and deferred revenues increased as
a result of new business. Cash used in investing activities was
$7,009,000. Cash used in investing activities was the result of
goodwill generated from the ADAM acquisition and capital
expenditures incurred as a result of business expansion. Cash
provided by financing activities of $7,022,000 was primarily
related to the private placement of common stock.
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Adam Acquisition. On September 24, 1997, the Company
completed the acquisition of ADAM, a financial services and
investment advisory company headquartered in Atlanta, Georgia.
ADAM has provided investment consulting services to institutional
investors since 1973. ADAMS's primary services are based around
mutual funds. ADAM 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. ADAM 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. ADAM's 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. ADAM currently has a staff of approximately
16 people who are located either in its corporate headquarters in
Atlanta, Georgia or in the Company's headquarters in Denver,
Colorado. In 1995, ADAM acquired Optima Funds Management, Inc.
("Optima"), a company that provides mutual fund wrap services to
clients. Optima was merged into ADAM in December, 1997.
The agreement providing for the acquisition of ADAM by the
Company provided that the Company would acquire all of the
outstanding capital stock of ADAM 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 ADAM at closing of the acquisition,
estimated to be approximately $1.6 million. At the closing of
the ADAM 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 ADAM's standard fee assets under management
in excess of $500 million, determined on the one-year
anniversary of the closing of the ADAM 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 ADAM acquisition,
not to exceed $2.0 million. The Company anticipates that ADAM
will continue to operate as a wholly owned subsidiary of the
Company in the future.
In connection with the ADAM acquisition, on September 24,
1997, the Company sold 1,220,749 shares of its Common Stock in
the ADAM 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 ADAM at the ADAM closing.
The additional $1,500,000 is currently being used by the Company
for working capital purposes.
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 ADAM 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 ADAM 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."
12
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The Company's operating losses incurred over the last
several years resulted in the need for significant funding.
During the first three quarters of 1996, the Company borrowed an
aggregate of $1.8 million from Bedford Capital Financial
Corporation ("Bedford") and received an additional $1.0 million
from the private placement of debt securities. These financings
were in addition to $1.2 million borrowed by the Company from
Bedford in July 1995 and $482,500 received by the Company from
the private placement of debt securities in late 1995 and early
1996. In November 1996, the Company borrowed an additional
$250,000 as bridge financing to fund working capital shortfalls
through the completion of a private placement of Common Stock.
See "Business-Corporate History." The loans from Bedford, the
private placements, and the bridge financing each involved the
issuance of warrants to purchase Common Stock.
Private Placement and Restructuring. In December 1996 the
Company completed a private placement of 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 September 30, 1997,
approximately $1.9 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 $1.3 million was used to fund the Company's other
working capital and capital expenditure requirements during the
first quarter of 1997. See "Business-Corporate History-Phillips
& Andrus LLC; KP3, LLC."
Uses of Cash. Between December 31, 1996, and September 30,
1997, cash and cash equivalents decreased from $6,499,000 at
December 31, 1996 to $3,465,000 ($1,575,000 of which was
unrestricted) at September 30, 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 $1,435,000 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
ADAM acquisition and in conjunction with the increase of sales
volume. See "-Results of Operations-Nine Months Ended September
30, 1997 Compared to Nine Months Ended September 30, 1996."
13
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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 History-Phillips & Andrus, LLC; KP3, LLC."
Through December 31, 1997, the Company had lent $150,800 to KP3
specifically to service interest payments on the loan. KP3 has
agreed to reimburse the Company for all amounts paid by the
Company toward the loan or for collateral applied to the loan,
including interest at an annual rate of 9% and has granted the
Company a security interest in the KP3 Shares. Such loan was
restructured through a different bank on October 1, 1997. In
connection therewith, the collateral pledge by the Company in
connection with the loan was reduced to $1,400,000 and the
Company released 87,500 of the KP3 Shares previously held as
collateral. The due date of the new loan is 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.
14
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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 "-ADAM 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
investment products that are currently marketed. As such,
managed account programs, such as asset allocation and wrap
accounts which assist investors in developing and implementing
appropriate investment strategies, have grown significantly to
service this segment of the marketplace. Wrap programs, which
offer a highly-personalized, fee-based (as opposed to
commission-based) platform for financial management, have grown
to more than $100 billion in assets at year-end 1995.
In recent years, there have been two principal objectives in
the development and marketing of asset allocation and wrap
programs. First, to improve customer service, programs were
developed offering asset allocation and professional money
management services that would better position a customer's
investment portfolio. Asset allocation is 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 $80 billion in 1994 to $110 billion in 1995, while mutual fund
wrap assets have grown from $8 billion in 1993 to $12 billion in
1994 to $19 billion in 1995. In 1988, assets in these wrap
programs were estimated at less than $2 billion.
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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 79 people,
including approximately 45 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) ADAM, 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 program available both on paper and through the
Company's proprietary software that provides comprehensive and
detailed investment suitability analysis, recommended allocation
of assets, portfolio modeling and rebalancing, and comprehensive
portfolio performance reporting, (iii) Managed Account Reporting
Services, a portfolio accounting and reporting service that
operates as a service bureau, and (iv) Style Manager_, a
discretionary money management program, using style index funds
and mutual funds, that offers equity style rotation. In
addition, PMC provides consulting services to Institutional
Channels and high net worth customers.
Private Wealth Management(TM)
Private Wealth Management(TM), PMC's multi-manager
institutional wrap program, has historically been PMC's largest
revenue producer. Targeted toward customers with high net worth
(typically having a portfolio larger than one million dollars),
Private Wealth Management(TM) assists financial planners in
assembling a custom-selected team of professional money managers
which precisely matches an individual investor's personal
investment goals, risk tolerance, and objectives.
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Each portion of an individual's portfolio (allocated into
asset classes such as equity, fixed income and cash, and asset
sub-classes such as value, growth, large cap, small cap, and
emerging markets) is managed by a carefully selected
institutional money management firm that has been chosen from
PMC's list of recommended managers as best suited to match an
investor's investment philosophy within a specific discipline.
An important and proprietary component of the Private Wealth
Management(TM) program involves the basis of selection of these
money managers. PMC currently recommends a number of independent
money managers for its Private Wealth Management(TM) multi-manager
program, representing a diverse range of philosophies and
styles. These managers are chosen based largely on quantitative
analysis emphasizing return-based, multi-factor style
benchmarking. High correlation to benchmark indices, supported
by positive alpha, are necessary to meet the "Preferred" standard
for manager recommendations. Also considered in manager
evaluations are historical performance, investment philosophy and
style, disciplines, employee turnover, rate of growth, accounts
gained or lost, and industry reputation. To help a customer
choose and understand investment options, PMC provides detailed
profiles on money managers in the context of style and
methodology to achieve maximum investment diversification.
Additionally, PMC will provide guidance on the termination of
existing managers and the rebalancing of the customer's assets.
The Company considers periodic portfolio rebalancing decisions to
be an extremely important determinant of long-term performance.
Thus, several rebalancing options are offered within PMC's
private account programs.
Private Wealth Management(TM) is marketed under both the PMC
label and private labels. Institutional Channels currently using
private-label versions of Private Wealth Management(TM) include
Chase Investment Services Corp., 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 Managed Account Reporting Service
("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.
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, MONY Securities Corporation,
Texas Commerce Bank and others.
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A version of Allocation Manager(TM), called Fund Counselor_, is
being marketed by NFCS. Under the Fund Counselor_ program, NFCS
will provide brokerage, clearing and custodial services and will
make the program available to its more than 225 bank, insurance
and financial planning broker/dealers. 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. In addition, PMC is
currently pursuing similar relationships with other substantial
distributors and securities clearing firms.
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 attractive monthly and quarterly reports.
MARS provides detailed statements that include comprehensive
management reporting, account reconciliation and cost-based
accounting on a full-accrual basis. In addition, PMC provides
full color, quarterly performance reports detailing the
investor's objectives and performance of each investment
strategy, money manager or mutual fund, as well as the entire
portfolio.
During 1996 PMC entered into an agreement with National
Financial Services Corporation, an affiliate of Fidelity
Management and Research ("NFSC"), to manage NFSC's newly created
performance reporting service called MAPS Tool Box ("MAPS").
MAPS provides NFSC's correspondents with access to high quality,
quarterly performance reports and tax lot, cost basis and fully
accrued account statements. This service is targeted at high net
worth investors managed by financial planners and financial
consultants who use the securities clearing services of NFSC.
MARS is also being marketed within the Schwab system to the many
investment advisors that use Schwab's custodial services.
Effective October 1997, the Company began providing MARS reports
to clients of Scotia McLeod, Inc. through a third party vendor
agreement with Infowise, Inc.
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Style Manager_ Asset Management Products
Style Manager_ is a family of discretionary asset management
products which recommend strategies for the periodic rebalancing
of both institutional and retail investor portfolios. Through
the use of Style Manager_, clients' portfolios are periodically
rebalanced through the rotation of U.S. equity styles (i.e.,
growth and value companies and large, mid and small
capitalization companies), with the intention of capturing
superior performance that results from taking advantage of
certain cyclical sector inefficiencies in the U.S. equity
markets. Recommended shifts in equity allocations are designed
to move assets away from under-performing sectors into those
likely to perform best. Although Style Manager_ recommends
shifts within the U.S. equity markets, it does not recommend
shifts between macro asset classes such as stocks, bonds and
cash, thus the program is not a market timing program as the term
is generally used. Currently, three Style Manager_ versions have
been developed.
Portfolio Brokerage Services, Inc.
Portfolio Brokerage Services, Inc. ("PBS"), a wholly owned
subsidiary of the Company, is registered as a broker/dealer with
the NASD and in all U.S. jurisdictions. PBS executes security
transactions for certain of PMC's privately managed account
programs on behalf of its customers through the customer's
custodian bank on a delivery vs. payment basis. A self-clearing
broker/dealer, substantially all trading activity of PBS is
unsolicited and initiated by the independent money managers used
in PMC's Private Wealth Management(TM) program. Managers make all
buy and sell decisions and place most orders with PBS for
execution. PBS executes substantially all trades through
third-party market makers. All transactions are effected on an
agency basis.
Portfolio Technology Services, Inc.
Portfolio Technology Services, Inc. ("PTS"), a wholly owned
subsidiary of the Company, is a technology company dedicated to
assisting the Company in providing innovative products to the
financial services industry. PTS leverages the product knowledge
of PMC to design and build integrated product solutions to meet
the challenge of consolidating products and pricing in multiple
segments of the financial services industry. As its primary
contribution to the Company, PTS has developed the sales
workstation platform used for Allocation Manager(TM) and
communication interfaces to multiple custodial systems. PTS
licenses its technology and provides customization services in
support of the Company's relationship with its Institutional
Channels. The Company estimates that it has spent approximately
$520,000 for research and development activities in its last two
fiscal years. Customers bear the cost of such activities
directly when software is customized for their particular
requirements. Payments by customers for this purpose during the
last two fiscal years approximated $90,000, and during the nine
months ended September 30, 1997, $20,000.
ADAM Investment Services, Inc.
ADAM was formed in 1973 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 several insurance
companies within variable life and variable annuity contracts.
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Today ADAM 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, ADAM's services are typically 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. ADAM collects all fees directly from client accounts and
pays the adviser's portion to the adviser. In certain instances
ADAM does not collect the adviser's portion of the fee and the
adviser invoices the client directly.
The services ADAM provides are described below.
Mutual Fund Portfolios. ADAM 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. ADAM will also
construct customized mutual fund portfolios for larger accounts.
Socially Responsible Portfolios. ADAM offers 5 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.
401(k) Services. ADAM offers its mutual fund portfolios as
options for use by 401(k) plans. ADAM has developed marketing,
enrollment and educational material for use in the 401(k)
market. ADAM has also developed relationships with custodial and
record keeping firms that work with advisers using ADAM's 401(k)
services.
Insurance and Annuity Services. ADAM 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 ADAM's
mutual fund portfolios to manage an investor's assets in a
consistent manner both inside and outside of insurance policies.
Private Label Program. ADAM 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. ADAM provides
advisers with a variety of marketing materials, newsletters,
slide presentations, software and proposal preparation services
that support the advisers' efforts to market ADAM's services.
ADAM also supports advisers' marketing efforts through field
wholesalers and in-house customer service personnel. ADAM
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. ADAM assists
advisers in opening client accounts and monitors and trades
client portfolios on a discretionary basis. ADAM provides
comprehensive quarterly reports to all clients.
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Distribution. ADAM distributes its services through six
marketing representatives who are supported by three account
servicing representatives. Marketing representatives recruit new
advisers to use ADAM's 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. All
marketing representatives and account servicing representatives
are employees of ADAM. ADAM terminated its relationship with ACG
Consulting Services, Inc., ADAM's former independent distribution
firm, in August 1996.
In 1995, ADAM acquired Optima. As of September 30, 1997,
Optima provided mutual fund wrap services to clients with assets
under management of approximately $100 million. ADAM's current
Chief Investment Officer was the President and Chief Investment
Officer of Optima. Optima was merged into ADAM in December, 1997.
Significant Relationships
Most of the Company's gross revenues are generated by fees
from the Company's Private Wealth Management(TM) investment advisory
programs. The programs are marketed and sold by Institutional
Channels and Independent Channels either under the Company's name
or under the "private label" of such channel. The Company's
private-label relationship with CISC accounted for approximately
18% of the Company's gross revenues during 1996. CISC recently
restructured its business, which restructuring has materially and
adversely affected the gross revenues derived from that
relationship during 1996. While the Company has no reason to
believe that its current investment advisory relationships will
not continue to generate revenues for the Company consistent with
prior years, other than that with CISC as discussed above, there
can be no assurance that such will be the case. Assets under
management for CISC and related revenues have remained stable
since completion of the CISC restructuring.
Pursuant to a joint marketing agreement between the Company
and Schwab, a specialized version of the Private Wealth
Management(TM) program is being marketed as an optional additional
service to independent registered investment advisors ("RIAs")
who utilize the services of Schwab. Schwab provides custody and
clearing services for independent RIAs. With respect to Schwab
Institutional Management's RIA customers who determine to use the
Company's products and services, Schwab will provide brokerage,
custody and securities clearing services while PMC will provide
asset allocation, money manager due diligence, monthly and
quarterly reporting, sales support and training.
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.
The Company targets other means of distribution, and has
executed selling agreements with new Institutional Channels for
its products. Examples of the new relationships include MONY
Securities Corporation, Cowen & Company, Texas Commerce Bank and
EVEREN Clearing Corp.
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Competition
In offering services through its Institutional and
Independent Channels, the Company competes with other firms that
offer wrap and managed account programs. These distribution
channels in turn compete with banks, insurance companies, large
securities brokers and other financial institutions which offer
wrap or managed account programs to the public. The Company
believes that firms compete in this market primarily on the basis
of service, since the wrap fees charged by others are similar to
those charged by the Company. While a number of firms each
provide a portion of the services provided by the Company through
its Institutional Channels, the Company believes it is one of a
few firms offering integrated services to customers. Firms that
compete with the Company in providing services to its Independent
Channels and Institutional Channels have more financial resources
and greater recognition in the financial community than the
Company. Competitors may reduce the fees charged for wrap or
managed account programs or pursue other competitive strategies
that could have an adverse impact on the Company.
The Company's success is in large part a function of the
Independent Channels and Institutional Channels through which its
services are offered to others. There are many alternatives to
wrap programs that are being offered to the public, such as life
cycle funds, asset allocation funds, portfolio strategies and
third-party asset allocation services, and these services are
competitive with those offered by the Company. As financial
institutions continue to grow and build in-house asset
administration service capabilities, some will be able to provide
these services internally rather than using outsourcing
providers. Competitors may succeed in developing products and
services that are more effective than those that have been or may
be developed by the Company and may also prove to be more
successful than the Company in developing these products and
marketing these services to third-party asset managers. The
Company does not offer its products online because its does not
believe the nature of its products and services are compatible
with that method of distribution.
Government Regulation
The Company's business falls entirely within the securities
industry, an industry which is heavily regulated by the federal
and state governments. New regulatory changes affecting the
securities industry could adversely affect the Company's
business. In addition, as an investment adviser and a
broker/dealer, the Company's subsidiaries are subject to
regulation by the Commission, the NASD and state regulatory
agencies. Consequently, the Company could become subject to
restrictions or sanctions from the Commission, the NASD or such
state regulatory agencies. It is impossible to predict the
direction future regulations will take or the effect of such
regulations on the Company's business.
Corporate History
Acquisition of Schield Management Company
In September 1993, Portfolio Management Consultants, Inc.
("PMC") merged with Schield Management Company ("Schield"), a
publicly traded market timing firm, in a share exchange. In that
transaction, all operating assets of Schield were divested prior
to the merger and it was treated as a reverse acquisition of
Schield by PMC. Schield's name was changed to PMC International,
Inc. and PMC became a wholly owned subsidiary of the Company,
with PMC's shareholders receiving shares in the publicly held
company.
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SEC Investigation and Settlement
During November 1993, the staff of the Commission began an
examination of PMC and in January 1994, the Commission issued a
"Formal Order of Investigation." In April 1994, the staff of the
Commission made a formal enforcement recommendation against PMC,
its President Mr. Kenneth S. Phillips and its former Chief
Executive Officer, Mr. Marc Geman. Mr. Geman terminated his
association with the Company to pursue other interests at the
closing of the initial Bedford Loan (as hereinafter defined) in
July 1995. The recommendation alleged that PMC and such officers
had violated anti-fraud provisions of the Securities Act, the
Exchange Act and the Investment Adviser's Act of 1940, and the
record keeping requirements of the Exchange Act.
Over the course of the following two years the Company
committed significant resources to its defense and the defense of
its officers. The case addressed issues associated with
disclosures and standards of "best execution" in advisory and
wrap programs. The investigation adversely affected the
Company's new business development activities during the period,
as very few firms were willing to develop relationships with the
Company while an enforcement recommendation was pending.
On June 27, 1996, PMC and Mr. Phillips announced that they
had reached a settlement agreement with the Commission. Pursuant
to the settlement agreement, PMC and Mr. Phillips, without
admitting or denying the Commission's allegations, consented to
an Order whereby PMC agreed to engage a compliance executive and
to refund net principal trading profits together with prejudgment
interest thereon, in an amount to be determined by an independent
accountant. The net trading profits were determined to be
$457,000, plus $146,000 of interest through the date of payment.
The refund process was completed in May 1997. In addition, Mr.
Phillips agreed to a censure and payment of a $25,000 fine.
On June 27, 1996, administrative proceedings were instituted
against Mr. Geman, as an individual, by the Commission in
connection with the above described investigation. A hearing was
held before an administrative law judge on November 5 and 6,
1996. 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 PMC 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.
The decision has been appealed.
Bedford
In July 1995, the Company entered into a transaction with
Bedford pursuant to which Bedford loaned $1.2 million to the
Company and received an option to loan up to an additional $1.8
million to the Company for a specified period of time and
pursuant to certain call provisions. Each dollar loaned carried
a ten-year warrant to purchase one share of the Common Stock at
an exercise price of $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 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").
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In addition, the Company granted to Bedford certain other
rights in connection with future debt and equity financings which
included a right of first negotiation regarding future fundings,
a 30-day exclusive negotiation period, and a right of first
refusal to match unsolicited offers for financing. The Company
also agreed to pay a $100,000 annual monitoring fee to Nevcorp
Inc., which is owned by J.W. Nevil Thomas, who has been
designated by Bedford to serve on the Company's Board of
Directors.
The Company's relationship with Bedford was restructured in
December 1996. See "-December 1996 Restructuring."
December 1995 and June 1996 Offerings
In December 1995 and January 1996, the Company issued a
total of 482.5 units through a private offering (the "December
1995 Offering"), with each unit consisting of a convertible
promissory note with a principal amount of $1,000 and a warrant
to purchase 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 December 31, 1997, the Company has lent $150,800 to KP3
specifically to service interest payments on the loan. 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. In
connection therewith, the collateral pledge by the Company in
connection with the KP3 Loan was reduced to $1,400,000 and
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the Company released 87,500 of the KP3 Shares previously held as
collateral. The new loan due date is December 31, 1998.
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 (as
defined below). Half of the loan was provided by Keefe,
Bruyette & Woods, Inc. ("KBW"), placement agent in the December
1996 Offering, and the balance by certain members of management
of the Company and a subsidiary of Bedford. The lenders received
five-year warrants to purchase an aggregate of 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 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. The new warrants issued by the Company
to Bedford and others pursuant to clauses (i) and (ii) are
referred to hereafter as the "New Warrants."
25
<PAGE>
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 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.
ADAM Acquisition and Financing
On September 24, 1997, the Company completed the acquisition
of ADAM, a financial services and investment advisory company
headquartered in Atlanta, Georgia. ADAM has provided investment
consulting services to institutional investors since 1973.
ADAMS'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. 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. ADAM 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. ADAM's
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. ADAM has a staff of
approximately 37 people, all of whom are located in its corporate
headquarters in Atlanta Georgia. ADAM has one wholly-owned
subsidiary, Optima, which it acquired in 1995. Optima provides
mutual fund wrap services to clients. Optima was merged into
ADAM in December, 1997.
The agreement providing for the acquisition of ADAM by the
Company provided that the Company would acquire all of the
outstanding capital stock of ADAM 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 ADAM at closing of the acquisition,
estimated to be approximately $1.6 million. At the closing of
the ADAM 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 ADAM's standard fee assets under management
in excess of $500 million, determined on the one-year
anniversary of the closing of the ADAM 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 ADAM acquisition,
not to exceed $2.0 million. ADAM is now a wholly owned
subsidiary of the Company, and the Company anticipates that ADAM
will continue to operate as a wholly owned subsidiary of the
Company in the near future.
26
<PAGE>
In connection with the ADAM acquisition, on September 24,
1997, the Company sold 1,220,749 shares of its Common Stock in
the ADAM Private Placement at a price of $6.00 per share. 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 ADAM
at the ADAM closing. The additional $1,500,000 is currently
being used by the Company for working capital purposes. The
Company anticipates that the balance of the proceeds from the
ADAM Private Placement will be used for its working capital
requirements.
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. ADAM 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. ADAM pays approximately $24,000 per
month for this office space. On January 21, 1998, ADAM entered
into a sublease agreement for its Atlanta office space. Pursuant
to the agreement, ADAM is to sublease all of the above described
office space at $4.25 per square foot until February 17, 1998.
From February 17, 1998 until March 31, 1998, the office space is
to be sublet for $8.50 per square foot, and from April 1, 1998
until the termination of the lease in April, 1999, the office
space is to be sublet for $17.00 per square foot. ADAM 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
approximately 79 persons as of January 31, 1998, including
approximately 45 professionals. None of the Company's employees
are subject to a collective bargaining agreement. The Company's
management believes that the Company's relationship with its
employees is good.
Legal Proceedings
In June 1996, PMC reached a settlement with the
Commission in connection with an investigation of certain trading
practices of PMC. See "Business-Corporate History-SEC
Investigation and Settlement." The Company is not aware of any
material legal proceedings or investigations currently pending or
threatened against the Company.
In June 1997, PMC 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 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 Company believes that the claims described
in the NASD Arbitration notice are without basis and intends to defend
the matter vigorously.
27
<PAGE>
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 Vice President Finance and
Operations
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
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 ADAM, the
Company's wholly owned subsidiary, as Chief Operating Officer of
Optima, a wholly owned subsidiary of ADAM, and as a member of the
Boards of Directors of both ADAM and Optima. Mr. MacKillop was
appointed to the Board of Directors on October 27, 1997. Mr.
MacKillop has been employed by ADAM since 1992. From 1991 until
1992 Mr. MacKillop served as outside general counsel to ADAM.
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-Vice President Finance and Operations. Mr.
Ash joined the Company during the fourth quarter of 1997 and was
named Vice President Finance and Operations in January, 1998
and President of Portfolio Brokerage Services, Inc., the Company's
wholly owned subsidiary, in February 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.
28
<PAGE>
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 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 among Bedford, the Company,
Mr. Phillips, Mr. Andrus and P&A, (i) Bedford is entitled to
designate one director and one additional director is to be
reasonably acceptable to Bedford and Messrs. Phillips and Andrus
and (ii) Messrs Phillips and Andrus are entitled to designate
three directors, including one member of senior management
designated after the date of the agreement. Mr. Thomas is
currently the director designated by Bedford and Messrs. Phillips
and MacKillop are two of the three directors they are entitled to
designate. The director acceptable to Bedford and Messrs.
Phillips and Andrus is currently Mr. Bibb. The remaining
director, who is to be a member of senior management, has not yet
been designated by Messrs. Phillips and Andrus.
29
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information
concerning compensation paid by the Company and its subsidiaries
to the Company's Chief Executive Officer and to each of its other
executive officers at the end of 1996.
Summary Compensation Table
- ---------------------------------------------------------
Annual Long-Term
Compensation Compensation
Name and Principal Fiscal Salary Options
Position Year Granted(1)
- ---------------------------------------------------------
Kenneth S. Phillips 1996 $252,000 12,500
President, Chief 1995 228,124
Executive Officer 1994 241,774
- ---------------------------------------------------------
David L. Andrus(2) 1996 $240,000 262,500
Executive Vice 1995 40,000
President
- ---------------------------------------------------------
Vali Nasr(3) 1996 $139,015 12,500
Chief Financial 1995 126,475
Officer & Treasurer 1994 128,262
- ---------------------------------------------------------
(1) The shares of Common Stock to be received upon the exercise
of all stock options granted during the period covered by the
Table.
(2) Mr. Andrus joined the Company in 1995 and his affiliation
with the Company as an employee ceased effective January 11,
1998.
(3) Mr. Nasr's employment with the Company terminated effective
January 30, 1998. Mr. Nasr is currently serving as a consultant
to the Company.
30
<PAGE>
During the year ended December 31, 1996, the Company granted to
its Chief Executive Officer and the other executive officers
listed in the Summary Compensation Table options to acquire a
total of 675,500 shares of Common Stock as set forth in the
following table.
Option Grants in Last Fiscal Year
- --------------------------------------------------------------------
Percentage
of Total
Number of Options
Shares Granted to
Name Underlying Employees Exercise Expiration
Options in Price Date
Granted Fiscal
Year
- --------------------------------------------------------------------
Kenneth S. 12,500 4.2% 6/7/2001
Phillips $4.00
- --------------------------------------------------------------------
David L. Andrus 200,000 87.5% $6.25 1/11/2000
50,000 $8.50 12/17/2002
12,500 6/7/2001
$4.00
- --------------------------------------------------------------------
Vali Nasr 12,500 4.2% $4.25 3/31/2001
- --------------------------------------------------------------------
______________________
The following table sets forth certain information with
respect to options exercised during the year ended December 31,
1996 by those officers listed in the Summary Compensation Table.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year End Option/SAR Values
- --------------------------------------------------------------------
- --------------- ---------- --------- ---------------- --------------
Shares Number of
Acquired Securities Value of
on Value Underlying Unexercised
Name Exercise Realized Unexercised Money
Options at Options at
FY End FY End
Exercisable Exercisable
/Unexercisable /Unexercisable
- --------------- ---------- --------- ---------------- --------------
Kenneth S. 0 0 5,000/7,500 $22,500/$33,750
Phillips
- --------------- ---------- --------- ---------------- --------------
David L. 0 0 73,750/188,750 $168,830/$513,750
Andrus
- --------------- ---------- --------- ---------------- --------------
Vali Nasr 0 0 12,500/0 $56,250/$0
- --------------- ---------- --------- ---------------- --------------
31
<PAGE>
Compensation of Directors
During 1996, the Company did not pay its employee directors
for attending board meetings. Each of the three outside
directors received a $5,000 annual retainer and a $500 fee for
each meeting attended. The Company reimburses all of its
directors for travel and out-of-pocket expenses in connection
with their attendance at meetings of the Board of Directors. On
June 7, 1996, each member of the Board of Directors was granted
options to purchase 12,500 shares of Common Stock at an exercise
price of $4.00 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 $4.00, $8.00, $12.00,
$16.00 and $20.00, respectively, for twenty consecutive trading
days.
Employment Agreements
The Company has employment agreements with Mr. Phillips, its
President and Chief Executive Officer, and ADAM has an
employment agreement with Mr. MacKillop, the Executive Vice
President and Chief Operating Officer of the Company. In
addition, the Company has an employment agreement with Mr.
Andrus, its former Executive Vice President. The Agreement with
Mr. Phillips is dated July 26, 1995 and is for a three
year-term. Either party may terminate the agreement upon 90
days' prior notice. The agreement provides for a minimum salary
of $240,000 ($300,000 if the Company has pre-tax profits of at
least $1,000,000), 40% of the annual bonus pool (equal to 10% of
the Company's pre-tax profits), a car allowance, and
participation in the Company's other benefit plans. Effective
January 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 agreement with Mr. MacKillop is dated September 23,
1997, and is for a two-year term. ADAM 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 Agreement with Mr. Andrus is dated July 26, 1995 and was
amended in December 1996. It provides for a three year-term
ending November 1998. Either party may terminate the agreement
upon 90 days' prior notice. The agreement provides for a minimum
salary of $240,000, options to acquire 250,000 shares of Common
Stock, and participation in the Company's other benefit plans.
Effective January 1, 1997, Mr. Andrus salary was increased to
$300,000. If the Company terminates the agreement without cause,
it will be obligated to make severance payments to Mr. Andrus in
an amount up to one-years' compensation. In addition, the
agreement provides 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. Pursuant to his employment agreement, Mr.
Andrus will receive severance payments in an amount equal to his
base salary of $240,000, 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 will cease sooner in the event Mr.
Andrus gains employment affording him comparable compensation.
32
<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 January 30, 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 executive officer of
the Company named in the Summary Compensation Table, and (iv) all
directors and executive officers of the Company as a group. The
share amounts in this table reflect shares of Common Stock
issuable upon the exercise of options and warrants exercisable
within the next 60 days.
Shareholder Footnotes Shares Percent
- --------------------------------------------------------------------
Ken Philips (1) (10)(11) 688,379 14.15
Scott A. MacKillop (1) (13) 8,750 .18
Steven Ash (1) 0 0
Nevil Thomas (2) (11)(14) 7,500 .15
Porter Bibb (3) (11)(15) 5,000 .10
Emmett Daly (4) (12)(18) 52,500 1.07
Richard Hyde (5) (12) 2,500 .05
Bedford (6) (16) 742,813 15.18
KP3, LLC (1) (17) 410,961 8.46
OCH ZIFF Capital Mgmt (9) 466,666 9.61
Bay Pond Partners, LP (7) 365,832 5.56
Bay Pond Investors (Bermuda)(7) 270,250 7.53
Wheatley Partners 401,916 8.27
(Wellington Management Company)(8)
Officers and Directors (7 persons)(19) 764,629 15.56
FOOTNOTES:
(1) The address of Mr. Phillips, Mr. Ash, Mr. MacKillop, and KP3, LLC is 555
17th Street, 14th Floor, Denver, Colorado 80202.
(2) The address of Mr. Thomas is Scotia Plaza, Suite 4712, 40 King Street
West, Toronto, Ontario M5H 3Y2.
(3) The address of Mr. Bibb is 590 Madison Avenue, New York, New York 10022.
(4) The address of Mr. Daly is Two World Trade Center, 85th Floor, New York,
New York 10048.
(5) The address of Mr. Hyde is Moreland Capital, Inc., 30050 Chagrin
Boulevard, Suite 100, Pepper Pike, Ohio 44124.
(6) The address of Bedford Capital Financial Corporation is 2nd Floor,
Charlotte Hs., Shirly Street, Box N964, Nassau, Bahamas.
(7) The address of Bay Pond Partners, L.P. and Bay Pond Investors (Bermuda),
Ltd. Is c/o Wellington Management Company, L.L.P., 75 State Street,
Boston, Massachusetts 02109.
(8) The address of Wheatley Partners is 80 Cutter Mill Road, Suite 311,
Great Neck, New York 11021.
(9) The address of OCH ZIFF Capital Management is 153 East 53rd Street, 43rd
Floor, New York, New York 10022.
(10) Includes 410,961 shares owned by KP3, LLC ("KP3"), a Colorado limited
liability company, of which Mr. Phillips is the managing member and has
the controlling ownership interest; includes 2,313 common shares
underlying presently exercisable warrants.
(11) Includes 5,000 common shares underlying presently exercisable options.
(12) Includes 2,500 common shares underlying presently exercisable options.
(13) Includes 3,250 common shares underlying presently exercisable options.
(14 Includes 2,500 shares owned by Mr. Thomas' spouse, Suzanne E. Thomas.
Does not include shares owned by Bedford Capital Financial Corporation
("Bedford") of which Mr. Thomas is a director and a 6.13% shareholder.
(15) Does not include 50,000 common shares underlying presently exercisable
options granted to Ladenburg, Thalmann & Co., Inc., of which Mr. Bibb
is a managing director.
(16) Includes 34,063 shares underlying presently exercisable options or
warrants, and 58,750 common shares owned by KP3 and included in the
beneficial ownership of Mr. Phillips which Bedford may acquire pursuant to
a presently exercisable option. See, "Recent Offerings."
(17) All common shares have been included in the beneficial ownership of Mr.
Phillips; 58,750 common shares have been included in the beneficial
ownership of Bedford.
(18) Includes 12,500 shares jointly owned with Regina Daly.
(19) Based upon total common shares outstanding of 4,857,803 plus 56,813
common shares underlying presently exercisable options.
33
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into an agreement with Ladenburg, Thalmann
& Co., Inc., investment bankers ("Ladenburg"), in January 1995,
pursuant to which Ladenburg would assist the Company in financing
efforts. Ladenburg was involved in the Company's transactions
with Bedford. Mr. D. Porter Bibb, a principal of Ladenburg, was
named to the Company's Board of Directors in September 1995.
In July 1995, the Company borrowed $1.2 million from Bedford.
As a result of this transaction and a simultaneous transaction
wherein Bedford purchased 1 million shares of outstanding Common
Stock of the Company from a former principal of the Company,
Bedford became a greater than 10% shareholder of the Company,
with the right to acquire in excess of 50% of the Company's
Common Stock. Mr. J.W. Nevil Thomas and another affiliate of
Bedford were appointed to the Company's Board of Directors in
connection with that transaction. See "Business-Corporate
History-Bedford."
Also in July 1995, the Company's then Chief Executive Officer
and a director, Marc Geman, resigned. In connection with his
resignation, Mr. Geman was entitled to severance payments
totaling $180,000, due in monthly payments of $15,000. As of
December 31, 1996, Mr. Geman had received all of the severance
payments to which he was entitled. The Company also entered into
an Indemnification Agreement with Mr. Geman whereby the Company
agreed to hold him harmless, in an amount not to exceed $100,000,
for expenses incurred in defense of the pending investigation by
the Commission. As of December 31, 1996, and September 30, 1997,
a total of $50,786 and $72,000, respectively, 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. See "Business-Corporate History."
Mr. Andrus purchased $100,000 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.
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 to be repaid on the earlier of the closing of the December
1996 Offering or March 31, 1997. The lenders also received
warrants to purchase a total of 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.
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
34
<PAGE>
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."
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.
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
ADAM and current Executive Vice President, Chief Operating Officer
and director of the Company, Michael T. Wilkinson, former director
and principal shareholder of ADAM and two other ADAM employees,
participated in the offering. All of these individuals participated
in the ofering on the same terms as all other investors.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares of Common
Stock, $0.01 par value. As of January 30, 1998, the Company had
4,857,903 shares of Common Stock issued and outstanding with
rights, options and warrants outstanding which could require the
Company to issue 929,545 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.
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. The
Articles provide for a series A of preferred stock, no par value
per share (the "Series A Preferred").
35
<PAGE>
As of the date of this Prospectus, the only series of
preferred stock to be designated and issued were shares of Series
A Preferred, 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 January
30, 1998, unpaid cumulative dividends in arrears with respect to
the Series A Preferred amounted to $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 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.
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 1,519,495
Shares offered hereby for resale by the Selling Shareholders,
298,750 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.
36
<PAGE>
Ownership Ownership
of shares Amount of
Selling Shareholder of Common of shares
Stock Shares of
Prior to Offered Common
Offering Hereby Stock
After
the
Offering
- ------------------------- ----------- --------- --------
Acadia Fund I L.P. 30,250 30,250 0
The Common Fund 28,333 3,333 25,000
Bay Pond Investors (Bermuda) L.P. 270,250 35,000 235,250(8)
Bay Pond Partners, L.P. 365,833 73,333 292,500(9)
Canmerge Consultants Limited 17,500 5,000 12,500
Emmett J. Daly(1)
and Regina Daly JT/TEN (1) 12,500 12,500 0
Endicott Partners, L.P. 25,000 25,000 0
Euro Credit Investments Ltd. 131,875 5,000 126,875(10)
Financial Services Hedge Fund, L.P. 40,250 5,000 35,250
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 & Woods, Inc. 123,166 41,666 81,500(11)
Adam J. Lewis 1,666 1,666 0
James C. Lott &
Mary M. Lott JT/TEN 10,000 5,000 5,000
Scott A. MacKillop (1) (3) 5,500 5,500 0
Malta Hedge Fund, L.P. 44,625 44,625 0
Malta Hedge Fund II, L.P. 7,875 7,875 0
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
Management, L.P. 466,666 466,666 0
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) 2,500 2,500 0
Eric R. Thorpe 833 833 0
Peter L. van der Velden 4,250 2,500 1,750
Wheatley Foreign Partners, L.P. 29,142 13,333 15,809
Wheatley Partners, L.P. 399,273 153,333 245,940(12)
Michael T. Wilkinson 17,500 17,500 0
Albert Yanni 3,250 3,250 0
David Andrus(5) 25,000 193,750 25,000
Carolyn Kling(6) 0 50,000 0
<PAGE>
Roger Bowden(6) 10,905 31,250 10,905
Karen Garcia(6) 881 11,250 881
Vali Nasr(7) 17,624 12,500 17,624
___________
(1) Director of the Company
(2) Employee of the Company
(3) Scott A. MacKillop is the Executive Vice President of the
Company.
(4) Michael T. Wilkinson is a former director of ADAM, a
subsidiary of the Company.
(5) David Andrus is the former Executive Vice President and a director
of the Company.
(6) Former employee of the Company.
(7) Vali Nasr is the former Chief Financial Officer of the
Company.
(8) Represents approximately 1.58% of the outstanding Common
Stock of the Company.
(9) Represents approximately 4.76% of the outstanding Common
Stock of the Company.
(10)Represents approximately 2.46% of the outstanding Common
Stock of the Company.
(11)Represents approximately 1.58% of the outstanding Common
Stock of the Company.
(12)Represents approximately 4.76% of the outstanding Common
Stock of the Company.
38
<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.
39
<PAGE>
EXPERTS
The financial statements of PMC International, Inc. as of
December 31, 1996 and 1995, 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. The financial statements
of ADAM Investment Services, Inc. as of December 31, 1996 and
1995, and for the years then ended included herein have been
included herein in reliance upon the report of Faucett, Taylor &
Associates, P.C., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PMC International, Inc.
Financial statements for the years ended December 31, 1996
and 1995 and the Nine Months ended September 30, 1997 and 1996
Independent Auditors' Report..............................F-2
Consolidated Balance Sheets...............................F-3
Consolidated Statements of Operations.....................F-5
Consolidated Statements of Changes in Shareholders' Equity
(Deficit).................................................F-6
Consolidated Statements of Cash Flows.....................F-8
Notes to Consolidated Financial Statements...............F-10
ADAM Investment Services, Inc.
Independent Auditors' Report.............................F-24
Consolidated Balance Sheets as of December 31, 1996 and 1995F-26
Consolidated Statement of Income for the years ended
December 31, 1996 and 1995.....................................F-27
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1996 and 1995; .............................F-29
Consolidated Statement of Cash Flows for the years ended
December 31, 1996 and 1995.....................................F-31
Notes to Consolidated Financial Statements...............F-33
Pro Forma Financial Information
Unaudited Pro Forma Consolidated Statement of Income for the
Year Ended December 31, 1996...................................F-40
Unaudited Pro Forma Consolidated Statement of Income for the
6 months ended June 30, 1997...................................F-41
Unaudited Pro Forma Consolidated Balance Sheet June 30, 1997F-42
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
PMC International, Inc.
We have audited the accompanying consolidated balance sheets of
PMC International, Inc. and its subsidiaries (the "Company") as
of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit), and
cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the
Company at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
SPICER, JEFFRIES & CO.
Denver, Colorado
March 1, 1997
F-2
<PAGE>
<TABLE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 AND SEPTEMBER 30, 1997 (UNAUDITED)
<CAPTION>
ASSETS
September 30 December 31, December 31,
1997 1996 1995
(Unaudited) (As
restated;
Note 1)
<S> <C> <C> <C>
Cash and Cash Equivalents (See Notes 1 and 7) $3,465,269 $ 6,499,390 $ 313,885
Receivables
Investment management fees, net of allowance of 1,330,769 145,714 39,733
$250,000 (see Note 1)
Other receivables 124,141 160,483 63,210
Furniture and Equipment, at cost, net of 1,389,662 936,234 688,233
accumulated depreciation of $1,600,779, $689,227
and $355,231
Software and Product Develpment Costs, at cost, net 1,101,042 511,123 419,617
of accumulated amortization of $411,524 in 1997
and $203,526 in 1996 (See Note 1)
Goodwill, net of amortization of $10,498 5,400,076 -- --
Prepaid Expenses and Other Assets 1,428,493 340,006 220,605
Long-Term Note Receivable (See Note 2) 545,811 570,494 897,167
TOTAL ASSETS $14,785,263 $ 9,163,444 $ 2,642,450
=========== ============ ============
See accompanying notes to financial statements.
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $1,197,151 $839,095 $ 1,442,694
Accrued expenses 612,386 535,520 707,897
Other liabilities (See Note 7) 139,100 730,909 571,389
Deferred revenue 1,391,999 552,868 411,347
Notes payable (See Note 6) 368,423 14,694 1,647,470
Obligations under capital leases (See Note 7) 382,655 219,821 75,490
---------- -------- ----------
TOTAL LIABILITIES 4,091,714 2,892,907 4,856,287
COMMITMENTS AND CONTINGENCIES (See Note 7)
SHAREHOLDERS' EQUITY (DEFICIT) (See Note 3)
Preferred stock - no par value - authorized 345,455 439,742 872,543
5,000,000 shares; issued and outstanding,
138,182 shares, 175,897 shares and 349,017
shares
Common stock, $.01 par value - authorized, 48,579 36,179 13,889
50,000,000 shares, issued and outstanding,
4,857,903 shares, 3,617,939 shares and
1,388,928 shares
Additional paid-in capital 23,049,235 16,461,953 3,565,576
Accumulated Deficit (12,749,720) (10,667,337) (6,665,845)
----------- ---------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 10,693,549 6,270,537 (2,213,837)
----------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,785,263 $ 9,163,444 $ 2,642,450
F-4
</TABLE>
<PAGE>
<TABLE>
F-1
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
<CAPTION>
(Unaudited)
Nine Months Ended Year Ended
September 30, December 31,
1997 1996 1996 1995
(As restated;
Note 1)
<S> <C> <C> <C> <C>
REVENUE:
Investment management $9,001,181 $7,322,124 $9,634,992 $8,632,888
(See Note 1)
Other income 304,392 370,293 451,889 539,591
Total revenue 9,305,573 7,692,417 10,086,881 9,172,479
Investment manager
and other fees 4,437,494 4,225,107 5,580,846 5,139,613
4,868,079 3,467,310 4,506,035 4,032,866
OPERATING EXPENSES:
Salaries and benefits 3,027,800 2,309,941 3,487,811 2,524,936
Clearing charges and 438,107 630,555 813,239 766,515
user fees
Advertising and 661,743 525,436 830,140 629,476
promotion
General and 882,038 593,093 845,767 792,650
administrative
Product development 146,279 76,916 132,392 56,800
costs
Occupancy and 529,275 437,048 611,562 482,266
equipment costs
Professional fees 311,452 399,620 763,086 484,860
Provision for bad 250,000 - - -
debts
Interest 26,019 232,528 331,008 102,011
Depreciation and 623,751 376,000 537,522 148,567
amortization
Goodwill 10,498 - - -
amortization
Severance Pay 43,500 - - -
Settlement expense - - 155,000 465,000
Total operating 6,950,462 5,581,137 8,507,527 6,453,081
expenses
NET LOSS $(2,082,383) $(2,113,827) $(4,001,492) $(2,420,215)
NET LOSS PER COMMON SHARE $ (0.58) $ (1.60) $ (2.85) $ (1.83)
(see Note 1) =========== ========= ======== =======
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 3,659,774 1,388,928 1,425,509 1,386,631
(See Note 1)
See accompanying notes to financial statements.
F-5
</TABLE>
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, 1996 AND 1995 AND SEPTEMBER 30, 1997 (UNAUDITED)
<CAPTION>
Common Stock Additional Preferred Stock Total
Paid-In Shareholders'
Equity
Shares Amount Capital Shares Amount Deficit (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1994 as 5,540,501 $276,564 $3,637,689 349,017 $872,543 $(4,274,803) $511,993
previously reported
Stock Split effected (Note 1) (4,155,376) (262,713) 262,713
Adjustment for the cumulative
effect on prior years for the
correction of an error (Note 1) - - (350,000) - - 29,173 (320,827)
---------- -------- ----------- -------- --------- ------------ -------------
BALANCES, December 31, 1994, as 1,385,125 13,851 3,550,402 349,017 872,543 (4,245,630) 191,166
restated
Issuance of stock to 401K plan 3,803 38 15,174 - - - 15,212
Net loss - - - - -
(2,420,215) (2,420,215)
BALANCES, December 31, 1995 1,388,928 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 875,000 8,750 2,515,000 - - - 2,523,750
common stock
Preferred stock converted to 59,511 595 432,206 (173,120) (432,801) - -
common stock
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
F-6
<PAGE>
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 12,964 130 94,157 (37,715) (94,287) - -
common stock
Less stock issuance costs - - (845,974) - - - (845,974)
Net loss - - - - - (2,082,383) (2,082,383)
---------- -------- ----------- -------- --------- ------------ -------------
BALANCES, September 30, 1997 4,857,903 $48,579 $23,049,235 138,182 $ 345,455 $(12,749,720) $ 10,693,549
(unaudited)
========== ======== =========== ======== ========= ============ =============
See accompanying notes to financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
INCREASE (DECREASE) IN CASH
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1997 1996 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (as restated;
Note 1)
<S> <C> <C> <C> <C>
Net loss $ (2,082,383) $ (2,113,827) $ (4,001,492) $ (2,420,215)
Adjustments to reconcile net loss to net
cash used in operating activities:
Accretion of discount on note (43,777) (52,507) (67,181) (69,053)
receivable
Depreciation and amortization 634,249 376,000 537,522 148,567
Common stock issued as compensation - - - 15,212
under 401K plan
Changes in operating assets and
liabilities:
Investment management fees receivable (1,185,055) 74,174 (105,981) 32,085
Other receivables 36,342 (51,650) (97,273) 22,196
Prepaid expenses and other assets (1,088,487) (201,308) (119,401) 9,509
Accounts payable 358,056 (484,344) (597,029) 729,837
Accrued expenses 76,866 83,209 (172,377) 103,805
Other liabilities 11,630 10,129 159,520 464,399
Income taxes payable 2,152 - - -
SEC settlement distribution (605,591) - - -
Deferred revenue 839,131 99,370 141,521 37,346
Net cash used in operating (3,046,867) (2,260,754) (4,322,171) (926,312)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (869,180) (479,456) (376,574) (405,932)
Reduction of long-term note receivable 68,460 300,318 393,854 338,067
Cost of product development (797,918) - (295,022) (419,617)
Acquisition of ADAM (5,410,574) - - -
Reduction of secured demand note - 225,000
-
Net cash used in investing (7,009,212) (179,138) (277,742) (262,482)
activities
See accompanying notes to financial
statements.
F-8
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 353,729 2,869,227 890,974 1,602,470
Changes in obligations under capital lease 162,834 (42,060) (67,672) (14,709)
Sale of common stock, less offering costs 6,505,395 - 9,960,741 -
Proceeds from exercise of stock options - - 1,375 -
Principal payments on subordinated note - - - (225,000)
payable
Net cash provided by (used in) 7,021,958 2,827,167 10,785,418 1,362,761
financing activities
NET INCREASE (DECREASE) IN CASH (3,034,121) 387,275 6,185,505 173,967
CASH, at beginning of period 6,499,390 313,885 313,885 139,918
CASH, at end of period $ 3,465,269 $ 701,160 $ 6,499,390 $ 313,885
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 23,814 $ 67,990 $ 367,180 $ 96,969
NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment via capital lease $ 266,980 $ 137,139 $ 205,433 $ 90,199
obligation
Conversion of preferred stock to common stock $ 94,287 $ 432,801 $ -
Conversion of note payable to common stock $ - $ - $ 2,523,750 $ -
See accompanying notes to financial statements.
F-9
</TABLE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
On September 24, 1997, PMC International, Inc. ("PMCI" or the "Company")
completed its acquisition (the "Acquisition") of ADAM Investment Services,
Inc. ("ADAM"), a Delaware corporation, and its wholly owned subsidiary,
Optima Funds, Inc., ("Optima") a Georgia corporation, pursuant to a Stock
Purchase Agreement dated July 25, 1997 ("the Agreement") among the Company,
ADAM and ADAM's shareholders. PMCI acquired all of the issued and
outstanding shares of common stock of ADAM from its shareholders in
consideration for payment of $5 million at closing and two earn-out payments
on the first and second anniversary dates of the closing. The first earn-out
payment will equal 1.0% of ADAM's standard fee assets under management in
excess of $500 million, determined on the one-year anniversary of the closing
of the Acquisition, not to exceed $2.0 million, plus interest thereon at a
rate of 8.75%. The second earn-out payment will equal 1.0% of ADAM's
standard fee assets under management in excess of $700 million, determined on
the two-year anniversary of the closing of the Acquisition, not to exceed
$2.0 million. The Acquisition was accounted for using the purchase method of
accounting. The excess of the cost of the Acquisition over the fair value of
the assets acquired and liabilities assumed was recorded as goodwill. The
Acquisition was funded from the proceeds of a private placement of PMCI
common stock which also closed on September 24, 1997. The Company raised
approximately $6.6 million by selling 1,220,749 shares of PMCI common stock
at $6.00 per share.
On September 23, 1993, the shareholders of Schield Management Company
("Schield") approved an exchange of common stock of Schield for all of the
outstanding common stock of Portfolio Management Consultants, Inc.
("PMC") and a name change from Schield to PMC International, Inc. ("PMCI").
The share exchange was completed on September 30, 1993 and as a result of
this transaction, PMC is a wholly owned subsidiary of PMCI. The share
exchange between Schield and PMC was treated as a reverse acquisition and
accounted for under the purchase method of accounting. Under reverse
acquisition accounting, PMC was considered the acquiror for accounting
and financial reporting purposes, and acquired the assets and assumed
the liabilities of Schield. The Schield assets acquired and liabilities
assumed were recorded at their fair values. The cost of the acquisition
of Schield of $1,741,018 was based on the NASDAQ publicly traded price of
the outstanding Schield common stock prior to the announcement of the
transaction. The excess of the cost of the acquisition over the fair value
of the assets acquired and liabilities assumed was recorded as
goodwill. Subsequently, it was determined that due to the nature of this
transaction, goodwill should not have been recorded. Accordingly,
the balances of the additional paid-in capital and deficit at December
31, 1995 have been restated from amounts previously reported to reflect
a retroactive charge of $350,000 to additional paid-in capital for the
original goodwill recorded and a credit of $52,513 to deficit for the
amortization of such goodwill to that date. Of the amount charged to
the deficit, $23,340 (negligible per share) is applicable to 1995 and
has been reflected as a reduction of general and administrative expenses
for that year, the balance being charged to the deficit at December 31,
1994. The effect on the 1996 statement of operations would be to reduce
the net loss by $23,340 (negligible per share).
PMC was organized in 1986 and its principal business activity is the
administration of private and institutional managed account programs with
its customers located substantially in the United States. Its services
include investment suitability analysis, portfolio modeling and
asset allocation, money manager selection, portfolio accounting and
performance reporting. PMC is registered as an investment advisor under
the Investment Advisors Act of 1940.
F-10
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 vs. payment basis.
Portfolio Technology Services, 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 Investment Services, Inc. ("ADAM"), a Delaware corporation, was
formed in 1973 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 several insurance
companies within variable life and variable annuity contracts. On
September 24, 1997, the Company acquired all of the issued and outstanding
voting stock of ADAM. ADAM is currently a wholly owned subsidiary of the
Company.
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. The September 30, 1997 and September 30, 1996
amounts included herein are unaudited. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations,
cash flows and changes in shareholders' equity at September 30, 1997
and September 30, 1996 have been made.
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.
Revenue from software customizations is recorded as such revenue accrues
under the terms of the related agreements. Revenue from software
maintenance is recorded as such revenue accrues under the terms of the
maintenance contracts. Software products are used in generating
investment managment revenues and therefore are recorded as such
revenues accrue under the terms of the related investment managment contracts.
Securities transactions and related commission income are recorded on a
trade date basis. In the normal course of business, PBS executes,
as agent, transactions on behalf of customers. If the agency
transactions do not settle because of failure to perform by
either the customer or the counter-party, PBS may be obligated to discharge
the obligation of the non-performing party and, as a result, may incur a
loss if the market value of the security is different from the contract
amount of the transactions.
F-11
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
intended to be sold or otherwise marketed 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. 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.
Product development costs consist of salary and benefits, outside services
and other direct costs relating to customization of products for institutional
client relationships. These costs are capitalized and amortized straight
line over the terms of the related contracts. These costs are being amortized
over periods ranging from 36 to 60 months.
General allowances for losses are provided based on past experience.
Management's evaluation considers various factors including, but not limited
to, the ability to collect all amounts due according to contract terms.
Specific allowances for losses are established when a significant and
permanent contingency exists or is likely to occur.
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 discussed 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.
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.
F-12
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
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
$44,910, $113,430, $57,166 and $113,430 for the periods ended September
30, 1997 and 1996, and December 31, 1996 and 1995, respectively, have
been added back to the net loss in computing the net loss per share.
The Company adopted the provisions of SFAS 121, Accounting for the Impairment
of Long-Lived 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 1995 amounts have been reclassified to conform to the 1996 presentation.
NOTE 2 - LONG-TERM NOTE RECEIVABLES
In connection with the Schield reverse acquisition, the Company acquired a
long-term note receivable related to the sale of Schield's market
timing operations to an entity controlled by a founder of Schield.
The note is payable in monthly installments of $32,000, including
interest through August, 1998. The note was recorded at its estimated
fair value as of September 30, 1993. The discount from the face
amount of the note receivable is a credit to interest income over the
life of the note using the interest method. The principal balance of
the note as of December 31, 1996 is $634,578 compared to its carrying
amount of $570,494. The principal balance of the note as of September 30,
1997 is $379,376 compared to its carrying amount of $320,534
(unaudited). While the original transaction involved a transfer of
operations by the Company to a former employee who had been responsible
for managing the operations, the transaction was handled on an arms length
basis. The Company did not provide any guarantee of the obligations
of the buyer and had no further involvement with the business after
the sale. Moreover, the outstanding principal balance of the note
receivable has been reduced by approximately eighty percent (80%)
since the sale (from an original principal balance of $1,807,350 to
$379,376 as of September 30, 1997), and payments on the note receivable
have been made on a timely fashion in all material respects.
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 to the one officer and $95,793 to employees of the Company that
are not officers or directors. 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 monthly
installments in the amount of $3,435 collected through payroll deductions.
These notes will mature on December 31, 1999, with balloon payments of $38,825
due from employees.
F-13
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
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 September 30, 1997, cumulative dividends in arrears totaled $275,964
(unaudited).
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 12,964 shares of common stock. At September
30, 1997, there were 138,182 shares of preferred stock outstanding.
In September 1997, the Company issued 1,220,749 shares in a private
placement at $6.00 per share or cash of $7,324,494 less offering costs
of $797,216.
NOTE 4 - INCOME TAXES
The Company has an unused net operating loss carryforward of approximately
$7,000,000 for income tax purposes, $1,200,000 expiring in 2009,
$1,800,000 in 2010 and the remainder expiring in 2011. This net
operating loss carryforward may result in future income tax benefits
of approximately $2,800,000; however, because realization is uncertain
at this time, a valuation reserve in the same amount has been established.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996 and 1995 are as follows:
F-14
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
-------------------------------------------------------
1996 1995
Deferred tax liabilities $ - $ -
-------- ----------
Deferred tax assets
Net operating loss carry 2,579,000 1,149,500
forwards
Legal settlement 233,300 175,000
Total deferred tax assets 2,812,300 1,324,500
Valuation allowance for (2,812,300) (1,324,500)
deferred tax assets
------------ ----------
$ - $ -
The valuation allowance for deferred tax assets was increased by $1,487,800
and $855,300 during 1996 and 1995, respectively.
NOTE 5 - REGULATORY REQUIREMENTS
PBS is subject to the Securities and Exchange Commission's Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital. At December 31, 1996, PBS had net capital and net capital
requirements of $233,288 and $100,000, respectively, and the Company's
net capital ratio (aggregate indebtedness to net capital) was .53 to 1. At
September 30, 1997, PBS had net capital and net capital requirements of
$1,130,694 and $100,000, respectively, and the Company's net capital
ratio was .07 to 1 (unaudited). According to Rule 15c3-1, PBS's net
capital ratio shall not exceed 15 to 1. On a consolidated basis, as a
result of the requirement, net assets of $120,000 are unavailable
for any purpose other than meeting PBS's net capital requirements at
December 31, 1996 and September 30, 1997.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
September December December
30, 1997 31, 31,
1996 1995
(unaudited)
- --------------------------------------------------------------------
8-1/2% note payable to
shareholder, due July 26, 2000 $ - $ - $1,200,000
interest payable monthly
beginning August 10, 1996,
principal and all accrued and
unpaid interest is due at
maturity, secured by all assets
of PMCI and its subsidiaries
(except PBS which security
interest is only to its
outstanding common stock owned
by PMCI).
F-15
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
- --------------------------------------------------------------------
11.5% note payable to 8,423 14,694 22,470
shareholder(s), unsecured, due
August 1, 1998, payable in
monthly installments of $832
including interest. In 1996 and
1995, principal of $7,776 and
$6,159 mature.
- --------------------------------------------------------------------
9% notes payable to employees - - 425,000
and unrelated individuals, due
December 29, 1996, principal and
interest payable on or before
maturity date, secured by a
second lien on Company assets.
- ----------------------------------
5% Note payable to a former
stockholder of ADAM consists of
$360,000 of which $160,000 is 360,000
current and $200,000 is long
term. The note requires annual
principal and interest payments
and matures February 9, 1999.
- --------------------------------------------------------------------
$ 368,423 $ 14,694 $1,647,470
The above $1,200,000 shareholder note payable is related to a
financing and stock purchase agreement which encompasses a series of
transactions, none of which are considered binding until certain
criteria are met. The shareholder acquired 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. Through July 9, 1996, this shareholder fulfilled its option and
loaned the Company an additional $1,800,000 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.
During March, 1995, through a private offering, PMCI issued
$300,000 of convertible promissory notes bearing 15% interest per
annum. These notes were repaid in July 1995. In addition, in November,
1996, the Company borrowed $250,000 from unrelated persons on a
short-term basis carrying interest at 12%. In December, 1996 these
amounts were repaid through the proceeds of the private offering (see Note 3).
F-16
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(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 agree 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.
Interest expense for the periods ended September 30, 1997 and 1996,
December 31, 1996 and 1995 was $26,017, $232,528, $331,008 and $102,011
respectively.
As of September 30, 1997, maturities of notes payable are as follows:
September 30, Amount
1998 $168,423
1999 160,000
2000 40,000
-----------
$ 368,423
F-17
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
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 would disgorge its
trading profits realized from principal trading together with
prejudgment interest in an amount estimated to be $465,000. In 1996,
the settlement was accepted by the Commission with the total amount
payable, including accrued interest approximating $620,000. These
amounts have been included in other liabilities in the accompanying
financial statements.
In January 1997, KP3, LLC, a limited liability company owned and
controlled by the Company's president and chief executive officer
(the "LLC") borrowed $1,750,000 from a bank with a due date of December
31, 1997. The purpose of the loan was to finance payment of
the deferred portion of the purchase price of 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 included in cash and cash equivalents
(representing the initial principal balance and an interest reserve)
in the accompanying balance sheet became restricted for this purpose.
The Company has also agreed to loan the LLC amounts sufficient to pay
interest on the loan so long as the amount of loans made and bank collateral
provided would not exceed $2,000,000. Effective March 31, 1997, the
Company loaned the LLC $31,689 specifically designated to pay the
interest on the bank loan. The borrower (the LLC) has agreed to
reimburse the Company for any amounts paid by the Company toward the
loan or for collateral applied to the loan, including interest at an
annual rate of 9%, and has granted the Company a security interest in
410,961 shares of the Company's common stock held by it.
The Company has leases for office space and equipment under
various operating and capital leases. Included in furniture and equipment
is $295,552 of equipment under capital leases at December 31, 1996
and accumulated depreciation relating to these leases of $30,184.
Future minimum lease payments under noncancelable leases as of
December 31, 1996 are as
follows:
Principal
Year Ending due
December 31, Operating Capital Capital
Lease
-----------------------------------------------------------
1997 $ $ $
375,824 123,992 103,119
-----------------------------------------------------------
1998 351,672 103,486 95,336
-----------------------------------------------------------
1999 298,658 22,178 21,366
-----------------------------------------------------------
2000 293,567 - -
-----------------------------------------------------------
2001
24,000 - -
-----------------------------------------------------------
$ 249,656 $
1,343,721 219,821
-----------------------------------------------------------
Less amount
representing interest 29,835
-----------------------------------------------------------
Present value of net
minimum lease $
payments 219,821
Total rent expense for facilities and equipment for the periods
ended September 30, 1997 and 1996, December 31, 1996 and 1995,
was $396,388, $362,626, $471,339 and $410,263, respectively.
F-18
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
NOTE 8 - STOCK OPTIONS AND WARRANTS
The Company has no formal stock option plan, however it has granted
options to officers, employees, shareholders and certain other
individuals and entities allowing them to purchase common stock of the
Company generally at the market value of the stock at date of grant. Options
are generally for a five-year term, however, in certain instances the term
is longer. In addition common stock warrants have been issued in
connection with certain private offerings of debt. At December 31,
1996, warrants to purchase common stock at various prices were outstanding
which expire as follows:
----------------------------------------------
Expiration Date Warrants Exercise
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
----------------------- -------------
The following table describes certain information related to the
Company's compensatory stock option activity for the year ending
December 31, 1996.
----------------------------------------------
Average Number of Weighted
Options Exercise
Price
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
Outstanding, 254,000 $ 5.68
December 31, 1995
----------------------------------------------
----------------------------------------------
Grants during year:
----------------------------------------------
----------------------------------------------
Exercise price = 338,125 5.60
market price
----------------------------------------------
----------------------------------------------
Exercise price > 50,000 6.24
market price
----------------------------------------------
----------------------------------------------
Exercised during (250) 5.52
year
----------------------------------------------
----------------------------------------------
Forfeited during (5,500) 4.52
year
----------------------------------------------
----------------------------------------------
Expired during year 11.16
(8,750)
----------------------------------------------
----------------------------------------------
Outstanding, 627,625 5.80
December 31, 1996
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
Exercisable, 350,125 5.80
December 31, 1996
----------------------------------------------
The weighted average grant date fair value of the options granted in 1996
was as follows:
----------------------------------
Exercise price equals $ 2.68
market price
----------------------------------
----------------------------------
Exercise price less than 4.12
market price
----------------------------------
The fair value of each option grant is estimated using the
Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 5.88% to 6.50%; dividend yield of 0%;
expected lives of five to six years; and volatility of 44.2%.
A summary of the Company's outstanding and exercisable stock
options as of December 31, 1996 is as follows:
---------------------------------------------------------
Range of Exercise Number of Weighted Weighted
Prices Options Average Average
Exercise Remaining
Price Contractual
Life
(months)
$4.00 - $5.52
---------------------------------------------------------
Outstanding 307,125 $4.56 31(a)
---------------------------------------------------------
Exercisable 182,125 4.68 39
---------------------------------------------------------
---------------------------------------------------------
$6.00 - $6.24
---------------------------------------------------------
Outstanding 244,375 6.20 63(b)
---------------------------------------------------------
Exercisable 141,875 6.20 63(c)
---------------------------------------------------------
---------------------------------------------------------
$8.52 - $10.00
---------------------------------------------------------
Outstanding 63,125 8.80 58
---------------------------------------------------------
Exercisable 13,125 10.00 6
---------------------------------------------------------
---------------------------------------------------------
$12.40
---------------------------------------------------------
---------------------------------------------------------
Outstanding 13,000 12.40 13
---------------------------------------------------------
---------------------------------------------------------
Exercisable 13,000 12.40 13
---------------------------------------------------------
(a) Excludes 50,000 options which expire 12 months after employee
termination.
(b) Excludes 200,000 options which expire 12-24 months after employee
termination.
(c) Excludes 120,000 options which expire 12-24 months after employee
termination.
On February 26, 1997, the Board of Directors granted options to purchase
a total of 17,500 shares of the Company's common stock to employees at
an exercise price of $10.00 per share and which expire in six years.
The options vest 20% on the first anniversary of each employees date
of hire with the balance vesting in equal successive quarterly installments
over the following four years, provided, however, each employee must
be employed by the Company at the time any vesting would occur. The Board
of Directors also granted options to purchase 12,500 shares of common
stock to Mr. Emmett Daly in connection with his appointment as a director
of the Company on February 27, 1997. The options vest at the rate of 20%
at each such time as the average of the bid and asked price of the common
stock equals $10.00, $14.00, $18.00, $22.00 and $26.00 respectively,
for 20 consecutive trading days. Mr. Daly's options are
exercisable at $10.00 per share and expire in five years.
The Board of Directors granted options to purchase 12,500 shares
of common stock to Mr. Richard C. Hyde in connection with his appointment
as a director of the Company on July 9, 1997. The options vest at the
rate of 20% at each such time as the average of the bid and asked price
of the common stock equals $7.872, $11.872, $15.872, $19.872, and
$23.872, respectively, for 20 consecutive trading days. Mr. Hyde's
options are exercisable at $7.872 per share and expire in five years.
<PAGE>
PMC INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(Continued)
The Board of Directors granted options to purchase 62,500 shares of
common stock to Mr. Scott MacKillop and a total of 41,250 shares of
common stock to a total of 6 other employees of ADAM in connection with
the Acquisition. The options vest as follows: 20% of each employee's
options vest on the first anniversary of the Company's Acquisition of ADAM
and the balance in equal successive quarterly installments over the
following four year period, provided, however, that the employee must
me employed or engaged by PMCI or one of its affiliates a s either an
employee or consultant on the date any vesting would occur. The exercise
price of options are $6.50 per common share and the options expire six years
from the date of grant unless employment or engagement is terminated
prior to that time, which case the options shall expire 90 days after
termination.
The Board also granted options to purchase 12,500 shares of common
stock to Mr. Scott MacKillop in connection with his appointment as a
director of the Company on October 27, 1997. The options vest at the rate
of 20% at each such time as the average of the bid and asked price of the
common stock equals $6.50, $10.50, $14.50, $18.50, $22.50, respectively,
for 20 consecutive trading days. Mr. MacKillop's options are
exercisable at $6.50 per share and expire in five years.
In May 1997, a total of 6,250 stock options were exercised to purchase
6,250 shares of common stock at the exercise price of $4.00 per share on
5,000 options and $5.50 per share
on 1,250 options.
As previously described, the Company applies APB 25 and related
Interpretations in accounting for its stock options. Accordingly, no
compensation cost has been recognized. Had compensation cost for the
Company's options been determined based on the fair value at the grant
dates for awards consistent with the method of SFAS 123, the Company's
net loss and loss per share would have increased to the pro-forma amounts
indicated below:
--------------------------------------------------------
September December 31,
30,
-----------
1997 1996 1995
--------------------------------------------------------
--------------------------------------------------------
Net loss $(2,300,613) $ $
(5,111,682)(2,518,266)
--------------------------------------------------------
--------------------------------------------------------
Net loss per share $(.64) $ $
(3.63) (1.90)
--------------------------------------------------------
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 of service to defer up to 15% of their salary.
The Company intends to match employee contributions by an amount
determined annually by the board of directors. Only contributions
up to the first 6% of an employee's salary will be considered for the match.
On February 15, 1995 PMCI's Board of Directors approved the issuance
of 3,803 shares of PMCI common stock (valued at the market price at
the date of grant of $4.00 per share) to match participant's contributions
for the year ended December 31, 1994.
NOTE 10 - RISKS AND UNCERTAINTIES
PMC's revenues are primarily derived from a percentage of the assets
under the management of its distribution channels. Assets under
management are impacted by both the extent to which PMC adds or loses
clients and the appreciation or depreciation of the U.S. and international
equity and fixed income markets. Assets of customers of an unrelated
organization constitute approximately 16% of the total customer assets
in PMC's managed account programs as of December 31, 1996. A downturn in
general economic conditions could cause investors to cease using the
products, including its proprietary software products, and services of
the Company or its distribution channels.
The Company has deposits in banks in excess of the FDIC insured amount
of $100,000. The amounts in excess of the $100,000 are subject to loss
should the banks cease business.
The Company has been notified of a threatened litigation from a former
employee alleging damages of $645,000. 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 approximate 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.
NOTE 12 - PRO FORMA INFORMATION FROM ACQUISITION OF ADAM INVESTMENT
SERVICES, INC. (UNAUDITED)
On September 24, 1997, the Company acquired all of the issued and outstanding
voting stock of ADAM. Pro forma revenue, income from continuing
operations, net loss, and loss per share for the three months ended
September 30, 1996 and 1997, as though the acquisition occurred at the
beginning of such periods are as follows:
- ------------------------ ------- -------------------------------
1997 1996
- ------------------------ ------- -------------------------------
- ------------------------ ------- -------------------------------
Revenue $6,069,084 $6,403,385
- ------------------------ ------- -------------------------------
- ------------------------ ------- -------------------------------
Income from continuing (1,052,238) (1,022,751)
operations
- ------------------------ ------- -------------------------------
- ------------------------ ------- -------------------------------
Net income (1,052,238) (1,022,751)
- ------------------------ ------- -------------------------------
- ------------------------ ------- -------------------------------
Income per share (0.23) (0.44)
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
To the Board of Directors of
ADAM Investment Services, Inc. and Subsidiary
We have audited the consolidated balance sheet of ADAM Investment
Services, Inc. and Subsidiary as of December 31, 1996 and the
related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated 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 audit provides 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 ADAM Investment Services, Inc. and Subsidiary as of
December 31, 1996, and the results of their operations and their
cash flows for the year then ended in conformity with generally
accepted accounting principles.
Faucett, Taylor & Associates, P.C.
March 20, 1997
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
To the Board of Directors of
ADAM Investment Services, Inc. and Subsidiary
We have audited the consolidated balance sheet of ADAM Investment
Services, Inc. and Subsidiary as of December 31, 1995 and the
related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated 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 audit provides 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 ADAM Investment Services, Inc. and Subsidiary as of
December 31, 1995 and the results of their operations and their
cash flows for the year then ended in conformity with generally
accepted accounting principles.
Faucett, Taylor & Associates, P.C.
March 15, 1996
<PAGE>
ADAM INVESTMENT SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 & DECEMBER 31, 1995
ASSETS
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 733,359 $ 581,025
Marketable securities (notes 2 & 6) 46,612 28,525
Accounts receivable 121,359 165,894
Receivable - related parties
(note 3) 303,119 201,009
Prepaid expenses (note 2) 864,673 932,884
Deferred tax asset (note 4) 111,000 126,000
-------------- -------------
Total current assets 2,180,122 2,035,337
FURNITURE & EQUIPMENT(1)(note 2) 204,390 234,958
OTHER ASSETS
Goodwill(2) 712,289 585,659
-------------- -------------
Total assets $ 3,096,801 $ 2,855,954
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
CURRENT LIABILITIES
Accounts payable $ 571,562 $ 228,769
Accrued interest 32,633 22,000
Deferred revenue (note 2) 1,068,567 1,188,878
Income taxes payable (note 4) 53,320 71,437
Notes payable, current
portion 210,884 280,153
-------------- -------------
Total current liabilities 1,936,966 1,791,237
DEFERRED TAX LIABILITY (note 4) 17,142 14,142
NOTES PAYABLE net of current
portion 360,000 466,768
-------------- -------------
Total liabilities 2,314,108 2,272,147
MINORITY INTEREST -0- 24,935
STOCKHOLDERS' EQUITY 782,693 558,872
-------------- -------------
Total liabilities &
stockholders' equity $ 3,096,801 $ 2,855,954
============== =============
(1) net of accumulated depreciation of $485,867 in fiscal year
1996; $408,647 in fiscal year 1995.
(2) net of accumulated amortization of $87,334 in fiscal year
1996; $34,451 in fiscal year 1995.
ADAM INVESTMENT SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED
DECEMBER 31, 1996 & DECEMBER 31, 1995
1996 1995
...................... ......................
ADVISORY SERVICE FEES $15,389,734 $15,015,933
COMMISSIONS EXPENSE 11,005,780 10,784,083
-------- --------
ADVISORY SERVICE NET PROFIT 4,383,954 4,231,850
OTHER INCOME:
Other service fees 199,294 202,081
Investment income 23,029 15,244
-------- --------
4,606,277 4,449,175
OPERATING EXPENSES
Salaries, payroll
taxes & benefits $2,252,668 $2,298,586
Professional fees 493,574 391,186
Office expenses 335,611 331,365
Rent 339,928 282,965
Travel, entertainment
& other 234,083 138,402
Marketing & publication 75,222 121,462
Depreciation &
amortization 134,793 110,590
Equipment rental 60,067 59,721
Insurance 46,626 42,802
Other taxes 31,545 32,016
Maintenance & repairs 30,825 29,668
Contract labor 17,918 27,772
Other misc. expenses 18,964 26,569
Data processing 9,819 12,390
Net realized losses
on investments 0 7,513
Allocation to/from
related parties (note 3) (9,527) 4,072,116 (15,417) 3,897,590
-------- -------- -------- --------
Net operating income 534,161 551,585
INTEREST EXPENSE 53,957 57,599
-------- --------
Net income before
income taxes &
minority interest 480,204 493,986
INCOME TAXES (note 4)
Current tax expense 208,752 169,608
Deferred tax expense 18,000 226,752 15,000 184,608
-------- -------- -------- --------
Net income before
minority income 253,452 309,378
MINORITY INTEREST 1,820 989
======== ========
Net income $251,632 $310,367
======== ========
ADAM INVESTMENT SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 1996 & DECEMBER 31, 1995
YEAR ENDED DECEMBER 31, 1996
------- --------- ------- -------- --------- --------
ADDITIONAL UNREALIZED
(1)COMMON PAID IN RETAINED TREASURY HOLDING
STOCK CAPITAL EARNINGS STOCK GAIN(LOSS) TOTAL
------- --------- ------- -------- --------- --------
BALANCE
December
31, 1995 $1,000 $1,341,783 $(358,911) $(425,806) $806 $ 558,872
NET INCOME 251,632 251,632
CHANGE IN
UNREALIZED
GAIN(LOSS) 269 269
(2)DIVIDENDS (28,080) (28,080)
------- --------- ------- -------- --------- --------
BALANCE
December
31, 1996 $1,000 $1,341,783 $(135,359) $(425,806) $1,075 $782,693
======= ========== ========= ========= ======== ==========
YEAR ENDED DECEMBER 31, 1995
------- --------- ------- -------- --------- --------
ADDITIONAL UNREALIZED
(2)COMMON PAID IN RETAINED TREASURY HOLDING
STOCK CAPITAL EARNINGS STOCK GAIN(LOSS) TOTAL
------- --------- ------- -------- --------- --------
BALANCE
December
31, 1994 $1,000 $1,315,377 $(641,198) $ -0- $(9,772) $666,007
PURCHASE
OF
TREASURY
STOCK (600,000) (600,000)
SALE OF
TREASURY
STOCK 25,806 174,194 200,000
NET INCOME 310,367 310,367
CHANGE IN
UNREALIZED
GAIN(LOSS) 10,578 10,578
(3)DIVIDENDS (28,080) (28,080)
------- --------- ------- -------- --------- --------
BALANCE
December
31, 1995 $1,000 $1,341,783 $(358,911) $(425,806) $806 $558,872
======= ========== ========== ========== ======== ==========
(1) Common stock authorized and issued is 1,000 shares with 783
shares outstanding in 1996 with $1 par value.
(2) Common stock authorized and outstanding is 1,000 shares in
1995 with $1 par value.
(3) Dividends paid at the rate of $28 per share for common
stock.
ADAM INVESTMENT SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1996 & DECEMBER 31, 1995
1996 1995
Cash flows from operating activities
Net income $ 251,632 $ 310,367
--------- ---------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized loss on investments -0- 7,513
Depreciation & amortization 134,793 110,590
Deferred taxes 18,000 15,000
Minority interest 1,820 (989)
Change in receivable - related parties (102,110) (114,591)
Change in accrued expenses 10,633 22,000
Change in accounts receivable 44,535 206,071
Change in prepaid expense 68,211 105,974
Change in accounts payable 342,793 (74,823)
Change in income taxes payable (18,117) (26,328)
Change in deferred revenue (120,311) (187,562)
--------- ---------
Total adjustments 380,247 62,855
--------- ---------
Net cash provided by operating
activities 631,879 373,222
--------- ---------
Cash flows from investing activities
Purchase of furniture & equipment (51,342) (92,088)
Payment for purchase of subsidiary (6,268) (419,758)
Proceeds from sale of marketable
securities -0- 498,685
Purchase of marketable securities (17,818) (5,882)
--------- ---------
Net cash used by investing activities (75,428) (19,043)
--------- ---------
Cash flows from financing activities
Proceeds from notes payable -0- 427,074
Repayment of notes payable (376,037) (160,153)
Purchase of treasury stock -0- (120,000)
Dividends paid (28,080) (28,080)
--------- ---------
Net cash provided by financing
activities (404,117) 118,841
--------- ---------
Increase in cash and cash equivalents 152,334 473,020
Cash & cash equivalents, beginning of
year 581,025 108,005
--------- ---------
Cash & cash equivalents, end of year $ 733,359 $ 581,025
========= =========
ADAM INVESTMENT SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1996 & DECEMBER 31, 1995
Supplemental disclosure of cash flow information:
Cash paid during the year for:
1996 1995
Interest $ 46,901 $35,599
Income taxes $226,869 $98,622
Supplemental disclosure of noncash investing and financing
activities:
In fiscal year 1996, the Company purchased the remaining 25%
of the capital stock of Optima Funds Management, Inc., with
a note payable of $200,000.
In fiscal year 1996, the Company also recorded a net
unrealized gain on investments in the stockholders' equity
account of $269.
In fiscal year 1995, the Company purchased treasury stock of
$600,000 for cash of $120,000 and a note payable of
$480,000. The Company exchanged shares of treasury stock at
a gain of $25,806 which was included in additional paid in
capital.
In fiscal year 1995, the Company purchased 75% of the
capital stock of Optima Funds Management, Inc., as follows:
(FY 1995)
Fair value of net assets acquired $ 77,770
Goodwill 620,110
---------
Total purchase price $697,880
=========
Consideration exchanged:
(FY 1995)
Cash $464,600
Payable 33,280
Treasury Stock 200,000
--------
Total consideration exchanged $697,880
========
In fiscal year 1995, the Company also recorded a net
unrealized gain on investments in the stockholders' equity
account of $10,578.
Disclosure of accounting policy:
For purposes of the statement of cash flows, the Company
considers all cash on deposit with a maturity of three months or
less to be cash equivalents.
ADAM INVESTMENT SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1996 & DECEMBER 31, 1995
1. ORGANIZATION
ADAM Investment Services, Inc., ("the Company") was incorporated
under the laws of the State of Delaware on April 3, 1980, and is
registered with the Securities and Exchange Commission as an
investment adviser under the Investment Advisers Act of 1940.
The Company offers investment advisory services to clients
throughout the United States. One of the Company's primary
investment services is a managed account program used by
investment advisors who market the service to their investment
clients. The Company marketed this service to investment
advisors in prior years through Advisory Consulting Group, Inc.
(ACG). The Company took over this marketing during 1996 and
plans on continuing to market its own products. The Company
earns fees for the investment management services provided to
clients. Investment advisers using the service with their
clients pay the Company annual fees for training, marketing
materials and support.
The Company acquired 75% of Optima Funds Management, Inc. in
March 1995 and acquired the remaining 25% in February 1996.
Optima Funds Management, Inc., registered with the Securities and
Exchange Commission on April 27, 1987 as an investment adviser.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Consolidation - The accompanying financial statements include the
accounts of the Company and it holly owned subsidiary, Optima
Funds Management, Inc. Intercompany transactions and balances
have been eliminated in consolidation.
Revenue and commission recognition - The Company earns fees from
clients for investment services provided. The Company typically
bills its fees in advance on a quarterly basis. Billed but
unearned fees are reflected in the accompanying consolidated
balance sheet as deferred revenue. Investment service fees are
recognized as income as the services are provided.
The Company pays a commission to subscribers for investment
clients who contract to use The ADAM Network. Commissions are
based on a percentage of the fee income earned by the Company and
commissions are typically paid in advance on a quarterly basis.
Commissions paid in advance are included in prepaid expenses in
the accompanying consolidated balance sheet and amounted to
$784,635 at December 31, 1996 and $853,406 at December 31,
1995. Prepaid commissions are recognized as an expense as the
related fee income is recognized.
Marketable securities - The Company has adopted FAS Statement 115
on accounting for certain investments in debt and equity
securities. Under the FAS Statement 115, the Company's
marketable securities are classified as available-for-sale,
trading, or held to maturity securities are classified as
available-for-sale, trading, or held to maturity securities
according to management's intentions. At both December 31, 1996
and 1995, all of the Company's marketable securities were
available-for-sale (see Note 9).
Furniture and equipment - Furniture and equipment are carried at
cost. Depreciation is computed on the straight-line method over
the estimated useful lives of the assets, which is five years.
Furniture and equipment at the balance sheet date consists of the
following:
1996 1995
Equipment $ $
432,781 386,634
Furniture 217,685 217,180
Leasehold Improvements 39,791 39,791
--------- ---------
690,257 643,605
Less accumulated
depreciation (485,867) (408,647)
========= =========
$ 204,390 $ 234,958
========= =========
Credit Risk - There are funds in excess of the federally insured
amounts for the Company of $1,106,857 in fiscal year 1996 and
$479,997 in fiscal year 1995. However, due to the rating and
stability of the financial institution at which these funds are
held, management believes credit risk is minimal.
3. RELATED PARTY TRANSACTIONS
The Company is affiliated with LCG Holdings, Inc. ("LCG") through
partial common ownership and management. LCG provides certain
administrative and other services for the Company. Management
has estimated LCG's costs for these services at $503,379 in
fiscal year 1996 and $484,583 in fiscal year 1995 which consist
of salaries and benefits, rent, and other administrative costs in
the approximate amounts of $320,389; $49,613; and $133,377
respectively in fiscal year 1996 and of $328,000; $36,000; and
$120,000 respectively in fiscal year 1995.
The Company provides data processing services for LCG.
Management has estimated the cost of such services to be $512,906
in fiscal year 1996 and $500,000 in fiscal year 1995 which
consists of salaries and benefits, rent and other administrative
costs in the approximate amounts of $286,877; $119,977; and
$106,032, respectively for fiscal year 1996 and $297,000;
$161,000; and $42,000, respectively for fiscal year 1995. These
expenses are included in the Company's accompanying consolidated
statement of income.
The Company and LCG have charged each other for the estimated
costs of providing these services to each other. These related
party charges are presented in the accompanying consolidated
statement of income on a net basis as allocations to/from related
parties. The gross and net amount of these charges are:
1996 1995
Company charges to LCG for data
processing services $ (512,906) $ (500,000)
LCG charges to the Company for
management and
administrative services 503,379 484,583
--------- ---------
Net related party cost allocation $ (9,527) $ (15,417)
========== ==========
At December 31, 1996 the Company had a receivable from LCG in the
amount of $303,119 which was repaid January 16, 1997. At
December 31, 1995 the Company had a receivable from LCG in the
amount of $201,009.
4. DEFERRED TAXES
Deferred income taxes arise from temporary differences resulting
from income and expense items reported for financial accounting
and tax purposes in different periods. Deferred taxes under FAS
109 are classified as current or noncurrent depending on the
classification of the assets and liabilities to which they
relate. Deferred taxes arising from timing differences that are
not related to an asset or liability are classified as current or
noncurrent depending on the periods in which the timing
differences are expected to reverse.
Temporary differences giving rise to the deferred tax asset or
liability result from recognition of deferred revenues, prepaid
expenses and depreciation expense, as well as, the tax benefit of
net operating loss carryforwards.
The Company has available at December 31, 1996 and 1995 an unused
operating loss carryforward that expires in 2005 which may be
applied against future taxable income. Due to the change in
ownership from the purchase of the Company in 1992, the operating
losses available for use are limited by tax regulations to $3,115
per year, which was reported in fiscal year 1996 as $28,035
through 2005 and in fiscal year 1995 as a total of $31,150
through 2005.
The Company's effective income tax rate is higher than what would
be expected if the federal statutory rate were applied to income
from continuing operations primarily because of income recognized
and expenses deductible for tax purposes that are not recognized
for financial reporting purposes.
5. DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan that covers all
full time employees 21 years of age and older who have completed
one year of service. Contributions to the plan by employees are
limited to 15% of their salary. The Company matches the employee
contributions 50% up to a maximum amount which is the lesser of
6% of the employee's salary or the IRS limitation. The Company
contribution is at the discretion of the Board of Directors.
Contributions paid to the plan by the Company were $35,106 in
1996 and $18,984 in 1995.
The vesting schedule is as follows:
Years of Service Percentage
Vested
----------------- -----------------
1 20
2 40
3 60
4 80
5 100
6. MARKETABLE SECURITIES
Following is a summary of investment securities classified as
available-for-sale at December 31, 1996 and December 31, 1995:
Gross Unrealized
Fair Value Amortized Cost Holding Gain
----------------- ----------------- -----------------
1996 1995 1996 1995 1996 1995
........ ........ ....... ........ ........ .......
Mutual Funds $29,078 $11,810 $28,003 $11,004 $ 1,075 $ 806
Money Funds 17,534 16,715 17,534 16,715 -0- -0-
-------- -------- ------- -------- -------- -------
$46,612 $28,525 $45,537 $27,719 $ 1,075 $ 806
======== ======== ======= ======== ======== =======
Realized gains and losses are determined on the average cost
method. During 1996 and 1995 sales proceeds and gross realized
gains and losses on securities classified as available for sale
were:
1996 1995
Sales proceeds NA $ 498,685
========== =========
Gross realized
losses $ 115 $ 8,722
========== =========
Gross realized
gains $ 302 $ 1,209
========== =========
Stockholders' equity included an unrealized holding gain on
available-for-sale securities of $1,075 for 1996 and $806 for
1995.
7. SUBSEQUENT EVENT
On February 1, 1996, the Company purchased the minority interest
in Optima Funds Management, Inc., with a $200,000 note payable.
8. MANAGEMENT ESTIMATES
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.
9. NOTES PAYABLE
The Company had nine notes payable in 1996 and eight notes
payable in 1995 to stockholders of the Company with an aggregate
amount due of $210,884 in fiscal year 1996 of which $90,884 was
current in fiscal year 1996 and an aggregate amount due of
$266,921 in fiscal year 1995. The notes require quarterly
principal and interest payments and bear interest at the rate of
11% per annum and matured April 1, 1997.
The Company has a note payable to a former stockholder of the
Company, reported as $360,000 in fiscal year 1996 of which
$120,000 is current and $480,000 in fiscal year 1995. The note
requires annual principal and interest payments and bears
interest at the rate of 5% per annum and matures February 9, 1999.
1996 1995
Notes payable $ 570,884 $ 746,921
Less: Current
portion (210,844) (280,153)
---------- ----------
Long term $ 360,000 $ 466,768
========== ==========
Principal maturities of long term debt for the next five years
and in aggregate are as follows:
as reported in Consolidated Financial Statements for Year Ended
December 31, 1996
Years Ending December 31 Amount
1997 $210,884
1998 160,000
1999 160,000
2000 40,000
2001 -0-
---------------
$ 570,884
===============
as reported in Consolidated Financial Statements for Year Ended
December 31,1995
Years Ending December 31 Amount
1996 $ 280,153
1997 226,768
1998 120,000
1999 120,000
2000 -0-
---------------
$ 746,921
===============
<PAGE>
PMC INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information
is based upon the historical financial statement of PMC
International, Inc. and the historical financial statement of
ADAM Investment Services, Inc. and Subsidiary.
The unaudited pro forma consolidated balance sheet presents the
combined financial position of PMC International, Inc. and ADAM
Investment Services, Inc. as of June 30, 1997, using the purchase
method of accounting. Accordingly, the combined identifiable
assets and liabilities of the Companies have been adjusted to
their estimated fair values based upon a preliminary purchase
price of $5,000,000.
The unaudited pro forma consolidated statement of income for the year
ended December 31, 1996, assumes the business combination occurred on
January 1, 1996, and includes the historical operations of PMC
International, Inc., for the year ended December 31, 1996, and the
historical operations of ADAM Investment Services, Inc. for the fiscal
year ended December 31, 1996, adjusted for the pro forma effects of the
business combination.
The unaudited pro forma consolidated statement of income for the six months
ended June 30, 1997, assumes the business combination occurred on
January 1, 1997, and includes the historical operations of PMC
International, Inc., for the six months ended June 30, 1997, and the
historical operation of ADAM Investment Services, Inc. for the six months
ended June 30, 1997, adjusted for the pro forma effects of the
business combination.
The following unaudited consolidated pro forma financial information
has been prepared based upon assumptions deemed appropriate by
PMC International, Inc. and are not necessarily indicative of the
consolidated financial position or results of operation if the
business combination had been consummated on the assumed dates
and are not necessarily indicative of the actual results of the
future operations of the combined companies.
PMC INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED
DECEMBER 31, 1996
Pro PMCI/ADAM
PMCI ADAM Forma combined
Adjustment
REVENUE:
Investment
management fees $9,634,992 15,389,734 $ 25,024,726
Other income 451,889 222,323 674,212
--------- --------- --------- ---------
Total revenue 10,086,881 15,612,057 0 25,698,938
EXPENSES:
Investment mgr.
and other fees 5,580,846 11,005,780 16,586,626
Salaries and
benefits 3,487,811 2,286,180 5,773,991
Clearing charges
and user fees 813,239 9,819 823,058
Advertising and
promotion 830,140 309,305 1,139,445
General and
administrative 845,767 124,460 970,227
Software
development costs 132,392 0 132,392
Occupancy and
equipment costs 1,149,084 830,860 1,979,944
Professional fees 763,086 511,492 1,274,578
Settlement expenses 155,000 0 155,000
Interest 331,008 53,957 384,965
Goodwill
amortization - ADAM 537,620(1) 537,620
--------- --------- --------- ---------
Total expenses 14,088,373 15,131,853 537,620 29,757,846
Net income before
income taxes &
minority interest $(4,001,492) $ 480,204 $(537,620) $(4,058,908)
INCOME TAXES:
Current tax expense 0 208,752 208,752
Deferred tax
expense 0 18,000 18,000
--------- --------- --------- ---------
Net income
before minority
interest (4,001,492) 253,452 (537,620) (4,285,660)
MINORITY INTEREST: 0 1,820 1,820
--------- --------- --------- ---------
Net income (loss) $(4,001,492) $ 251,632 $ (537,620) $(4,287,480)
========= ========= ========= =========
Net income (loss)
per common share $ (0.71) $ 322.61 $ (0.40)
========= ======== =========
WEIGHTED AVERAGE OF
SHARES OUTSTANDING 5,702,036 780 10,804,880
========= ========= =========
(1) The adjustment of $537,620 reflects twelve months of
amortization cost of the ADAM goodwill ($5,376,202 amortized over
120 months.)
PMC INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
PMCI ADAM Pro PMCI/ADAM
Forma combined
Adjustment
Cash & cash equivalents $3,109,724 $ 79,338 $7,324,494 (1) $ 4,824,217
(564,339)(2)
(5,125,000)(3)
Receivables:
Investment management
fees 970,554 161,421 1,131,975
Other receivables 140,494 111,000 251,494
--------- --------- --------- ---------
Total 4,220,772 351,759 1,635,155 6,207,686
Furniture & equipment
(net) 1,252,174 165,161 1,417,335
Software development
(net) 493,872 0 493,872
Prepaid expenses &
other assets 713,120 747,447 1,460,567
Long term note
receivables 564,946 0 564,946
Goodwill (net) 0 685,240 5,125,000 (3) 5,376,202
(434,038)(3)
--------- --------- --------- ---------
$7,244,884 $1,949,607 $6,326,117 $15,520,608
Total assets ========= ========= ========= =========
LIABILITIES
Account payable 754,693 294,023 $ 0 1,048,716
Accrued expenses 511,481 10,500 0 521,981
Other liabilities 106,193 19,294 0 125,487
Deferred revenue 551,489 831,752 0 1,383,241
Notes payable 10,619 40,000 0 50,619
Obligations under
capital lease 369,682 0 0 369,682
--------- --------- --------- ---------
Total current
liabilities 2,304,157 1,195,569 0 3,499,726
Note payable - long
term 0 320,000 0 320,000
--------- --------- --------- ---------
Total liabilities $2,304,157 $1,515,569 $0 $3,819,726
SHAREHOLDERS' EQUITY
Preferred stock $345,455 $ 0 $ 0 $ 345,455
Common stock 366,664 1,000 (1,000)(3) 415,494
48,830 (1)
Treasury stock (ADAM) 0 (425,806) 425,806 (3) 0
Additional paid in
capital 16,208,069 1,341,784 (1,341,784)(3) 22,919,394
7,275,664 (1)
(564,339)(2)
Accumulated deficit (11,979,461) (482,940) 482,940 (3) (11,979,461)
--------- --------- --------- ---------
TOTAL SHAREHOLDERS'
EQUITY 4,940,727 434,038 6,326,117 11,700,882
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 7,244,884 $1,949,607 $ 6,326,117 $15,520,608
========= ========= ========= =========
(1) The adjustment of $7,324,494 reflects the proceeds of the
PMC International common stock offering (4,882,996 shares, .01
par value at $1.50/share).
(2) The adjustment of $564,339 reflects corporate finance fees
paid to Keefe, Bruyette & Woods, Inc., related to the PMC
International common stock offering.
(3) The adjustment reflects the ADAM acquisition price of
$5,000,000; costs incurred related to the ADAM acquisition of
$125,000; and the inclusion of ADAM's equity at 6/30/97 of $434,038.
PMC INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
Pro PMCI/ADAM
PMCI ADAM Forma combined
Adjustments
REVENUE:
Investment
management fees $5,618,982 $6,433,532 12,052,514
Other income 232,224 83,305 315,529
-------- -------- -------- ---------
Total revenue 5,851,206 6,516,837 0 12,368,043
EXPENSES:
Investment mgr.
and other fees 2,734,674 4,641,176 7,375,850
Salaries and
benefits 2,138,957 1,292,960 3,431,917
Clearing charges
and user fees 277,655 0 277,655
Advertising and
promotion 416,730 117,552 534,282
General and
administrative 585,049 189,522 774,571
Software
development costs 85,683 0 85,683
Occupancy and
equipment costs 607,754 346,424 954,178
Professional fees 300,708 235,978 536,686
Interest 16,121 14,830 30,951
Goodwill
Amortization - Optima 0 27,049 (27,049) 0
Goodwill
Amortization - ADAM 0 0 268,810(1) 268,810
-------- -------- --------- ---------
Total expenses 7,163,331 6,865,491 241,761 14,270,583
NET income (loss)
before income taxes (1,312,125) (348,654) (241,761) (1,902,540)
INCOME TAXES 0 0 0 0
-------- -------- -------- ---------
Net income (loss) (1,312,125) (348,654) (241,761) (1,902,540)
======== ======== ======== =========
Net loss per common
share $(0.09) $(451.04) $ (0.10)
======= ======== =======
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANCING 14,523,220 773 19,406,216
======== ======== =========
(1) The adjustment of $268,810 reflects the six months of
amortization cost of the ADAM goodwill ($5,376,202 amortized
over 120 months).
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article V of the Company's 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 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.
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, except for
the Commission registration fee, are estimated:
Securities and Exchange Commission
registration fee.............................. $2,989.06
Legal fees and expenses....................... 13,000.00
Accounting fees and expenses.................. 3,000.00
Total...................................$18,989.06
All of the above expenses will be borne by the Company.
Item 26. Recent Sales of Unregistered Securities
February 1995 Private Placement
In February 1995, the Company sold debt securities in an
aggregate principal amount of $300,000. Each dollar loaned
carried with it a warrant to purchase one share of Common Stock
at an exercise price of $4.00 per share. Purchasers received
registration rights with respect to shares of Common Stock issued
upon exercise of the warrants. The purchasers were primarily
employees, business associates and affiliates of the Company.
Bedford Loans
In July 1995, the Company entered into a transaction with
Bedford pursuant to which Bedford loaned $1.2 million to the
Company and received an option to loan up to an additional $1.8
million to the Company for a specified period of time and
pursuant to certain call provisions. Between July 1995 and July
1996, the Company obtained the full $3.0 million financing from
Bedford. 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.
December 1995 and June 1996 Private Placements
In December 1995 and January 1996, the Company issued a
total of 482.5 units through a private placement, with each unit
consisting of a convertible promissory note with a principal
amount of $1,000 and a warrant to purchase 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 placement under substantially the same terms. The
purchasers of these units were primarily employees, business
associates and affiliates of the Company. Each purchaser
received registration rights with respect to the shares of Common
Stock underlying the warrants.
November 1996 Bridge Loan
In November 1996, the Company borrowed $250,000 to fund its
working capital requirements pending closing of a private
placement of Common Stock in December 1996. Fifty percent of the
loan was provided by Keefe, Bruyette & Woods, Inc., the Placement
Agent in the December 1996 private placement, and the balance
equally by certain members of management of the Company, Bedford,
and certain affiliates of Bedford. The lenders received
five-year warrants to purchase an aggregate of 6,250 shares of
the 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.
December 1996 Private Placement
On December 24, 1996 the Company completed a private
placement of 1,294,250 shares of Common Stock at a price of $8.50
per share. The purchasers of the Shares were all accredited
investors.
December 1996 Restructuring
On December 24, 1996, the Company completed a restructuring
of its debt. The restructuring involved the repayment of
interest owing under the notes issued in connection with the
December 1996/January 1996 and May/June 1996 private placements
and the Bedford loans. In connection with the restructuring,
Bedford exercised warrants to purchase a total of 255,937 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.
ADAM Private Placement
On September 24, 1997, the Company, in connection with the
acquisition of ADAM Invesement Services, Inc., completed a
private placement of 1,220,749 shares of Common Stock at a price
of $6.00 per share. The purchasers of such shares of Common
Stock were all 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.
Item 27. Exhibits
(a) Exhibits
3.1 Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (2)
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
5.1 Opinion of Holme Roberts & Owen LLP*
10.1 Employment Agreement between the Company and
Kenneth S. Phillips dated as of July 26, 1995(2)
10.2 Amended and Restated Employment Agreement between
the Company and David L. Andrus dated as of
December 17, 1996(2)
10.3 Form of Subscription Agreement between the Company
and each of the lenders in the November 1996
bridge financing(2)
10.4 Form of warrant issued to each of the lenders in
the November 1996 bridge financing.(2)
10.5 Form of Registration Rights Agreement between the
Company, each of the lenders in the November 1996
bridge financing, each of the investors in the
December 1996 private placement, and the placement
agent in the December 1996 private placement.(2)
10.6 Form of Subscription Agreement between the Company
and each of the investors in the December 1996
private placement. (2)
10.7 Warrant dated December 24, 1996 issued toKeefe,
Bruyette & Woods, Inc.(2)
10.8 Form of warrant issued to investors in connection
with the December 1996 restructuring
10.9 Restructuring Agreement dated as of December 24,
1996 among the Company, Bedford Capital Financial
Corporation ("Bedford"),Portfolio Management
Consultants, Inc.("PMC"), Portfolio Brokerage
Services, Inc.("PBS") and Portfolio Technology
Services ("PTS").(2)
10.10 Amended and Restated Registration Rights Agreement
dated as of December 24, 1996 among the Company
and Bedford.(2)
10.11 Shareholders Agreement dated as of December 24,
1996 among the Company, Bedford, Kenneth S.
Phillips, David L. Andrus and Phillips & Andrus
LLC.(2)
10.12 Form of Warrant dated December 24, 1996 issued to
Bedford and certain of its associates.(2)
10.13 Advisory Agreement effective as of July 26, 1995,
between Nevcorp Inc. and the Company(2)
10.14 Termination of Nevcorp Consulting Agreement (2)
10.15 PMC International, Inc. Equity Incentive Plan
10.16 Reimbursement and Pledge Agreement dated January
8, 1997 among the Company, KP3, LLC, and Kenneth
S. Phillips (2)
10.17 Term Loan Agreement dated as of January 8, 1997
among the Company, KP3, LLC and Norwest Bank
Colorado N.A. (2)
10.18 Investment Agreement dated as of July 26, 1995
among the Company, PMC, PBS, PTS, and Bedford (2)
10.19 Stock 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)
10.20 Non-Compete Agreement between ADAM Investment
Services, Inc., and Michael T. Wilkinson(4)
10.21 Employment Agreement between ADAM Investment
Services, Inc., and Scott A. MacKillop(4)
10.22 Form of Subscription Agreement between the Company
and each of the purchasers in the ADAM Private
Placement
21.1 List of Subsidiaries
23.1 Consent of Spicer, Jeffries & Co., Certified
Public Accountants
23.2 Consent of Faucett, Taylor & Associates, P.C.
23.3 Consent of Holme Roberts & Owen LLP is included in
Exhibit 5.1
24.1 Power of Attorney*
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 33-37800), dated
November 15, 1990.
(2) Incorporated by reference from the Company's Registration
Statement on Form SB-2 (File No. 333-21335), dated February
7, 1997.
(3) Incorporated by reference from Amendment Number 2 to the
Company's Registration Statement on Form SB-2 (File No.
333-21335), dated June 23, 1997.
(4) Incorporated by reference from the Company's Current Report
on Form 8-K (Commission File No. 0-14937), dated October 9,
1997.
* Previously filed
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 governedby a final adjudication of
such issue.
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 6th day of
February, 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 February 6, 1998
Executive
Kenneth S. Phillips Officer and
Director
\s\ Scott A. MacKillop Executive Vice February 6, 1998
President and
Scott A. MacKillop Director
\s\ Stephen M. Ash Vice President February 6, 1998
Finance and
Stephen Ash Operations
(principal accounting
and financial officer)
* Chairman of the Board February 6, 1998
and Director
J.W. Nevil Thomas
* Director February 6, 1998
D. Porter Bibb
* Director February 6, 1998
Emmett J. Daly
* Director February 6, 1998
Richard Hyde
*By: \s\Kenneth S. Phillips
Kenneth S. Phillips,
attorney-in-fact
<PAGE>
EXHIBIT INDEX
- --------------------------------------------------------------------
Exhibit Description
Number
- --------------------------------------------------------------------
3.1 Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (2)
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
10.1 Employment Agreement between the Company and Kenneth S.
Phillips dated as of July 26, 1995(2)
10.2 Amended and Restated Employment Agreement between the
Company and David L. Andrus dated as of December 17, 1996(2)
10.3 Form of Subscription Agreement between the Company and each
of the lenders in the November 1996 bridge financing(2)
10.4 Form of warrant issued to each of the lenders in the
November 1996 bridge financing.(2)
10.5 Form of Registration Rights Agreement between the Company,
each of the lenders in the November 1996 bridge financing,
each of the investors in the December 1996 private
placement, and the placement agent in the December 1996
private placement.(2)
10.6 Form of Subscription Agreement between the Company and each
of the investors in the December 1996 private placement. (2)
10.7 Warrant dated December 24, 1996 issued toKeefe, Bruyette &
Woods, Inc.(2)
10.8 Form of warrant issued to investors in connection with the
December 1996 restructuring
10.9 Restructuring Agreement dated as of December 24, 1996 among
the Company, Bedford Capital Financial Corporation
("Bedford"),Portfolio Management Consultants, Inc.("PMC"),
Portfolio Brokerage Services, Inc.("PBS") and Portfolio
Technology Services ("PTS").(2)
10.10 Amended and Restated Registration Rights Agreement dated as
of December 24, 1996 among the Company and Bedford.(2)
10.11 Shareholders Agreement dated as of December 24, 1996 among
the Company, Bedford, Kenneth S. Phillips, David L. Andrus
and Phillips & Andrus LLC.(2)
10.12 Form of Warrant dated December 24, 1996 issued to Bedford
and certain of its associates.(2)
10.13 Advisory Agreement effective as of July 26, 1995, between
Nevcorp Inc. and the Company(2)
10.14 Termination of Nevcorp Consulting Agreement (2)
10.15 PMC International, Inc. Equity Incentive Plan
10.16 Reimbursement and Pledge Agreement dated January 8, 1997
among the Company, KP3, LLC, and Kenneth S. Phillips (2)
10.17 Term Loan Agreement dated as of January 8, 1997 among the
Company, KP3, LLC and Norwest Bank Colorado N.A. (2)
10.18 Investment Agreement dated as of July 26, 1995 among the
Company, PMC, PBS, PTS, and Bedford (2)
10.19 Stock 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)
10.20 Non-Compete Agreement between ADAM Investment Services,
Inc., and Michael T. Wilkinson(4)
10.21 Employment Agreement between ADAM Investment Services, Inc.,
and Scott A. MacKillop(4)
10.22 Form of Subscription Agreement between the Company and each
of the purchasers in the ADAM Private Placement
21.1 List of Subsidiaries
23.1 Consent of Spicer, Jeffries & Co., Certified Public
Accountants
23.2 Consent of Faucett, Taylor & Associates, P.C.
23.3 Consent of Holme Roberts & Owen LLP is included in
Exhibit 5.1
24.1 Power of Attorney
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 33-37800), dated
November 15, 1990.
(2) Incorporated by reference from the Company's Registration
Statement on Form SB-2 (File No. 333- 21335), dated February
7, 1997.
(3) Incorporated by reference from Amendment Number 2 to the
Company's Registration Statement on Form SB-2 (File No.
333-21335), dated June 23, 1997.
(4) Incorporated by reference from the Company's Current Report
on Form 8-K (Commission File No. 0-14937), dated October 9, 1997.
* Previously filed
EXHIBIT 10.15
PMC INTERNATIONAL, INC.
EQUITY INCENTIVE PLAN
(AS ADOPTED BY THE SHAREHOLDERS AT THE ANNUAL MEETING OF
SHAREHOLDERS HELD DECEMBER 15, 1997)
ARTICLE I
INTRODUCTION
1.1 Establishment. PMC International, Inc., a Colorado
corporation, hereby establishes the PMC International, Inc.
Equity Incentive Plan (the "Plan") for certain employees and
directors of the Company (as defined in subsection 2.1(f)) and
certain consultants to the Company. The Plan permits the grant
of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, non-qualified
stock options, restricted stock awards, stock appreciation
rights, stock bonuses, stock units and other stock grants to
certain employees and directors of the Company and to certain
consultants to the Company.
1.2 Purposes. The purposes of the Plan are to provide those who
are selected for participation in the Plan with added incentives
to continue in the long-term service of the Company and to create
in such persons a more direct interest in the future success of
the operations of the Company by relating incentive compensation
to increases in shareholder value, so that the income of those
participating in the Plan is more closely aligned with the income
of the Company's shareholders. The Plan is also designed to
provide a financial incentive that will help the Company attract,
retain and motivate the most qualified employees, directors and
consultants.
ARTICLE II
DEFINITIONS
2.1 Definitions. The following terms shall have the meanings
set forth below:
(a) "Affiliated Corporation" means any corporation or
other entity that is affiliated with PMCI through stock ownership
or otherwise and is designated as an "Affiliated Corporation" by
the Board, provided, however, that for purposes of Incentive
Options granted pursuant to the Plan, an "Affiliated Corporation"
means any parent or subsidiary of the Company as defined in
Section 424 of the Code.
(b) "Award" means an Option, a Restricted Stock Award,
a Stock Appreciation Right, a Stock Unit, grants of Stock
pursuant to Article XI or other issuances of Stock hereunder.
(c) "Board" means the Board of Directors of PMCI.
(d) "Code" means the Internal Revenue Code of 1986, as
it may be amended from time to time.
(e) "Committee" means a committee consisting of
members of the Board who are empowered hereunder to take actions
in the administration of the Plan. The Committee shall be so
constituted at all times as to permit the Plan to comply with
Rule 16b-3 or any successor rule promulgated under the Securities
Exchange Act of 1934 (the "1934 Act"). Members of the Committee
and any subcommittee or special committee shall be appointed from
time to time by the Board, shall serve at the pleasure of the
Board and may resign at any time upon written notice to the
Board. The Committee shall select Participants from Eligible
Employees and Eligible Consultants of the Company and shall
determine the awards to be made pursuant to the Plan and the
terms and conditions thereof. For purposes of making
determinations under this Plan with regard to Eligible Directors,
the "Committee" shall consist of the Board.
(f) "Company" means PMCI and the Affiliated
Corporations.
(g) "Disabled" or "Disability" shall have the meaning
given to such terms in Section 22(e)(3) of the Code.
(h) "Effective Date" means the effective date of the
Plan, November 12, 1997.
(i) "Eligible Directors" means those directors of the
Company who are not Eligible Employees or Eligible Consultants,
as defined below.
(j) "Eligible Employees" means those employees
(including, without limitation, officers and directors who are
also employees) of the Company or any subsidiary or division
thereof, upon whose judgment, initiative and efforts the Company
is, or will become, largely dependent for the successful conduct
of its business. For purposes of the Plan, an employee is an
individual whose wages are subject to the withholding of federal
income tax under section 3401 of the Code.
(k) "Eligible Consultants" means those consultants to
the Company who are determined, by the Committee, to be
individuals whose services are important to the Company and who
are eligible to receive Awards, other than Incentive Options,
under the Plan.
(l) "Fair Market Value" means the average of the mean
between the bid and the asked prices of the Stock or the closing
price, as applicable, on the Nasdaq Stock Market, the principal
stock exchange or other market on which the Stock is traded, over
the five consecutive trading days ending on a particular date or
by such other method as the Committee may specify at the time an
Award is granted. If the price of the Stock is not reported on
any securities exchange or national market system, the Fair
Market Value of the Stock on a particular date shall be as
determined by the Committee. If, upon exercise of an Option, the
exercise price is paid by a broker's transaction as provided in
subsection 7.2(g)(ii)(D), Fair Market Value, for purposes of the
exercise, shall be the price at which the Stock is sold by the
broker.
(m) "Incentive Option" means an Option designated as
such and granted in accordance with Section 422 of the Code.
(n) "Non-Qualified Option" means any Option other than
an Incentive Option.
(o) "Option" means a right to purchase Stock at a
stated or formula price for a specified period of time. Options
granted under the Plan shall be either Incentive Options or
Non-Qualified Options.
(p) "Option Certificate" shall have the meaning given
to such term in Section 7.2 hereof.
(q) "Option Holder" means a Participant who has been
granted one or more Options under the Plan.
(r) "Option Price" means the price at which each share
of Stock subject to an Option may be purchased, determined in
accordance with subsection 7.2(b).
(s) "Participant" means an Eligible Employee, Eligible
Director or Eligible Consultant designated by the Committee, or
in the case of an Eligible Director, the Board, from time to time
during the term of the Plan to receive one or more of the Awards
provided under the Plan.
(t) "PMCI" means PMC International, Inc. and any
successor thereto.
(u) "Restricted Stock Award" means an award of Stock
granted to a Participant pursuant to Article VIII that is subject
to certain restrictions imposed in accordance with the provisions
of such Section.
(v) "Share" means a share of Stock.
(w) "Stock" means the $0.01 par value common stock of
PMCI.
(x) "Stock Appreciation Right" means the right,
granted by the Committee pursuant to the Plan, to receive a
payment equal to the increase in the Fair Market Value of a Share
of Stock subsequent to the grant of such Award.
(y) "Stock Bonus" means either an outright grant of
Stock or a grant of Stock subject to and conditioned upon certain
employment or performance related goals.
(z) "Stock Unit" means a measurement component equal
to the Fair Market Value of one share of Stock on the date for
which a determination is made pursuant to the provisions of this
Plan.
2.2 Gender and Number. Except when otherwise indicated by
the context, the masculine gender shall also include the feminine
gender, and the definition of any term herein in the singular
shall also include the plural.
ARTICLE III
PLAN ADMINISTRATION
The Plan shall be administered by the Committee. In
accordance with the provisions of the Plan, the Committee shall,
in its sole discretion, select the Participants from among the
Eligible Employees, Eligible Directors and Eligible Consultants,
determine the Awards to be made pursuant to the Plan, the number
of Stock Units, Stock Appreciation Rights or shares of Stock to
be issued thereunder and the time at which such Awards are to be
made, fix the Option Price, period and manner in which an Option
becomes exercisable, establish the duration and nature of
Restricted Stock Award restrictions, establish the terms and
conditions applicable to Stock Bonuses and Stock Units, and
establish such other terms and requirements of the various
compensation incentives under the Plan as the Committee may deem
necessary or desirable and consistent with the terms of the
Plan. With regard to issuance of Awards to non-employee members
of the Board, such decisions identical to those made by the
Committee as to Eligible Employees and Eligible Consultants shall
be made by the Board. The Committee shall determine the form or
forms of the agreements with Participants that shall evidence the
particular provisions, terms, conditions, rights and duties of
PMCI and the Participants with respect to Awards granted pursuant
to the Plan, which provisions need not be identical except as may
be provided herein; provided, however, that Eligible Consultants
and Eligible Directors shall not be eligible to receive Incentive
Options. The Committee may from time to time adopt such rules
and regulations for carrying out the purposes of the Plan as it
may deem proper and in the best interests of the Company. The
Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or in any agreement
entered into hereunder in the manner and to the extent it shall
deem expedient and it shall be the sole and final judge of such
expediency. No member of the Committee shall be liable for any
action or determination made in good faith. The determinations,
interpretations and other actions of the Committee pursuant to
the provisions of the Plan shall be binding and conclusive for
all purposes and on all persons.
ARTICLE IV
STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. The number of Shares that are
authorized for issuance under the Plan in accordance with the
provisions of the Plan and subject to such restrictions or other
provisions as the Committee may from time to time deem necessary
shall not exceed 500,000, subject to the provisions regarding
changes in capital described below. The maximum number of Shares
with respect to which a Participant may receive Options and Stock
Appreciation Rights under the Plan in any calendar year is
100,000 Shares. The Shares may be either authorized and unissued
Shares or previously issued Shares acquired by PMCI. This
authorization may be increased from time to time by approval of
the Board and by the stockholders of PMCI if, in the opinion of
counsel for PMCI, stockholder approval is required. Shares of
Stock that may be issued upon exercise of Options or Stock
Appreciation Rights, that are issued as Restricted Stock Awards
or Stock Bonuses, that are issued with respect to Stock Units,
and that are issued as incentive compensation or other Stock
grants under the Plan shall be applied to reduce the maximum
number of Shares remaining available for use under the Plan.
PMCI shall at all times during the term of the Plan and while any
Options or Stock Units are outstanding retain as authorized and
unissued Stock at least the number of Shares from time to time
required under the provisions of the Plan, or otherwise assure
itself of its ability to perform its obligations hereunder.
4.2 Other Shares of Stock. Any shares of Stock that are
subject to an Option that expires or for any reason is terminated
unexercised, any shares of Stock that are subject to an Award
(other than an Option) and that are forfeited, and any shares of
Stock withheld for the payment of taxes or received by PMCI as
payment of the exercise price of an Option shall automatically
become available for use under the Plan, provided, however, that
no more than 100,000 shares of Stock may be awarded pursuant to
Incentive Options.
4.3 Adjustments for Stock Split, Stock Dividend, Etc. If
PMCI shall at any time increase or decrease the number of its
outstanding Shares or change in any way the rights and privileges
of such Shares by means of the payment of a stock dividend or any
other distribution upon such shares payable in Stock, or through
a stock split, subdivision, consolidation, combination,
reclassification or recapitalization involving the Stock, then in
relation to the Stock that is affected by one or more of the
above events, the numbers, rights and privileges of the following
shall be increased, decreased or changed in like manner as if
they had been issued and outstanding, fully paid and
nonassessable at the time of such occurrence: (i) the Shares as
to which Awards may be granted under the Plan and (ii) the Shares
then included in each outstanding Award granted hereunder.
4.4 Other Distributions and Changes in the Stock. If
(a) PMCI shall at any time distribute with respect to
the Stock assets or securities of persons other than PMCI
(excluding cash or distributions referred to in Section 4.3), or
(b) PMCI shall at any time grant to the holders of its
Stock rights to subscribe pro rata for additional shares thereof
or for any other securities of PMCI, or
(c) there shall be any other change (except as
described in Section 4.3) in the number or kind of outstanding
Shares or of any stock or other securities into which the Stock
shall be changed or for which it shall have been exchanged,
and if the Committee shall in its discretion determine that the
event described in subsection (a), (b), or (c) above equitably
requires an adjustment in the number or kind of Shares subject to
an Option or other Award, an adjustment in the Option Price or
the taking of any other action by the Committee, including
without limitation, the setting aside of any property for
delivery to the Participant upon the exercise of an Option or the
full vesting of an Award, then such adjustments shall be made, or
other action shall be taken, by the Committee and shall be
effective for all purposes of the Plan and on each outstanding
Option or Award that involves the particular type of stock for
which a change was effected. Notwithstanding the foregoing
provisions of this Section 4.4, pursuant to Section 8.3 below, a
Participant holding Stock received as a Restricted Stock Award
shall have the right to receive all amounts, including cash and
property of any kind, distributed with respect to the Stock after
such Restricted Stock Award was granted upon the Participant's
becoming a holder of record of the Stock.
4.5 General Adjustment Rules. No adjustment or
substitution provided for in this Article IV shall require PMCI
to sell a fractional share of Stock under any Option, or
otherwise issue a fractional share of Stock, and the total
substitution or adjustment with respect to each Option and other
Award shall be limited by deleting any fractional share. In the
case of any such substitution or adjustment, the aggregate Option
Price for the total number of shares of Stock then subject to an
Option shall remain unchanged but the Option Price per share
under each such Option shall be equitably adjusted by the
Committee to reflect the greater or lesser number of shares of
Stock or other securities into which the Stock subject to the
Option may have been changed, and appropriate adjustments shall
be made to other Awards to reflect any such substitution or
adjustment.
4.6 Determination by the Committee, Etc. Adjustments under
this Article IV shall be made by the Committee, whose
determinations with regard thereto shall be final and binding
upon all parties thereto.
ARTICLE V
CORPORATE REORGANIZATION; CHANGE IN CONTROL
5.1 Reorganization. Upon the occurrence of any of the
following events, if the notice required by Section 5.2 shall
have first been given, the Plan and all Options then outstanding
hereunder shall automatically terminate and be of no further
force and effect whatsoever, without the necessity for any
additional notice or other action by the Board or the Company:
(a) the merger or consolidation of the Company with or into
another corporation (other than a consolidation or merger in
which the Company is the continuing corporation and which does
not result in any reclassification or change of outstanding
shares of Common Stock); or (b) the sale or conveyance of the
property of the Company as an entirety or substantially as an
entirety (other than a sale or conveyance in which the Company
continues as holding company of an entity or entities that
conduct the business or businesses formerly conducted by the
Company); or (c) the dissolution or liquidation of the Company.
5.2 Required Notice. At least 30 days' prior written
notice of any event described in Section 5.1 shall be given by
the Company to each Option Holder, unless in the case of the
events described in clauses (a) or (b) of Section 5.1, the
Company, or the successor or purchaser, as the case may be, shall
make adequate provision for the assumption of the outstanding
Options or the substitution of new options for the outstanding
Options on terms comparable to the outstanding Options except
that the Option Holder shall have the right thereafter to
purchase the kind and amount of securities or property or cash
receivable upon such merger, consolidation, sale or conveyance by
a holder of the number of Shares that would have been receivable
upon exercise of the Option immediately prior to such merger,
consolidation, sale or conveyance (assuming such holder of Stock
failed to exercise any rights of election and received per share
the kind and amount received per share by a majority of the
non-electing shares). The provisions of this Article VII shall
similarly apply to successive mergers, consolidations, sales or
conveyances. Such notice shall be deemed to have been given when
delivered personally to an Option Holder or when mailed to an
Option Holder by registered or certified mail, postage prepaid,
at such Option Holder's address last known to the Company.
5.3 Acceleration of Exercisability. Option Holders
notified in accordance with Section 5.2 may exercise their
Options at any time before the occurrence of the event requiring
the giving of notice (but subject to occurrence of such event),
regardless of whether all conditions of exercise relating to
length of service have been satisfied.
5.4 Change of Control. Unless provided otherwise by the
Committee at the time of the grant of an Award, upon a change in
control of PMCI as defined below: (i) all Options shall become
immediately exercisable in full during the remaining term
thereof, and shall remain so, whether or not the Participants to
whom such Options have been granted remain employees or
consultants of the Company; (ii) all restrictions with respect to
outstanding Restricted Stock Awards shall immediately lapse;
(iii) all Stock Units shall become immediately payable; and (iv)
all other Awards shall become immediately exercisable or shall
vest, as the case may be, without any further action or passage
of time. A "Change in Control" is deemed to have occurred if (i)
a person (as such term is used in Section 13(d) of the Exchange
Act) becomes the beneficial owner (as defined in Rule 13d-3 under
the Exchange Act) of shares of the Company having 30% or more of
the total number of votes that may be cast for the election of
directors of the Company without the prior approval of at least a
majority of the members of the Board unaffiliated with such
person, or (ii) individuals who constitute the directors of the
Company at the beginning of a 24-month period cease to constitute
at least 2/3 of all directors at any time during such period,
unless the election of any new or replacement directors was
approved by a vote of at least a majority of the members of the
Board in office immediately prior to such period and of the new
and replacement directors so approved. Notwithstanding anything
to the contrary in this Section 5.4, no Option will become
exercisable by virtue of the occurrence of a Change in Control if
the Option Holder of that Option or any group of which that
Option Holder is a member is the person whose acquisition
constituted the Change in Control.
ARTICLE VI
PARTICIPATION
Participants in the Plan shall be those Eligible Employees
and Eligible Directors of the Company who, in the judgment of the
Committee, are performing, or during the term of their incentive
arrangement will perform, vital services in the management,
operation and development of the Company, and significantly
contribute, or are expected to significantly contribute, to the
achievement of long-term corporate economic objectives. Eligible
Consultants shall be selected from those non-employee consultants
to the Company who are performing services important to the
operation and growth of the Company. Participants may be granted
from time to time one or more Awards; provided, however, that the
grant of each such Award shall be separately approved by the
Committee and receipt of one such Award shall not result in
automatic receipt of any other Award. Upon determination by the
Committee that an Award is to be granted to a Participant,
written notice shall be given to such person, specifying the
terms, conditions, rights and duties related thereto. Each
Participant shall, if required by the Committee, enter into an
agreement with PMCI, in such form as the Committee shall
determine and which is consistent with the provisions of the
Plan, specifying such terms, conditions, rights and duties.
Awards shall be deemed to be granted as of the date specified in
the grant resolution of the Committee, which date shall be the
date of any related agreement with the Participant. In the event
of any inconsistency between the provisions of the Plan and any
such agreement entered into hereunder, the provisions of the Plan
shall govern.
ARTICLE VII
OPTIONS
7.1 Grant of Options. Coincident with or following
designation for participation in the Plan, a Participant may be
granted one or more Options. The Committee in its sole
discretion shall designate whether an Option is an Incentive
Option or a Non-Qualified Option; provided, however, that only
Non-Qualified Options may be granted to Eligible Consultants and
Eligible Directors. The Committee may grant both an Incentive
Option and a Non-Qualified Option to an Eligible Employee at the
same time or at different times. Incentive Options and
Non-Qualified Options, whether granted at the same time or at
different times, shall be deemed to have been awarded in separate
grants and shall be clearly identified, and in no event shall the
exercise of one Option affect the right to exercise any other
Option or affect the number of shares for which any other Option
may be exercised, except as provided in subsection 7.2(j). An
Option shall be considered as having been granted on the date
specified in the grant resolution of the Committee.
7.2 Stock Option Certificates. Each Option granted under
the Plan shall be evidenced by a written stock option certificate
or agreement (an "Option Certificate"). An Option Certificate
shall be issued by PMCI in the name of the Participant to whom
the Option is granted (the "Option Holder") and in such form as
may be approved by the Committee. The Option Certificate shall
incorporate and conform to the conditions set forth in this
Section 7.2 as well as such other terms and conditions that are
not inconsistent as the Committee may consider appropriate in
each case.
(a) Number of Shares. Each Option Certificate shall
state that it covers a specified number of shares of Stock, as
determined by the Committee.
(b) Price. The price at which each share of Stock
covered by an Option may be purchased shall be determined in each
case by the Committee and set forth in the Option Certificate,
but in no event shall the price be less than 100 percent of the
Fair Market Value of the Stock on the date an Incentive Option is
granted.
(c) Duration of Options; Restrictions on Exercise.
Each Option Certificate shall state the period of time,
determined by the Committee, within which the Option may be
exercised by the Option Holder (the "Option Period"). The Option
Period must end, in all cases, not more than ten years from the
date the Option is granted. The Option Certificate shall also
set forth any installment or other restrictions on Option
exercise during such period, if any, as may be determined by the
Committee. Each Option shall become exercisable (vest) over such
period of time, if any, or upon such events, as determined by the
Committee.
(d) Termination of Services, Death, Disability, Etc.
The Committee may specify the period, if any, after which an
Option may be exercised following termination of the Option
Holder's services. The effect of this subsection 7.2(d) shall be
limited to determining the consequences of a termination and
nothing in this subsection 7.2(d) shall restrict or otherwise
interfere with the Company's discretion with respect to the
termination of any individual's services. If the Committee does
not otherwise specify, the following shall apply:
(i) If the services of the Option Holder are
terminated within the Option Period for "cause", as determined by
the Company, the Option shall thereafter be void for all
purposes. As used in this subsection 7.2(d), "cause" shall mean
willful misconduct, a willful failure to perform the Option
Holder's duties, insubordination, theft, dishonesty, conviction
of a felony or any other willful conduct that is materially
detrimental to the Company or such other cause as the Board in
good faith reasonably determines provides cause for the discharge
of an Option Holder.
(ii) If the Option Holder becomes Disabled, the
Option may be exercised by the Option Holder within one year
following the Option Holder's termination of services on account
of Disability (provided that such exercise must occur within the
Option Period), but not thereafter. In any such case, the Option
may be exercised only as to the shares as to which the Option had
become exercisable on or before the date of the Option Holder's
termination of services because of Disability.
(iii) If the Option Holder dies during the Option
Period while still performing services for the Company or within
the one year period referred to in (ii) above or the three-month
period referred to in (iv) below, the Option may be exercised by
those entitled to do so under the Option Holder's will or by the
laws of descent and distribution within one year following the
Option Holder's death, (provided that such exercise must occur
within the Option Period), but not thereafter. In any such case,
the Option may be exercised only as to the shares as to which the
Option had become exercisable on or before the date of the Option
Holder's death.
(iv) If the services of the Option Holder are
terminated (which for this purpose means that the Option Holder
is no longer employed by the Company or performing services for
the Company) by the Company within the Option Period for any
reason other than cause, Disability or the Option Holder's death,
the Option may be exercised by the Option Holder within three
months following the date of such termination (provided that such
exercise must occur within the Option Period), but not
thereafter. In any such case, the Option may be exercised only
as to the shares as to which the Option had become exercisable on
or before the date of termination of services.
(e) Transferability. Each Option shall not be
transferable by the Option Holder except by will or pursuant to
the laws of descent and distribution. Each Option is exercisable
during the Option Holder's lifetime only by him or her, or in the
event of Disability or incapacity, by his or her guardian or
legal representative. The Committee may, however, provide at the
time of grant or thereafter that the Option Holder may transfer a
Non-Qualified Option to a member of the Option Holder's immediate
family, a trust of which members of the Option Holder's immediate
family are the only beneficiaries, or a partnership of which
members of the Option Holder's immediate family or trusts for the
sole benefit of the Option Holder's immediate family are the only
partners. Immediate family means the Option Holder's spouse,
issue (by birth or adoption), parents, grandparents, and siblings
(including half brothers and sisters and adopted siblings).
During the Option Holder's lifetime the Option Holder may not
transfer an Incentive Option under any circumstances.
(f) Consideration for Grant of Option. Each Option
Holder agrees to remain in the employment of the Company or to
continue providing consulting services to the Company, as the
case may be, at the pleasure of the Company, for a continuous
period of at least one year after the date the Option is granted,
at the rate of compensation in effect on the date of such
agreement or at such changed rate as may be fixed, from time to
time, by the Company. Nothing in this paragraph shall limit or
impair the Company's right to terminate the employment of any
employee or to terminate the consulting services of any
consultant.
(g) Exercise, Payments, Etc.
(i) Manner of Exercise. The method for
exercising each Option granted hereunder shall be by delivery to
PMCI of written notice specifying the number of Shares with
respect to which such Option is exercised. The purchase of such
Shares shall take place at the principal offices of PMCI within
thirty days following delivery of such notice, at which time the
Option Price of the Shares shall be paid in full by any of the
methods set forth below or a combination thereof. Except as set
forth in the next sentence, the Option shall be exercised when
the Option Price for the number of shares as to which the Option
is exercised is paid to PMCI in full. If the Option Price is
paid by means of a broker's loan transaction described in
subsection 7.2(g)(ii)(D), in whole or in part, the closing of the
purchase of the Stock under the Option shall take place (and the
Option shall be treated as exercised) on the date on which, and
only if, the sale of Stock upon which the broker's loan was based
has been closed and settled, unless the Option Holder makes an
irrevocable written election, at the time of exercise of the
Option, to have the exercise treated as fully effective for all
purposes upon receipt of the Option Price by PMCI regardless of
whether or not the sale of the Stock by the broker is closed and
settled. A properly executed certificate or certificates
representing the Shares shall be delivered to or at the direction
of the Option Holder upon payment therefor. If Options on less
than all shares evidenced by an Option Certificate are exercised,
PMCI shall deliver a new Option Certificate evidencing the Option
on the remaining shares upon delivery of the Option Certificate
for the Option being exercised.
(ii) The exercise price shall be paid by any of
the following methods or any combination of the following
methods at the election of the Option Holder, or by any other
method approved by the Committee upon the request of the Option
Holder:
(A) in cash;
(B) by certified check, cashier's check or
other check acceptable to the Company, payable to the order of
PMCI;
(C) by delivery to PMCI of certificates
representing the number of shares then owned by the Option
Holder, the Fair Market Value of which equals the purchase price
of the Stock purchased pursuant to the Option, properly endorsed
for transfer to PMCI; provided however, that no Option may be
exercised by delivery to PMCI of certificates representing Stock,
unless such Stock has been held by the Option Holder for more
than six months; for purposes of this Plan, the Fair Market Value
of any shares of Stock delivered in payment of the purchase price
upon exercise of the Option shall be the Fair Market Value as of
the exercise date; the exercise date shall be the day of delivery
of the certificates for the Stock used as payment of the Option
Price; or
(D) by delivery to PMCI of a properly
executed notice of exercise together with irrevocable
instructions to a broker to deliver to PMCI promptly the amount
of the proceeds of the sale of all or a portion of the Stock or
of a loan from the broker to the Option Holder required to pay
the Option Price.
(h) Date of Grant. An Option shall be considered as
having been granted on the date specified in the grant resolution
of the Committee.
(i) Withholding.
(i) Non-Qualified Options. Upon exercise of an
Option, the Option Holder shall make appropriate arrangements
with the Company to provide for the amount of additional
withholding required by Sections 3102 and 3402 of the Code and
applicable state income tax laws, including payment of such taxes
through delivery of shares of Stock or by withholding Stock to be
issued under the Option, as provided in Article XVII.
(ii) Incentive Options. If an Option Holder makes
a disposition (as defined in Section 424(c) of the Code) of any
Stock acquired pursuant to the exercise of an Incentive Option
prior to the expiration of two years from the date on which the
Incentive Option was granted or prior to the expiration of one
year from the date on which the Option was exercised, the Option
Holder shall send written notice to the Company at the Company's
principal place of business of the date of such disposition, the
number of shares disposed of, the amount of proceeds received
from such disposition and any other information relating to such
disposition as the Company may reasonably request. The Option
Holder shall, in the event of such a disposition, make
appropriate arrangements with the Company to provide for the
amount of additional withholding, if any, required by Sections
3102 and 3402 of the Code and applicable state income tax laws.
7.3 Restrictions on Incentive Options.
(a) Initial Exercise. The aggregate Fair Market Value
of the Shares with respect to which Incentive Options are
exercisable for the first time by an Option Holder in any
calendar year, under the Plan or otherwise, shall not exceed
$100,000. For this purpose, the Fair Market Value of the Shares
shall be determined as of the date of grant of the Option.
(b) Ten Percent Stockholders. Incentive Options
granted to an Option Holder who is the holder of record of 10% or
more of the outstanding Stock of PMCI shall have an Option Price
equal to 110% of the Fair Market Value of the Shares on the date
of grant of the Option and the Option Period for any such Option
shall not exceed five years.
7.4 Shareholder Privileges. No Option Holder shall have
any rights as a shareholder with respect to any shares of Stock
covered by an Option until the Option Holder becomes the holder
of record of such Stock, and no adjustments shall be made for
dividends or other distributions or other rights as to which
there is a record date preceding the date such Option Holder
becomes the holder of record of such Stock, except as provided in
Article IV.
ARTICLE VIII
RESTRICTED STOCK AWARDS
8.1 Grant of Restricted Stock Awards. Coincident with or
following designation for participation in the Plan, the
Committee may grant a Participant one or more Restricted Stock
Awards consisting of Shares of Stock. The number of Shares
granted as a Restricted Stock Award shall be determined by the
Committee.
8.2 Restrictions. A Participant's right to retain a Restricted
Stock Award granted to him under Section 8.1 shall be subject to
such restrictions, including but not limited to his continuous
employment by or performance of services for the Company for a
restriction period specified by the Committee or the attainment
of specified performance goals and objectives, as may be
established by the Committee with respect to such Award. The
Committee may in its sole discretion require different periods of
service or different performance goals and objectives with
respect to different Participants, to different Restricted Stock
Awards or to separate, designated portions of the Shares
constituting a Restricted Stock Award. In the event of the death
or Disability of a Participant, or the retirement of a
Participant in accordance with the Company's established
retirement policy, all required periods of service and other
restrictions applicable to Restricted Stock Awards then held by
him shall lapse with respect to a pro rata part of each such
Award based on the ratio between the number of full months of
employment or services completed at the time of termination of
services from the grant of each Award to the total number of
months of employment or continued services required for such
Award to be fully nonforfeitable, and such portion of each such
Award shall become fully nonforfeitable. The remaining portion
of each such Award shall be forfeited and shall be immediately
returned to PMCI. If a Participant's employment or consulting
services terminate for any other reason, any Restricted Stock
Awards as to which the period for which services are required or
other restrictions have not been satisfied (or waived or
accelerated as provided herein) shall be forfeited, and all
shares of Stock related thereto shall be immediately returned to
PMCI.
8.3 Privileges of a Stockholder, Transferability. A
Participant shall have all voting, dividend, liquidation and
other rights with respect to Stock in accordance with its terms
received by him as a Restricted Stock Award under this Article
VIII upon his becoming the holder of record of such Stock;
provided, however, that the Participant's right to sell,
encumber, or otherwise transfer such Stock shall be subject to
the limitations of Section 11.2.
8.4 Enforcement of Restrictions. The Committee shall cause
a legend to be placed on the Stock certificates issued pursuant
to each Restricted Stock Award referring to the restrictions
provided by Sections 8.2 and 8.3 and, in addition, may in its
sole discretion require one or more of the following methods of
enforcing the restrictions referred to in Sections 8.2 and 8.3:
(a) Requiring the Participant to keep the Stock
certificates, duly endorsed, in the custody of PMCI while the
restrictions remain in effect; or
(b) Requiring that the Stock certificates, duly
endorsed, be held in the custody of a third party while the
restrictions remain in effect.
ARTICLE IX
STOCK UNITS
A Participant may be granted a number of Stock Units
determined by the Committee. The number of Stock Units, the
goals and objectives to be satisfied with respect to each grant
of Stock Units, the time and manner of payment for each Stock
Unit, and the other terms and conditions applicable to a grant of
Stock Units shall be determined by the Committee.
ARTICLE X
STOCK APPRECIATION RIGHTS
10.1 Persons Eligible. The Committee, in its sole discretion,
may grant Stock Appreciation Rights to Eligible Employees,
Eligible Directors or Eligible Consultants.
10.2 Terms of Grant. The Committee shall determine at the
time of the grant of a Stock Appreciation Right the time period
during which the Stock Appreciation Right may be exercised and
any other terms that shall apply to the Stock Appreciation Right.
10.3 Exercise. A Stock Appreciation Right shall entitle a
Participant to receive a number of shares of Stock (without any
payment to PMCI, except for applicable withholding taxes), cash,
or Stock and cash, as determined by the Committee in accordance
with Section 10.4 below. If a Stock Appreciation Right is issued
in tandem with an Option, except as may otherwise be provided by
the Committee, the Stock Appreciation Right shall be exercisable
during the period that its related Option is exercisable. A
Participant desiring to exercise a Stock Appreciation Right shall
give written notice of such exercise to PMCI, which notice shall
state the proportion of Stock and cash that the Participant
desires to receive pursuant to the Stock Appreciation Right
exercised. Upon receipt of the notice from the Participant, PMCI
shall deliver to the person entitled thereto (i) a certificate or
certificates for Stock and/or (ii) a cash payment, in accordance
with Section 10.4 below. The date PMCI receives written notice
of such exercise hereunder is referred to in this Article X as
the "exercise date". The delivery of Stock or cash received
pursuant to such exercise shall take place at the principal
offices of PMCI within 30 days following delivery of such notice.
10.4 Number of Shares or Amount of Cash. Subject to the
discretion of the Committee to substitute cash for Stock, or
Stock for cash, the number of Shares that may be issued pursuant
to the exercise of a Stock Appreciation Right shall be determined
by dividing: (a) the total number of Shares of Stock as to which
the Stock Appreciation Right is exercised, multiplied by the
amount by which the Fair Market Value of one share of Stock on
the exercise date exceeds the Fair Market Value of one Share of
Stock on the date of grant of one Share of Stock Appreciation
Right, by (b) the Fair Market Value of one Share of Stock on the
exercise date; provided, however, that fractional shares shall
not be issued and in lieu thereof, a cash adjustment shall be
paid. In lieu of issuing Stock upon the exercise of a Stock
Appreciation Right, the Committee in its sole discretion may
elect to pay the cash equivalent of the Fair Market Value of the
Stock on the exercise date for any or all of the Shares of Stock
that would otherwise be issuable upon exercise of the Stock
Appreciation Right.
10.5 Effect of Exercise. If a Stock Appreciation Right is
issued in tandem with an Option, the exercise of the Stock
Appreciation Right or the related Option will result in an equal
reduction in the number of corresponding Options or Stock
Appreciation Rights that were granted in tandem with such Stock
Appreciation Rights and Options.
10.6 Termination of Services. Upon the termination of the
services of a Participant, any Stock Appreciation Rights then
held by such Participant shall be exercisable within the time
periods, and upon the same conditions with respect to the reasons
for termination of services, as are specified in Section 7.2(d)
with respect to Options.
ARTICLE XI
STOCK BONUSES
The Committee may award Stock Bonuses to such Participants,
subject to such conditions and restrictions, as it determines in
its sole discretion. Stock Bonuses may be either outright grants
of Stock, or may be grants of Stock subject to and conditioned
upon certain employment or performance related goals.
ARTICLE XII
OTHER COMMON STOCK GRANTS
From time to time during the duration of this Plan, the
Board may, in its sole discretion, adopt one or more incentive
compensation arrangements for Participants pursuant to which the
Participants may acquire shares of Stock, whether by purchase,
outright grant, or otherwise. Any such arrangements shall be
subject to the general provisions of this Plan and all shares of
Stock issued pursuant to such arrangements shall be issued under
this Plan.
ARTICLE XIII
RIGHTS OF PARTICIPANTS
13.1 Service. Nothing contained in the Plan or in any Award, or
other Award granted under the Plan shall confer upon any
Participant any right with respect to the continuation of his
employment by, or consulting relationship with, the Company, or
interfere in any way with the right of the Company, subject to
the terms of any separate employment agreement or other contract
to the contrary, at any time to terminate such services or to
increase or decrease the compensation of the Participant from the
rate in existence at the time of the grant of an Award. Whether
an authorized leave of absence, or absence in military or
government service, shall constitute a termination of service
shall be determined by the Committee at the time.
13.2 Nontransferability. Except as provided otherwise at the
time of grant, no right or interest of any Participant in an
Option, a Stock Appreciation Right, a Restricted Stock Award
(prior to the completion of the restriction period applicable
thereto), a Stock Unit, or other Award granted pursuant to the
Plan, shall be assignable or transferable during the lifetime of
the Participant, either voluntarily or involuntarily, or
subjected to any lien, directly or indirectly, by operation of
law, or otherwise, including execution, levy, garnishment,
attachment, pledge or bankruptcy. In the event of a
Participant's death, a Participant's rights and interests in
Options, Stock Appreciation Rights, Restricted Stock Awards,
other Awards, and Stock Units shall, to the extent provided in
Articles VII, VIII, IX, X and XI, be transferable by will or the
laws of descent and distribution, and payment of any amounts due
under the Plan shall be made to, and exercise of any Options may
be made by, the Participant's legal representatives, heirs or
legatees. Notwithstanding the foregoing, the Option Holder may
not transfer an Incentive Option during the Option Holder's
lifetime. If in the opinion of the Committee a person entitled
to payments or to exercise rights with respect to the Plan is
disabled from caring for his affairs because of mental condition,
physical condition or age, payment due such person may be made
to, and such rights shall be exercised by, such person's
guardian, conservator or other legal personal representative upon
furnishing the Committee with evidence satisfactory to the
Committee of such status.
13.3 No Plan Funding. Obligations to Participants under the
Plan will not be funded, trusteed, insured or secured in any
manner. The Participants under the Plan shall have no security
interest in any assets of the Company, and shall be only general
creditors of the Company.
ARTICLE XIV
GENERAL RESTRICTIONS
14.1 Investment Representations. PMCI may require any
person to whom an Option, Stock Appreciation Right, Restricted
Stock Award, Stock Unit, or Stock Bonus is granted, as a
condition of exercising such Option or Stock Appreciation Right,
or receiving such Restricted Stock Award, Stock Unit, or Stock
Bonus, to give written assurances in substance and form
satisfactory to PMCI and its counsel to the effect that such
person is acquiring the Stock for his own account for investment
and not with any present intention of selling or otherwise
distributing the same, and to such other effects as PMCI deems
necessary or appropriate in order to comply with Federal and
applicable state securities laws. Legends evidencing such
restrictions may be placed on the Stock certificates.
14.2 Compliance with Securities Laws. Each Option, Stock
Appreciation Right, Restricted Stock Award, Stock Unit, and Stock
Bonus grant shall be subject to the requirement that, if at any
time counsel to PMCI shall determine that the listing,
registration or qualification of the shares subject to such
Option, Stock Appreciation Right, Restricted Stock Award, Stock
Unit, or Stock Bonus grant upon any securities exchange or under
any state or federal law, or the consent or approval of any
governmental or regulatory body, is necessary as a condition of,
or in connection with, the issuance or purchase of shares
thereunder, such Option, Stock Appreciation Right, Restricted
Stock Award, Stock Unit or Stock Bonus grant may not be accepted
or exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been
effected or obtained on conditions acceptable to the Committee.
Nothing herein shall be deemed to require PMCI to apply for or to
obtain such listing, registration or qualification.
14.3 Changes in Accounting Rules. Except as provided
otherwise at the time an Award is granted, notwithstanding any
other provision of the Plan to the contrary, if, during the term
of the Plan, any changes in the financial or tax accounting rules
applicable to Options, Stock Appreciation Rights, Restricted
Stock Awards, Stock Units or other Awards shall occur which, in
the sole judgment of the Committee, may have a material adverse
effect on the reported earnings, assets or liabilities of PMCI,
the Committee shall have the right and power to modify as
necessary, any then outstanding and unexercised Options, Stock
Appreciation Rights, outstanding Restricted Stock Awards,
outstanding Stock Units and other outstanding Awards as to which
the applicable services or other restrictions have not been
satisfied.
ARTICLE XV
OTHER EMPLOYEE BENEFITS
The amount of any compensation deemed to be received by a
Participant as a result of the exercise of an Option or Stock
Appreciation Right, the sale of shares received upon such
exercise, the vesting of any Restricted Stock Award, receipt of
Stock Bonuses, distributions with respect to Stock Units, or the
grant of Stock shall not constitute "earnings" or "compensation"
with respect to which any other employee benefits of such
employee are determined, including without limitation benefits
under any pension, profit sharing, 401(k), life insurance or
salary continuation plan.
ARTICLE XVI
PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time terminate, and from time to time
may amend or modify the Plan provided, however, that no amendment
or modification may become effective without approval of the
amendment or modification by the shareholders if shareholder
approval is required to enable the Plan to satisfy any applicable
statutory or regulatory requirements, or if PMCI, on the advice
of counsel, determines that shareholder approval is otherwise
necessary or desirable.
No amendment, modification or termination of the Plan shall
in any manner adversely affect any Options, Stock Appreciation
Rights, Restricted Stock Awards, Stock Units, Stock Bonuses or
other Award theretofore granted under the Plan, without the
consent of the Participant holding such Options, Stock
Appreciation Rights, Restricted Stock Awards, Stock Units, Stock
Bonuses or other Awards.
ARTICLE XVII
WITHHOLDING
17.1 Withholding Requirement. PMCI's obligations to deliver
shares of Stock upon the exercise of any Option, or Stock
Appreciation Right, the vesting of any Restricted Stock Award,
payment with respect to Stock Units, or the grant of Stock shall
be subject to the Participant's satisfaction of all applicable
federal, state and local income and other tax withholding
requirements.
17.2 Withholding With Stock. At the time the Committee
grants an Option, Stock Appreciation Right, Restricted Stock
Award, Stock Unit, Stock Bonus, other Award, or Stock, it may, in
its sole discretion, grant the Participant an election to pay all
such amounts of tax withholding, or any part thereof, by electing
to transfer to PMCI, or to have PMCI withhold from shares
otherwise issuable to the Participant, shares of Stock having a
value equal to the amount required to be withheld or such lesser
amount as may be elected by the Participant. All elections shall
be subject to the approval or disapproval of the Committee. The
value of shares of Stock to be withheld shall be based on the
Fair Market Value of the Stock on the date that the amount of tax
to be withheld is to be determined (the "Tax Date"). Any such
elections by Participants to have shares of Stock withheld for
this purpose will be subject to the following restrictions:
(a) All elections must be made prior to the Tax Date.
(b) All elections shall be irrevocable.
(c) If the Participant is an officer or director of
PMCI within the meaning of Section 16 of the 1934 Act ("Section
16"), the Participant must satisfy the requirements of such
Section 16 and any applicable Rules thereunder with respect to
the use of Stock to satisfy such tax withholding obligation.
ARTICLE XVIII
REQUIREMENTS OF LAW
18.1 Requirements of Law. The issuance of Stock and the
payment of cash pursuant to the Plan shall be subject to all
applicable laws, rules and regulations.
18.2 Federal Securities Law Requirements. If a Participant
is an officer or director of PMCI within the meaning of Section
16, Awards granted hereunder shall be subject to all conditions
required under Rule 16b-3, or any successor rule promulgated
under the 1934 Act, to qualify the Award for any exception from
the provisions of Section 16(b) of the 1934 Act available under
that Rule. Such conditions shall be set forth in the agreement
with the Participant which describes the Award or other document
evidencing or accompanying the Award.
18.3 Governing Law. The Plan and all agreements hereunder
shall be construed in accordance with and governed by the laws of
the State of Delaware.
ARTICLE XIX
DURATION OF THE PLAN
Unless sooner terminated by the Board of Directors, the Plan
shall terminate at the close of business on November 11, 2007,
and no Option, Stock Appreciation Right, Restricted Stock Award,
Stock Unit, Stock Bonus, other Award or Stock shall be granted,
or offer to purchase Stock made, after such termination.
Options, Stock Appreciation Rights, Restricted Stock Awards,
other Awards, and Stock Units outstanding at the time of the Plan
termination may continue to be exercised, or become free of
restrictions, or paid, in accordance with their terms.
Dated: To be effective November 12, 1997.
PMC INTERNATIONAL INC., a
Colorado corporation
By: \S\
Kenneth S. Phillips, President
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Portfolio Management Consultants, Inc.
Portfolio Brokerage Services, Inc.
Portfolio Technology Services, Inc.
PMC Investment Services, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in Amendment Number 1 to the
PMC International, Inc. Registration Statement on Form SB-2 of
our report dated March 1, 1997 accompanying the consolidated
financial statements of PMC International, Inc. for the years
ended December 31, 1996 and 1995 which is part of the
registration statement and to the reference to us under the
heading "Experts" in such registration statement.
February 6, 1998
/s/
Spicer, Jeffries & Co.
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in Amendment Number 1 to the
PMC International, Inc. Registration Statement on Form SB-2 of
our report dated March 20, 1997 accompanying the consolidated
financial statements of ADAM Investment Services, Inc. for the
years ended December 31, 1996 and 1995 which is part of the
registration statement and to the reference to us under the
heading "Experts" in such registration statement.
February 6, 1998
/s/
Faucett, Taylor & Associates, P.C.
